e10vqza

Amount

Description

$20.0 million

Exchanged 4.2 million Calpine common shares in privately negotiated transactions for approximately $20.0 million of par value of

HIGH TIDES I — 9/04 $734.8 million Repurchased $734.8 million in principal amount of outstanding Senior Notes, 2023 Convertible Senior Notes, and HIGH TIDES III in exchange for $553.8 million in cash.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q/A


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2004

OR

o		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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

534,306,554 shares of Common Stock, par value $.001 per share, outstanding on November 5, 2004.

CALPINE CORPORATION AND SUBSIDIARIES

REPORT ON FORM 10-Q

For the Quarter Ended September 30, 2004


		Page No.

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Condensed Balance Sheets September 30, 2004 and December 31, 2003		3
	Consolidated Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2004 and 2003		5
	Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003		7
	Notes to Consolidated Condensed Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		55
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		101
Item 4.	Controls and Procedures		101
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		102
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		109
Item 6.	Exhibits		110
Signatures			112
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

EXPLANATORY NOTE

This Amendment No. 1 to the Quarterly Report on Form 10-Q for Calpine Corporation (“Calpine”) for the quarter ended September 30, 2004 is being filed to restate our Consolidated Condensed Financial Statements for the three and nine months ended September 30, 2004 to correct errors in recording the tax provisions on income from continuing operations and within income from discontinued operations, net of tax, which had the effect of increasing net income and decreasing the net loss in the three and nine months ended September 30, 2004, respectively. This Amendment No. 1 also contains corrections to the tax provisions between continuing operations and discontinued operations for the three and nine months ended September 30, 2003, which did not affect net income or loss in such prior periods. See Note 2 “Restatement of Prior Period Financial Statements” to the consolidated condensed financial statements for further details. The financial statements and financial disclosures contained herein are consistent with the annual consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2004 filed with the SEC on March 31, 2005.

PART I — FINANCIAL INFORMATION


Item 1.	*Financial Statements.*

CALPINE CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

September 30, 2004 and December 31, 2003


			September 30,		December 31,
			2004		2003

			Restated(1)
			(Unaudited)
			(In thousands, except share
			and per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	1,487,822	$	991,806
	Accounts receivable, net			1,090,073		988,947
	Margin deposits and other prepaid expense			371,679		385,348
	Inventories			155,901		137,740
	Restricted cash			935,990		383,788
	Current derivative assets			416,930		496,967
	Current assets held for sale			—		2,565
	Other current assets			270,621		89,593

		Total current assets		4,729,016		3,476,754

Restricted cash, net of current portion				150,020		575,027
Notes receivable, net of current portion				223,590		213,629
Project development costs				144,625		139,953
Investments in power projects and oil and gas properties				392,611		444,150
Deferred financing costs				434,986		400,732
Prepaid lease, net of current portion				394,778		414,058
Property, plant and equipment, net				20,620,243		19,478,650
Goodwill, net				45,160		45,160
Other intangible assets, net				83,922		89,924
Long-term derivative assets				587,000		673,979
Long-term assets held for sale				—		743,149
Other assets				624,968		608,767

		Total assets	$	28,430,919	$	27,303,932

CALPINE CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS — (Continued)


			September 30,			December 31,
			2004			2003

			Restated(1)
			(Unaudited)
			(In thousands, except share
			and per share amounts)
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	1,099,430		$	938,644
	Accrued payroll and related expense			78,915			96,693
	Accrued interest payable			365,850			321,176
	Income taxes payable			9,224			18,026
	Notes payable and borrowings under lines of credit, current portion			210,603			254,292
	Notes payable to Calpine Capital Trusts, current portion			636,000			—
	Preferred interests, current portion			9,040			11,220
	Capital lease obligation, current portion			7,923			4,008
	CCFC I financing, current portion			3,208			3,208
	Construction/project financing, current portion			62,839			61,900
	Convertible Senior Notes Due 2006, current portion			72,126			—
	Senior notes and term loans, current portion			198,409			14,500
	Current derivative liabilities			524,025			456,688
	Current liabilities held for sale			—			221
	Other current liabilities			485,805			334,827

		Total current liabilities		3,763,397			2,515,403

Notes payable and borrowings under lines of credit, net of current portion				781,017			873,571
Notes payable to Calpine Capital Trusts, net of current portion				517,500			1,153,500
Preferred interests, net of current portion				138,068			232,412
Capital lease obligation, net of current portion				283,442			193,741
CCFC I financing, net of current portion				783,139			785,781
CalGen/ CCFC II financing				2,431,370			2,200,358
Construction/project financing, net of current portion				1,697,540			1,209,506
Convertible Senior Notes Due 2006, net of current portion				—			660,059
Convertible Notes Due 2014				617,504			—
Convertible Senior Notes Due 2023				633,775			650,000
Senior notes and term loans, net of current portion				9,339,577			9,369,253
Deferred income taxes, net				1,220,754			1,310,335
Deferred lease incentive				—			50,228
Deferred revenue				112,087			116,001
Long-term derivative liabilities				641,280			692,088
Long-term liabilities held for sale				—			17,828
Other liabilities				333,877			241,723

		Total liabilities		23,294,327			22,271,787

Minority interests				371,945			410,892

Stockholders’ equity:
	Preferred stock, $.001 par value per share; authorized 10,000,000 shares; none issued and outstanding in 2004 and 2003			—			—
	Common stock, $.001 par value per share; authorized 1,000,000,000 shares at December 31, 2003, and 2,000,000,000 shares at September 30, 2004; issued and outstanding 534,092,147 shares in 2004 and 415,010,125 shares in 2003			534			415
	Additional paid-in capital			3,137,912			2,995,735
	Additional paid-in capital, loaned shares			258,100			—
	Additional paid-in capital, returnable shares			(258,100	)		—
	Retained earnings			1,609,745			1,568,509
	Accumulated other comprehensive income			16,456			56,594

		Total stockholders’ equity	$	4,764,647		$	4,621,253

		Total liabilities and stockholders’ equity	$	28,430,919		$	27,303,932


(1)	See Note 2 to Consolidated Financial Statements regarding the restatement of financial statements.

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

CALPINE CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended September 30, 2004 and 2003


					Three Months Ended						Nine Months Ended
					September 30,						September 30,

					2004			2003			2004			2003

					Restated(1)						Restated(1)
					(In thousands, except per share amounts)
					(Unaudited)
Revenue:
	Electric generation and marketing revenue
	Electricity and steam revenue				$	1,671,147		$	1,416,866		$	4,230,004		$	3,563,193
		Transmission sales revenue				4,427			3,952			14,152			13,239
		Sales of purchased power for hedging and optimization				430,576			843,013			1,307,256			2,269,102

			Total electric generation and marketing revenue			2,106,150			2,263,831			5,551,412			5,845,534
Oil and gas production and marketing revenue Oil and gas sales						17,687			16,578			47,472			45,394
		Sales of purchased gas for hedging and optimization				423,733			305,706			1,258,441			961,652

			Total oil and gas production and marketing revenue			441,420			322,284			1,305,913			1,007,046
	Mark-to-market activities, net					(5,106	)		(11,023	)		(15,192	)		11,259
	Other revenue					14,736			81,496			51,573			97,596

			Total revenue			2,557,200			2,656,588			6,893,706			6,961,435

Cost of revenue:
	Electric generation and marketing expense
		Plant operating expense				181,907			180,772			575,830			496,119
		Transmission purchase expense				25,229			11,108			61,880			37,491
		Royalty expense				8,488			7,022			21,321			18,840
		Purchased power expense for hedging and optimization				351,151			835,892			1,171,260			2,254,560

			Total electric generation and marketing expense			566,775			1,034,794			1,830,291			2,807,010
	Oil and gas operating and marketing expense
	Oil and gas operating expense					14,719			15,263			42,864			53,642
		Purchased gas expense for hedging and optimization				429,373			293,241			1,243,781			941,312

			Total oil and gas operating and marketing expense			444,092			308,504			1,286,645			994,954
	Fuel expense					1,097,650			806,598			2,783,570			2,035,285
	Depreciation, depletion and amortization expense					149,288			131,001			420,405			373,128
	Oil and gas impairment					—			—			645			—
	Operating lease expense					25,805			28,439			80,567			84,298
	Other cost of revenue					19,187			8,380			68,177			20,501

			Total cost of revenue			2,302,797			2,317,716			6,470,300			6,315,176

				Gross profit		254,403			338,872			423,406			646,259
Loss (income) from unconsolidated investments in power projects and oil and gas properties						10,859			(4,110	)		11,663			(68,584	)
Equipment cancellation and impairment cost						7,820			632			10,187			19,940
Long-term service agreement cancellation charge						7,580			—			7,580			—
Project development expense						3,366			2,979			15,114			14,137
Research and development expense						3,982			2,849			12,921			7,709
Sales, general and administrative expense						58,377			49,426			170,990			142,841

	Income from operations					162,419			287,096			194,951			530,216
Interest expense						293,639			198,686			815,357			483,238
Distributions on trust preferred securities						—			15,297			—			46,610
Interest income						(17,185	)		(10,742	)		(39,166	)		(27,780	)
Minority interest expense						9,990			2,569			23,149			10,182
Income from repurchase of various issuances of debt						(167,154	)		(207,238	)		(170,548	)		(214,001	)

CALPINE CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS — (Continued)


			Three Months Ended					Nine Months Ended
			September 30,					September 30,

			2004		2003			2004			2003

			Restated(1)					Restated(1)
			(In thousands, except per share amounts)
			(Unaudited)
Other expense (income)				23,321		9,513			(177,088	)		64,570

	Income (loss) before provision (benefit) for income taxes			19,808		279,011			(256,753	)		167,397
Provision (benefit) for income taxes				5,221		102,481			(106,039	)		59,811

	Income (loss) before discontinued operations and cumulative effect of a change in accounting principle			14,587		176,530			(150,714	)		107,586
Discontinued operations, net of tax provision (benefit) of $76,737, $(61,354), $53,768, and $(45,612)				126,538		61,252			191,949			54,285
Cumulative effect of a change in accounting principle, net of tax provision of $—, $—, $— and $450				—		—			—			529

		Net income (loss)	$	141,125	$	237,782		$	41,235		$	162,400

Basic earnings (loss) per common share:
	Weighted average shares of common stock outstanding			444,380		388,161			425,682			383,447
	Income (loss) before discontinued operations and cumulative effect of a change in accounting principle		$	0.03	$	0.45		$	(0.35	)	$	0.28
	Discontinued operations, net of tax		$	0.29	$	0.16		$	0.45		$	0.14
	Cumulative affect of a change in accounting principle, net of tax		$	—	$	—		$	—		$	—

		Net income (loss)	$	0.32	$	0.61		$	0.10		$	0.42

Diluted earnings per common share:
	Weighted average shares of common stock outstanding before dilutive effect of certain convertible securities			446,922		394,950			425,682			388,622
	Income (loss) before dilutive effect of certain convertible securities, discontinued operations and cumulative effect of a change in accounting principle		$	0.03	$	0.45		$	(0.35	)	$	0.28
	Dilutive effect of certain convertible securities			—		(0.06	)		—			—

	Income (loss) before discontinued operations and cumulative effect of a change in accounting principle			0.03		0.39			(0.35	)		0.28
	Discontinued operations, net of tax			0.29		0.12			0.45			0.14
	Cumulative effect of a change in accounting principle, net of tax			—		—			—			—

		Net income (loss)	$	0.32	$	0.51		$	0.10		$	0.42


(1)	See Note 2 to Consolidated Financial Statements regarding the restatement of financial statements.

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

CALPINE CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2004 and 2003


					Nine Months Ended
					September 30,

					2004			2003

					Restated(2)
					(In thousands)
					(Unaudited)
Cash flows from operating activities:
	Net income (loss)				$	41,235		$	162,400
		Adjustments to reconcile net loss to net cash provided by operating activities:
			Depreciation, depletion and amortization(1)			598,856			489,431
			Deferred income taxes, net			(52,272	)		204,900
			(Gain) loss on sale of assets and development cost write-offs, net			(348,053	)		6,606
			Gain on repurchase of debt			(170,548	)		(192,296	)
			Equipment cancellation and impairment cost			10,187			19,940
			Stock compensation expense			15,190			12,028
			Foreign exchange losses			7,521			36,234
			Mark-to-market loss and other non-cash derivative activity			40,782			2,535
			Loss (income) from unconsolidated investments in power projects and oil and gas properties			11,663			(68,584	)
			Distributions from unconsolidated investments in power projects			22,263			125,679
			Other			64,386			10,505
		Change in operating assets and liabilities, net of effects of acquisitions:
			Accounts receivable			(104,787	)		(161,262	)
			Other current assets			(1,202	)		(150,573	)
			Other assets			(66,224	)		(142,530	)
			Accounts payable and accrued expense			218,862			(197,586	)
			Other liabilities			(57,989	)		13,905

				Net cash provided by operating activities		229,870			171,332

Cash flows from investing activities:
	Purchases of property, plant and equipment					(1,184,352	)		(1,523,643	)
	Disposals of property, plant and equipment					1,151,246			15,255
	Acquisitions, net of cash acquired					(187,786	)		(6,818	)
	Advances to joint ventures					(8,833	)		(51,945	)
	Project development costs					(23,605	)		(30,184	)
	Sale of collateral securities					93,963			—
	Repurchase of High Tides					(111,550	)		—
	Increase in restricted cash					(124,153	)		(258,255	)
	Decrease (increase) in notes receivable					9,979			(13,708	)
	Other					3,157			32,717

				Net cash used in investing activities		(381,934	)		(1,836,581	)

CALPINE CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS — (Continued)


			Nine Months Ended
			September 30,

			2004			2003

			Restated(2)
			(In thousands)
			(Unaudited)
Cash flows from financing activities:
	Borrowings from notes payable and borrowings under lines of credit			97,191			1,323,618
	Repayments of notes payable and borrowings under lines of credit			(328,943	)		(1,750,866	)
	Borrowings from project financing			3,477,854			1,369,900
	Repayments of project financing			(2,942,272	)		(1,395,788	)
	Repayments and repurchases of Senior Notes			(630,275	)		(906,308	)
	Repurchase of 4% Convertible Senior Notes			(586,926	)		(101,887	)
	Proceeds from issuance of Convertible Senior Notes			867,504			—
	Proceeds from issuance of Senior Notes			878,815			3,500,000
	Proceeds from income trust offering			—			126,462
	Proceeds from issuance of common stock			95			8,184
	Proceeds from King City financing transaction			—			82,000
	Financing costs			(175,802	)		(244,069	)
	Other			(23,538	)		35,243

		Net cash provided by financing activities		633,703			2,046,489

Effect of exchange rate changes on cash and cash equivalents				14,377			8,946
Net increase in cash and cash equivalents				496,016			390,186
Cash and cash equivalents, beginning of period				991,806			579,486

Cash and cash equivalents, end of period			$	1,487,822		$	969,672

Cash paid during the period for:
	Interest, net of amounts capitalized		$	674,875		$	322,051
	Income taxes		$	21,863		$	12,481


(1)	Includes depreciation and amortization that is charged to cost of revenue, discontinued operations and also included within sales, general and administrative expense and to interest expense in the Consolidated Condensed Statements of Operations.

(2)	See Note 2 to Consolidated Financial Statements regarding the restatement of financial statements.

Schedule of noncash investing and financing activities:

2004 issuance of 24.3 million shares of common stock in exchange for $40.0 million par value of HIGH TIDES I and $75.0 million par value of HIGH TIDES II.

2004 capital lease entered into for the King City facility for an initial asset balance of $114.9 million.

2004 issuance of 89 million shares of Calpine common stock pursuant to a Share Lending Agreement. See Note 7 for more information regarding the 89 million shares issued.

2004 acquired the remaining 50% interest in the Aries Power Plant for $3.7 million cash and $220.0 million of assumed liabilities, including debt of $173.2 million.

2004 exchange of a $177.0 million note for $266.2 million of our 4.75% Contingent Convertible Senior Notes Due 2023.

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)


1.	Organization and Operations of the Company

Calpine Corporation (“Calpine” or “the Company”), a Delaware corporation, and subsidiaries (collectively, also referred to as the “Company”) are engaged in the generation of electricity in the United States of America, Canada, Mexico and the United Kingdom. The Company is involved in the development, construction, 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 of America. In Canada, the Company has ownership interests in, and operates, gas-fired power generation facilities. In Mexico, Calpine is a joint venture participant in a gas-fired power generation facility under construction. In the United Kingdom, the Company owns and operates 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.	Restatement of Prior Period Financial Statements

Subsequent to the issuance of the Company’s financial statements for the quarterly period ended September 30, 2004, the Company determined that it: (1) incorrectly calculated the amount of taxes related to $225 million of funds repatriated from Canada; (2) recorded taxes on income from discontinued operations using the statutory rate rather than a lower effective rate reflecting certain permanent differences; and (3) made certain errors in calculating the effective rate on income from continuing operations. As a result, the Company has restated the accompanying consolidated condensed financial statements for the three and nine months ended September 30, 2004 and 2003 and as of September 30, 2004 from amounts previously reported to properly account for income taxes as follows (in thousands):


			Income			Adjustments
			Statement as			to Reflect			Income
			Previously			Correct Tax			Statement
			Reported			Entries			as Restated

Three Months Ended September 30, 2004
	Income (loss) before provision (benefit) for income taxes		$	19,808		$	—		$	19,808
	Provision (benefit) for income taxes			67,340			(62,119	)		5,221

	Income (loss) before discontinued operations and cumulative effect of a change in accounting principle			(47,532	)		62,119			14,587
	Discontinued operations, net of tax			62,551			63,987			126,538

		Net income (loss)	$	15,019		$	126,106		$	141,125

		Basic earnings per share	$	0.03		$	0.29		$	0.32
		Diluted earnings per share	$	0.03		$	0.29		$	0.32

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


			Income			Adjustments
			Statement as			to Reflect			Income
			Previously			Correct Tax			Statement
			Reported			Entries			as Restated

Nine Months Ended September 30, 2004
	Income (loss) before provision (benefit) for income taxes		$	(256,753	)	$	—		$	(256,753	)
	Provision (benefit) for income taxes			(81,955	)		(24,084	)		(106,039	)

	Income (loss) before discontinued operations and cumulative effect of a change in accounting principle			(174,798	)		24,084			(150,714	)
	Discontinued operations, net of tax			89,927			102,022			191,949

		Net income (loss)	$	(84,871	)	$	126,106		$	41,235

		Basic earnings per share	$	(0.20	)	$	0.30		$	0.10
		Diluted earnings per share	$	(0.20	)	$	0.30		$	0.10
Three Months ended September 30, 2003
	Income (loss) before provision (benefit) for income taxes		$	279,011		$	—		$	279,011
	Provision (benefit) for income taxes			41,310			61,171			102,481

	Income (loss) before discontinued operations and cumulative effect of a change in accounting principle			237,701			(61,171	)		176,530
	Discontinued operations, net of tax			81			61,171			61,252

		Net income (loss)	$	237,782		$	—		$	237,782

		Basic earnings per share	$	0.61		$	—		$	0.61
		Diluted earnings per share	$	0.51		$	—		$	0.51
Nine Months ended September 30, 2003
	Income (loss) before provision (benefit) for income taxes		$	167,397		$	—		$	167,397
	Provision (benefit) for income taxes			11,076			48,735			59,811

	Income (loss) before discontinued operations and cumulative effect of a change in accounting principle			156,321			(48,735	)		107,586
	Discontinued operations, net of tax			5,550			48,735			54,285
	Cumulative effect of a change in accounting principle, net of tax provision			529			—			529

		Net income (loss)	$	162,400		$	—		$	162,400

		Basic earnings per share	$	0.42		$	—		$	0.42
		Diluted earnings per share	$	0.41		$	0.01		$	0.42

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


				Adjustments
		Balance Sheet		to Reflect			Balance
		as Previously		Correct Tax			Sheet as
		Reported		Entries			Restated

As of September 30, 2004
	Income taxes payable	$	9,224	$	—		$	9,224
	Deferred income taxes, net of current portion	$	1,346,860	$	(126,106	)	$	1,220,754
	Total stockholders’ equity	$	4,638,541	$	126,106		$	4,764,647

The corrections discussed above did not have an impact on total cash flows from operating activities, investment activities and financing activities.


3.	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, 2003, included in the Company’s Annual Report on Form 10-K/A. The results for interim periods are not necessarily indicative of the results for the entire year.

Reclassifications — Certain prior years’ amounts in the consolidated financial statements have been reclassified to conform to the 2004 presentation. These include a reclassification between sales, general and administrative expense (“SG&A”) and plant operating expense for information technology and stock compensation costs and reclassifications to begin separately disclosing: (1) research and development expense (formerly in SG&A), (2) transmission sales revenue (formerly in electricity and steam revenue), (3) oil and gas impairment (formerly in depreciation, depletion and amortization expense) and (4) transmission purchase expense (formerly in plant operating expense).

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, retirement and operation), provision for income taxes, fair value calculations of derivative instruments and associated reserves, capitalization of interest, primary beneficiary determination for the Company’s investments in variable interest entities, the outcome of pending litigation and estimates of oil and gas reserve quantities used to calculate depletion, depreciation and impairment of oil and gas property and equipment.

Effective Tax Rate — For the three months ended September 30, 2004 and 2003, the Company’s effective rate from continuing operations was 26% and 37%, respectively. For the nine months ended September 30, 2004 and 2003, the effective rate from continuing operations was 41% and 36%, respectively. This effective rate variance is due to the consideration of estimated full year earnings in estimating the quarterly effective rate and due to the effect of significant permanent items.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Derivative Instruments — Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) as amended and interpreted by other related accounting literature, establishes accounting and reporting standards for derivative instruments (including certain derivative instruments embedded in other contracts). SFAS No. 133 requires companies to record derivatives on their balance sheets as either assets or liabilities measured at their fair value unless exempted from derivative treatment as a normal purchase and sale. All changes in the fair value of derivatives are recognized currently in earnings unless specific hedge criteria are met, which requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.

Accounting for derivatives at fair value requires the Company to make estimates about future prices during periods for which price quotes are not available from sources external to the Company. As a result, the Company is required to rely on internally developed price estimates when external price quotes are unavailable. The Company derives its future price estimates, during periods where external price quotes are unavailable, based on an extrapolation of prices from periods where external price quotes are available. The Company performs this extrapolation using liquid and observable market prices and extending those prices to an internally generated long-term price forecast based on a generalized equilibrium model.

SFAS No. 133 sets forth the accounting requirements for cash flow and fair value hedges. SFAS No. 133 provides that the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument be reported as a component of other comprehensive income and be reclassified into earnings in the same period during which the hedged forecasted transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, must be recognized currently in earnings. SFAS No. 133 provides that the changes in fair value of derivatives designated as fair value hedges and the corresponding changes in the fair value of the hedged risk attributable to a recognized asset, liability, or unrecognized firm commitment be recorded in earnings. If the fair value hedge is effective, the amounts recorded will offset in earnings.

With respect to cash flow hedges, if the forecasted transaction is no longer probable of occurring, the associated gain or loss recorded in other comprehensive income is recognized currently. In the case of fair value hedges, if the underlying asset, liability or firm commitment being hedged is disposed of or otherwise terminated, the gain or loss associated with the underlying hedged item is recognized currently. If the hedging instrument is terminated prior to the occurrence of the hedged forecasted transaction for cash flow hedges, or prior to the settlement of the hedged asset, liability or firm commitment for fair value hedges, the gain or loss associated with the hedge instrument remains deferred.

Where the Company’s derivative instruments are subject to a master netting agreement and the criteria of FASB Interpretation (“FIN”) 39 “Offsetting of Amounts Related to Certain Contracts (An Interpretation of APB Opinion No. 10 and SFAS No. 105)” are met, the Company presents its derivative assets and liabilities on a net basis in its balance sheet. The Company has chosen this method of presentation because it is consistent with the way related mark-to-market gains and losses on derivatives are recorded in its Consolidated Statements of Operations and within Other Comprehensive Income (“OCI”).

Mark-to-Market Activity, Net — This includes realized settlements of and unrealized mark-to-market gains and losses on both power and gas derivative instruments not designated as cash flow hedges, including those held for trading purposes. Gains and losses due to ineffectiveness on hedging instruments are also included in unrealized mark-to-market gains and losses. Trading activity is presented net in accordance with Emerging Issues Task Force (“EITF”) Issue No. 02-3, “Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities” (“EITF Issue No. 02-3”).

Presentation of Revenue Under EITF Issue No. 03-11 “Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to SFAS No. 133 and Not ‘Held for Trading Purposes’ As Defined

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

in EITF Issue No. 02-3: “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” (“EITF Issue No. 03-11”) — The Company accounts for certain of its power sales and purchases on a net basis under EITF Issue No. 03-11, which the Company adopted on a prospective basis on October 1, 2003. Transactions with either of the following characteristics are presented net in the Company’s Consolidated Condensed Financial Statements: (1) transactions executed in a back-to-back buy and sale pair, primarily because of market protocols; and (2) physical power purchase and sale transactions where the Company’s power schedulers net the physical flow of the power purchase against the physical flow of the power sale (or “book out” the physical power flows) as a matter of scheduling convenience to eliminate the need to schedule actual power delivery. These book out transactions may occur with the same counterparty or between different counterparties where the Company has equal but offsetting physical purchase and delivery commitments. In accordance with EITF Issue No. 03-11, the Company netted the following amounts (in thousands):


	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,

	2004		2003		2004		2003

Sales of purchased power for hedging and optimization	$	563,293	$	—	$	1,255,760	$	—

Purchased power expense for hedging and optimization		563,293		—		1,255,760		—

	$	—	$	—	$	—	$	—

Preferred Interests — As required in SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” (“SFAS No. 150”) the Company classifies certain preferred interests that are mandatorily redeemable, in short-term and long-term debt. These instruments require the Company to make priority distributions of available cash, as defined in each preferred interest agreement, representing a return of the preferred interest holder’s investment over a fixed period of time and at a specified rate of return in priority to certain other distributions to equity holders. The return on investment is recorded as interest expense under the interest method over the term of the priority period.

New Accounting Pronouncements

Stock-Based Compensation

On January 1, 2003, the Company prospectively adopted the fair value method of accounting for stock-based employee compensation pursuant to SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS No. 148”). SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for companies that voluntarily change their accounting for stock-based compensation from the less preferred intrinsic value based method to the more preferred fair value based method. Prior to its amendment, SFAS No. 123 required that companies enacting a voluntary change in accounting principle from the intrinsic value methodology provided by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” could only do so on a prospective basis; no adoption or transition provisions were established to allow for a restatement of prior period financial statements. SFAS No. 148 provides two additional transition options to report the change in accounting principle — the modified prospective method and the retroactive restatement method. Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has elected to adopt the provisions of SFAS No. 123 on a prospective basis; consequently, the Company is required to provide a pro-forma disclosure of net income and earnings per share as if SFAS No. 123 accounting had been applied to all prior periods presented within its

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

financial statements. As shown below, the adoption of SFAS No. 123 has had a material impact on the Company’s financial statements. The table below reflects the pro forma impact of stock-based compensation on the Company’s net loss and loss per share for the three and nine months ended September 30, 2004 and 2003, had the Company applied the accounting provisions of SFAS No. 123 to its prior years’ financial statements (in thousands, except per share amounts):


			Three Months Ended				Nine Months Ended
			September 30,				September 30,

			2004		2003		2004		2003

Net income (loss)
	As reported		$	141,125	$	237,782	$	41,235	$	162,400
	Pro Forma			140,102		234,353		37,288		148,780
Income (loss) per share data:
	Basic earnings per share
		As reported	$	0.32	$	0.61	$	0.10	$	0.42
		Pro Forma		0.32		0.60		0.09		0.39
	Diluted earnings per share
		As reported	$	0.32	$	0.51	$	0.10	$	0.42
		Pro Forma		0.31		0.50		0.09		0.38
Stock-based compensation cost, net of tax, included in income (loss), as reported			$	3,308	$	3,068	$	9,388	$	10,699
Stock-based compensation cost, net of tax, included in income (loss), pro forma				4,331		6,497		13,335		24,319

The range of fair values of the Company’s stock options granted for the three months ended September 30, 2004 and 2003, respectively, was as follows, based on varying historical stock option exercise patterns by different levels of Calpine employees: $2.39 in 2004, $3.58-3.75 in 2003, on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: expected dividend yields of 0%; expected volatility of 84.24% and 101.49%-106.91% for the three months ended September 30, 2004 and 2003, respectively; risk-free interest rates of 3.37% and 1.42-1.60% for the three months ended September 30, 2004 and 2003, respectively; and expected option terms of 4 years and 1.5 years for the three months ended September 30, 2004 and 2003, respectively.

The range of fair values of the Company’s stock options granted for the nine months ended September 30, 2004 and 2003, respectively, was as follows, based on varying historical stock option exercise patterns by different levels of Calpine employees: $1.90-$4.45 in 2004, $1.60-$5.16 in 2003, on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: expected dividend yields of 0%; expected volatility of 69.11%-97.99% and 70.44%-112.99% for the nine months ended September 30, 2004 and 2003, respectively; risk-free interest rates of 2.35%-4.54% and 1.39%-4.04% for the nine months ended September 30, 2004 and 2003, respectively; and expected option terms of 3-9¹/2 years and 1.5-9.5 years for the nine months ended September 30, 2004 and 2003, respectively.

FIN 46 and FIN 46-R

In January 2003 the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” (“FIN 46”). FIN 46 requires the consolidation of an entity by an enterprise that absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interest in the entity. Historically, entities have generally been consolidated by an enterprise when it has a controlling financial interest through ownership of a

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

majority voting interest in the entity. The objectives of FIN 46 are to provide guidance on the identification of Variable Interest Entities (“VIEs”) for which control is achieved through means other than ownership of a majority of the voting interest of the entity, and how to determine which business enterprise (if any), as the Primary Beneficiary, should consolidate the Variable Interest Entity (“VIE”). This model for consolidation applies to an entity in which either (1) the at-risk equity is insufficient to absorb expected losses without additional subordinated financial support or (2) its at-risk equity holders as a group are not able to make decisions that have a significant impact on the success or failure of the entity’s ongoing activities. A variable interest in a VIE, by definition, is an asset, liability, equity, contractual arrangement or other economic interest that absorbs the entity’s variability.

In December 2003 the FASB modified FIN 46 with FIN 46-R to make certain technical corrections and to address certain implementation issues. FIN 46, as originally issued, was effective immediately for VIEs created or acquired after January 31, 2003. FIN 46-R delayed the effective date of the interpretation to no later than March 31, 2004, (for calendar-year enterprises), except for Special Purpose Entities (“SPEs”) for which the effective date was December 31, 2003. The Company has adopted FIN 46-R for its investment in SPEs, equity method joint ventures, its wholly owned subsidiaries that are subject to long-term power purchase agreements and tolling arrangements, operating lease arrangements containing fixed price purchase options and its wholly owned subsidiaries that have issued mandatorily redeemable non-controlling preferred interests.

On application of FIN 46, the Company evaluated its investments in joint ventures and operating lease arrangements containing fixed price purchase options and concluded that, in some instances, these entities were VIEs. However, in these instances, the Company was not the Primary Beneficiary, as the Company would not absorb a majority of these entities’ expected variability. An enterprise that holds a significant variable interest in a VIE is required to make certain disclosures regarding the nature and timing of its involvement with the VIE and the nature, purpose, size and activities of the VIE. The fixed price purchase options under the Company’s operating lease arrangements were not considered significant variable interests. However, the joint ventures in which the Company has invested were considered significant variable interests. See Note 6 for more information related to these joint venture investments.

An analysis was performed for the Company’s wholly owned subsidiaries with significant long-term power sales or tolling agreements. Certain of the 100% Company-owned subsidiaries were deemed to be VIEs and held power sales and tolling contracts which may be considered variable interest under FIN 46-R. However, in all cases, the Company absorbed a majority of the entity’s variability and continues to consolidate the Company’s wholly owned subsidiaries. As part of the Company’s quantitative assessment, a fair value methodology was used to determine whether the Company or the power purchaser absorbs the majority of the subsidiary’s variability. The Company qualitatively determined that power sales or tolling agreements with a term for less than one-third of the facility’s remaining useful life or for less than 50% of the entity’s capacity would not cause the power purchaser to be the Primary Beneficiary, due to the length of the economic life of the underlying assets. Also, power sales and tolling agreements meeting the definition of a lease under EITF Issue No. 01-08, “Determining Whether an Arrangement Contains a Lease,” were not considered variable interests, due to certain exclusions under FIN 46-R.

A similar analysis was performed for the Company’s wholly owned subsidiaries that have issued mandatorily redeemable non-controlling preferred interests. These entities were determined to be VIEs in which the Company absorbs the majority of the variability, primarily due to the debt characteristics of the preferred interest, which are classified as debt in accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” in the Company’s Consolidated Condensed Balance Sheets. Consequently, the Company continues to consolidate these wholly owned subsidiaries.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Significant judgment was required in making an assessment of whether or not a VIE was a special purpose entity (“SPE”) for purposes of adopting and applying FIN 46-R. Entities that meet the definition of a business outlined in FIN 46-R and that satisfy other formation and involvement criteria are not subject to the FIN 46-R consolidation guidelines. The definitional characteristics of a business include having: inputs such as long-lived assets; the ability to obtain access to necessary materials and employees; processes such as strategic management, operations and resource management; and the ability to obtain access to the customers that purchase the outputs of the entity. Since the current accounting literature does not provide a definition of an SPE, the Company’s assessment was primarily based on the degree to which the VIE aligned with the definition of a business. Based on this assessment, the Company determined that six VIE investments were in SPEs: Calpine Northbrook Energy Marketing, LLC (“CNEM”), Power Contract Financing, L.L.C. (“PCF”), Power Contract Financing LLC III (“PCF III”) and Calpine Capital Trust I (“Trust I”), Calpine Capital Trust II (“Trust II”) and Calpine Capital Trust III (“Trust III” and together with Trust I and Trust II, the “Trusts”) and subject to FIN 46-R as of October 1, 2003.

On May 15, 2003, the Company’s wholly owned subsidiary, CNEM, completed the $82.8 million monetization of an existing power sales agreement with the Bonneville Power Administration (“BPA”). CNEM borrowed $82.8 million secured by the spread between the BPA contract and certain fixed power purchase contracts. CNEM was established as a bankruptcy-remote entity and the $82.8 million loan is recourse only to CNEM’s assets and is not guaranteed by the Company. CNEM was determined to be a VIE in which the Company was the Primary Beneficiary. Accordingly, the entity’s assets and liabilities were consolidated into the Company’s accounts as of June 30, 2003.

On June 13, 2003, PCF, a wholly owned stand-alone subsidiary of Calpine Energy Services, L.P. (“CES”), completed an offering of two tranches of Senior Secured Notes Due 2006 and 2010 (collectively called the “PCF Notes”), totaling $802.2 million. To facilitate the transaction, the Company formed PCF as a wholly owned, bankruptcy remote entity with assets and liabilities consisting of certain transferred power purchase and sales contracts, which serve as collateral for the PCF Notes. The PCF Notes are non-recourse to the Company’s other consolidated subsidiaries. PCF was determined to be a VIE in which the Company was the Primary Beneficiary. Accordingly, the entity’s assets and liabilities were consolidated into the Company’s accounts as of June 30, 2003.

Upon the adoption of FIN 46-R at December 31, 2003, for the Company’s investments in SPEs, the Company determined that its equity investment in the Trusts was not considered at-risk as defined in FIN 46-R and that the Company did not have a significant variable interest in the Trusts. Consequently, the Company deconsolidated the Trusts.

In addition, as a result of the debt reserve monetization consummated on June 2, 2004, the Company was required to evaluate its investment in the PCF and PCF III entities under FIN 46-R. The Company determined that the entities were VIEs but the Company was not the Primary Beneficiary and was, therefore, required to deconsolidate the entities.

The Company created CNEM, PCF, PCF III and the Trusts to facilitate capital transactions. However, in cases such as this where the Company has continuing involvement with the assets held by the deconsolidated SPE, the Company accounts for the capital transaction with the SPE as a financing rather than a sale under EITF Issue No. 88-18, “Sales of Future Revenue” (“EITF Issue No. 88-18”) or Statement of Financial Accounting Standard No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS No. 140”), as appropriate. When EITF Issue No. 88-18 and SFAS No. 140 require the Company to account for a transaction as a financing, derecognition of the assets underlying the financing is prohibited, and the proceeds received from the transaction must be recorded as debt. Accordingly, in situations where the Company accounts for transactions as financings under EITF Issue No. 88-18 or SFAS No. 140, the Company continues to recognize the assets and the debt of the

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

deconsolidated SPE on its balance sheet. The table below summarizes how the Company has accounted for its SPEs when it has continuing involvement under EITF Issue No. 88-18 or SFAS No. 140:


	FIN 46-R	Sale or
	Treatment	Financing

CNEM	Consolidate	N/A
PCF	Deconsolidate	Financing
PCF III	Deconsolidate	Financing
Trust I, Trust II and Trust III	Deconsolidate	Financing

EITF 04-7

An integral part of applying FIN 46-R is determining which economic interests are variable interests. In order for an interest to be considered a variable interest, it must “absorb variability” of changes in the fair value of the VIE’s underlying net assets. Questions have arisen regarding (a) how to determine whether an interest absorbs variability , and (b) whether the nature of how a long position is created, either synthetically through derivative transactions or through cash transactions, should affect the assessment of whether an interest is a variable interest. EITF Issue No. 04-7: “Determining Whether an Interest Is a Variable Interest in a Potential Variable Interest Entity” (“EITF Issue No. 04-7”) is still in the discussion phase, but will eventually provide a model to assist in determining whether an economic interest in a VIE is a variable interest. The Task Force’s discussions on this Issue have centered around whether the variability should be based on whether (a) the interest absorbs fair value variability, (b) the interest absorbs cash flow variability, or (c) the interest absorbs both fair value and cash flow variability. The final conclusions reached on this issue may impact the Company’s methodology used in making quantitative assessments of the variability of: the Company’s joint venture investments: wholly owned subsidiaries that have issued preferred interests to third parties; wholly owned subsidiaries that have entered into operating leases of power plants that contain a fixed price purchase option; wholly owned subsidiaries that have entered into longer term power sales agreements with third parties; and the Company’s investments in SPEs. However, until the EITF reaches a final consensus, the effects of this issue on the Company’s financial statements is indeterminable.

EITF 04-8

On September 30, 2004, the EITF reached a final consensus on EITF Issue No. 04-8 (“EITF Issue No. 04-8”): “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” The guidance in EITF Issue No. 04-8 is effective for periods ending after December 15, 2004, and must be applied by retroactively restating previously reported earnings per shares. The consensus requires companies that have issued contingently convertible instruments with a market price trigger to include the effects of the conversion in diluted earnings per share, regardless of whether the price trigger had been met. Prior to this consensus, contingently convertible instruments were not included in diluted earnings per share if the price trigger had not been met. Typically, the affected instruments are convertible into common stock of the issuer after the issuer’s common stock price has exceeded a predetermined threshold for a specified time period. Calpine’s $634 million outstanding at September 30, 2004, of 4.75% Contingent Convertible Senior Notes Due 2023 (“2023 Convertible Senior Notes”) and $736 million aggregate principal amount at maturity of Contingent Convertible Notes Due 2014 (“2014 Convertible Notes”) will be affected by the new guidance. This new guidance will accelerate the point at which the 2023 Convertible Senior Notes and 2014 Convertible Notes would potentially impact its diluted earnings per share, but once the trigger price is exceeded, there would be no additional dilution.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

SFAS No. 128-R

FASB is expected to modify Statement of Financial Accounting Standards No. 128: Earnings Per Share (“SFAS No. 128”) to make it consistent with International Accounting Standard No. 33, Earnings Per Share, so that earnings per share computations will be comparable on a global basis. The effective date is anticipated to coincide with the effective date of EITF Issue No. 04-8. The proposed changes will affect the application of the treasury stock method and contingently issuable (based on conditions other than market price) share guidance for computing year-to-date diluted earnings per share. In addition to modifying the year-to-date calculation mechanics, the proposed revision to SFAS No. 128 would eliminate a company’s ability to overcome the presumption of share settlement for those instruments or contracts that can be settled, at the issuer or holder’s option, in cash or shares. Under the revised guidance, the FASB has indicated that any possibility of share settlement other than in an event of bankruptcy will require an assumption of share settlement when calculating diluted earnings per share. The Company’s 2023 Convertible Senior Notes and 2014 Convertible Notes contain provisions that would require share settlement in the event of conversion, during certain limited events of default, including bankruptcy. Additionally, the 2023 Convertible Senior Notes include a provision allowing the Company to meet a put with either cash or shares of stock. The revised guidance is expected to increase the potential dilution to the Company’s earnings per share, particularly when the price of the Company’s common stock is low, since the more dilutive of the calculations would be used considering both:

(i) normal conversion assuming a combination of cash and a variable number of shares; and (ii) conversion during certain limited events of default assuming 100% shares at the fixed conversion rate.

EITF 03-13

At the September 29, 2004, EITF meeting, the EITF reached a tentative conclusion on Issue No. 03-13: Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations. The Issue provides a model to assist in evaluating (a) which cash flows should be considered in the determination of whether cash flows of the disposal component have been or will be eliminated from the ongoing operations of the entity and (b) the types of continuing involvement that constitute significant continuing involvement in the operations of the disposal component. FASB is expected to ratify the consensus at its November 2004 meeting with prospective application to transactions entered into after January 1, 2005. The Company considered the model outlined in EITF Issue No. 03-13 in its evaluation of the sale of the Canadian and Rockies disposal groups (see Note 9 for more information) and does not expect the new guidance to change the conclusions reached under the existing discontinued operations guidance in SFAS No. 144.


4.	Available-for-Sale Debt Securities

During the quarter, the Company exchanged 4.2 million shares of Calpine common stock in privately negotiated transactions for $20.0 million par value of HIGH TIDES I and repurchased $115.0 million par value of HIGH TIDES III. Due to the deconsolidation of the Trusts upon the adoption of FIN 46-R, the repurchased HIGH TIDES preferred securities are reflected as assets on the balance sheet.

The repurchased HIGH TIDES I are reflected on the balance sheet in Other Current Assets along with previously repurchased HIGH TIDES I and II. See Note 16 for a discussion of the redemption of HIGH TIDES I and II subsequent to September 30, 2004. The Company is accounting for the HIGH TIDES as available-for-sale in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). Therefore, the following HIGH TIDES I and II were recorded at fair

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

market value at September 30, 2004, with the difference from their repurchase price recorded in Other Comprehensive Income (in thousands):


		September 30, 2004

				Gross		Gross
				Unrealized		Unrealized
				Gains in Other		Losses in Other
		Repurchase		Comprehensive		Comprehensive
		Price		Income/(Loss)		Income/(Loss)		Fair Value

HIGH TIDES I		$	75,212	$	2,288	$	—	$	77,500
HIGH TIDES II			71,341		3,659		—		75,000

	Debt securities	$	146,553	$	5,947	$	—	$	152,500

The repurchased HIGH TIDES III are reflected on the balance sheet in Other Assets. The following HIGH TIDES III were recorded at fair market value in Other Assets at September 30, 2004, with the difference from their repurchase price recorded in Other Comprehensive Income (in thousands):


		September 30, 2004

				Gross		Gross
				Unrealized		Unrealized
				Gains in Other		Losses in Other
		Repurchase		Comprehensive		Comprehensive
		Price		Income/(Loss)		Income/(Loss)			Fair Value

HIGH TIDES III		$	110,592	$	—	$	(192	)	$	110,400

	Debt securities	$	110,592	$	—	$	(192	)	$	110,400


5.	Property, Plant and Equipment, Net and Capitalized Interest

As of September 30, 2004 and December 31, 2003, the components of property, plant and equipment, net, are stated at cost less accumulated depreciation and depletion as follows (in thousands):


		September 30,			December 31,
		2004			2003

Buildings, machinery, and equipment		$	16,102,657		$	13,226,310
Oil and gas properties, including pipelines			1,077,093			1,088,035
Geothermal properties			471,533			460,602
Other			552,982			234,759

			18,204,265			15,009,706
Less: accumulated depreciation and depletion			(1,790,363	)		(1,388,225	)

			16,413,902			13,621,481
Land			98,922			95,037
Construction in progress			4,107,419			5,762,132

	Property, plant and equipment, net	$	20,620,243		$	19,478,650

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Capital Spending — Construction and Development

Construction and Development costs in process consisted of the following at September 30, 2004 (in thousands):


						Equipment		Project
		# of				Included in		Development		Unassigned
		Projects		CIP		CIP		Costs		Equipment

Projects in active construction			10	$	2,935,248	$	1,057,034	$	—	$	—
Projects in advanced development			11		671,594		529,475		122,769		—
Projects in suspended development			6		455,013		195,818		12,904		—
Projects in early development			2		—		—		8,952		—
Other capital projects			NA		45,564		—		—		—
Unassigned			NA		—		—		—		66,133

	Total construction and development costs			$	4,107,419	$	1,782,327	$	144,625	$	66,133

Construction in Progress — Construction in progress (“CIP”) is primarily attributable to gas-fired power projects under construction including prepayments on gas and steam turbine generators and other long lead-time items of equipment for certain development projects not yet in active construction. Upon commencement of plant operation, these costs are transferred to the applicable property category, generally buildings, machinery and equipment.

Projects in Active Construction — The 10 projects in active construction are estimated to come on line from February 2005 to November 2007. These projects will bring on line approximately 4,634 MW of base load capacity (5,244 MW with peaking capacity). Interest and other costs related to the construction activities necessary to bring these projects to their intended use are being capitalized. One additional project, Goldendale, totaling 237 MW of base load capacity (271 MW with peaking capacity) that was in active construction at the beginning of the quarter went on line during the quarter. At September 30, 2004, the estimated funding requirements to complete these 10 projects, net of expected project financing proceeds, is approximately $0.4 billion.

Projects in Advanced Development — There are 11 projects in advanced development. These projects will bring on line approximately 5,585 MW of base load capacity (6,651 MW with peaking capacity). Interest and other costs related to the development activities necessary to bring these projects to their intended use are being capitalized. However, the capitalization of interest has been suspended on two projects for which development activities are complete. At September 30, 2004, the estimated cost to complete the 11 projects in advanced development is approximately $3.7 billion. The Company’s current plan is to commence construction with project financing, once power purchase agreements are arranged.

Suspended Development Projects — The Company has ceased capitalization of additional development costs and interest expense on certain development projects on which work has been suspended, due to current electric market conditions. Capitalization of costs may recommence as work on these projects resumes, if certain milestones and criteria are met. These projects would bring on line approximately 3,458 MW of base load capacity (3,938 MW with peaking capacity). At September 30, 2004, the estimated cost to complete the six projects is approximately $2.1 billion.

Projects in Early Development — Costs for projects that are in early stages of development are capitalized only when it is highly probable that such costs are ultimately recoverable and significant project milestones are achieved. Until then all costs, including interest costs, are expensed. The projects in early development with capitalized costs relate to three projects and include geothermal drilling costs and equipment purchases.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Other Capital Projects — Other capital projects primarily consist of enhancements to operating power plants, oil and gas and geothermal resource and facilities development as well as software developed for internal use.

Unassigned Equipment — As of September 30, 2004, the Company had made progress payments on four turbines, one heat recovery steam generator and other equipment with an aggregate carrying value of $66.1 million representing unassigned equipment that is classified on the balance sheet as other assets because it is not assigned to specific development and construction projects. The Company is holding this equipment for potential use on future projects. It is possible that some of this unassigned equipment may eventually be sold, potentially in combination with the Company’s engineering and construction services. For equipment that is not assigned to development or construction projects, interest is not capitalized.

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” (“SFAS No. 34”), 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)” (“SFAS No. 58”). The Company’s qualifying assets include construction in progress, certain oil and gas properties under development, construction costs related to unconsolidated investments in power projects under construction, and advanced stage development costs. For the three months ended September 30, 2004 and 2003, the total amount of interest capitalized was $86.8 million and $98.7 million, respectively, including $9.4 million and $13.0 million, respectively, of interest incurred on funds borrowed for specific construction projects and $77.4 million and $85.7 million, respectively, of interest incurred on general corporate funds used for construction. For the nine months ended September 30, 2004 and 2003, the total amount of interest capitalized was $297.4 million and $333.7 million, respectively, including $43.3 million and $51.4 million, respectively, of interest incurred on funds borrowed for specific construction projects and $254.1 million and $282.3 million, respectively, of interest incurred on general corporate funds used for construction. Upon commencement of plant operation, capitalized interest, as a component of the total cost of the plant, is amortized over the estimated useful life of the plant. The decrease in the amount of interest capitalized during the three and nine months ended September 30, 2004 reflects the completion of construction for several power plants and the 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 of interest incurred on general corporate funds, are certain of the Company’s Senior Notes and term loan facilities and the secured working capital revolving credit facility.

Impairment Evaluation — All projects including those under construction and development and unassigned turbines are reviewed for impairment whenever there is an indication of potential reduction in fair value. Equipment assigned to such projects is not evaluated for impairment separately, as it is integral to the assumed future operations of the project to which it is assigned. If it is determined that it is no longer probable that the projects will be completed and all capitalized costs recovered through future operations, the carrying values of the projects would be written down to the recoverable value in accordance with the provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). The Company reviews its unassigned equipment for potential impairment based on probability-weighted alternatives of utilizing the equipment for future projects versus selling the equipment. Utilizing this methodology, the Company does not believe that the equipment not committed to sale is impaired.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


6.	Investments in Power Projects and Oil and Gas Properties

The Company’s investments in power projects and oil and gas properties are integral to its operations. As discussed in Note 3, the Company’s joint venture investments were evaluated under FIN 46-R to determine which, if any, entities were VIEs. Based on this evaluation, the Company determined that the Acadia Energy Center, Grays Ferry Power Plant, Whitby Cogeneration facility and the Androscoggin Power Plant were VIEs, in which the Company held a significant variable interest. However, based on a qualitative and quantitative assessment of the expected variability in these entities, the Company was not the Primary Beneficiary. Consequently, the Company continues to account for these VIEs and its other joint venture investments in power projects 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).”

Acadia Powers Partners, LLC (“Acadia”) is the owner of a 1,160-megawatt electric wholesale generation facility located in Louisiana and is a joint venture between the Company and Cleco Corporation. The Company’s involvement in this VIE began upon formation of the entity in March 2000. The Company’s maximum potential exposure to loss at September 30, 2004, is limited to the book value of its investment of approximately $216.9 million.

Grays Ferry Cogeneration Partnership (“Grays Ferry”) is the owner of a 140-megawatt gas-fired cogeneration facility located in Pennsylvania and is a joint venture between the Company and Trigen-Schuylkill Cogeneration, Inc. The Company’s involvement in this VIE began with its acquisition of the independent power producer, Cogeneration Corporation of America, Inc. (“Cogen America”), now called Calpine Cogeneration Corporation, in December 1999. The Grays Ferry joint venture project was part of the portfolio of assets owned by Cogen America. The Company’s maximum potential exposure to loss at September 30, 2004, is limited to the book value of its investment of approximately $48.7 million.

Whitby Energy LLP (“Whitby”) is the owner of a 50-megawatt gas-fired cogeneration facility located in Ontario, Canada and is a joint venture between the Company and a privately held enterprise. The Company’s involvement in this VIE began with its acquisition of a portfolio of assets from Westcoast Energy Inc. (“Westcoast”) in September 2001, which included the Whitby joint venture project. The Company’s maximum potential exposure to loss at September 30, 2004, is limited to the book value of its investment of approximately $35.3 million.

Androscoggin Energy LLC (“AELLC”) is the owner of a 160-megawatt gas-fired cogeneration facility located in Maine and is a joint venture between the Company, Wisvest Corporation and Androscoggin Energy, Inc. The Company’s involvement in this VIE began with its acquisition of the independent power producer, SkyGen Energy LLC (“SkyGen”) in October 2000. The Androscoggin joint venture project was part of the portfolio of assets owned by SkyGen. The Company’s maximum potential exposure to loss at September 30, 2004, was limited to $39.0 million, which represents the book value of its investment of approximately $15.9 million and a notes receivable, including accrued but unpaid interest, from AELLC with a carrying value of $23.1 million as described below. See Notes 13 and 16 for a description and an update on litigation involving AELLC.

On September 2, 2004, the Company completed the sale of its equity investment in the Calpine Natural Gas Trust (“CNGT”). In accordance with SFAS No. 144, “Accounting For the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) the Company’s 25 percent equity method investment in the CNGT was considered part of the larger disposal group and therefore evaluated and accounted for as a discontinued operation. Accordingly, the following tables for investment balance as well as income (loss) from investments do not include the CNGT. However, tables for distributions from investments and related party transactions

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

with equity method affiliates include CNGT through the date of sale, September 2, 2004. See Note 9 for more information on the sale of the Canadian natural gas reserves and petroleum assets.

The following investments are accounted for under the equity method (in thousands):


		Ownership			Investment Balance at
		Interest as of
		September 30,			September 30,		December 31,
		2004			2004		2003

Acadia Energy Center			50.0	%	$	216,852	$	221,038
Valladolid III IPP			45.0	%		74,236		67,320
Grays Ferry Power Plant(1)			50.0	%		48,659		53,272
Whitby Cogeneration(2)			15.0	%		35,349		31,033
Androscoggin Power Plant			32.3	%		15,863		11,823
Aries Power Plant(3)			100.0	%		—		58,205
Other			—			1,652		1,459

	Total investments in power projects and oil and gas properties				$	392,611	$	444,150


(1)	On March 23, 2004, the Company completed the acquisition of the remaining 20% interest in Cogen America. As a result of the acquisition, the Company’s ownership percentage in the Grays Ferry Power Plant increased to 50%.

(2)	Whitby is owned 50% by the Company but a 70% economic interest in the Company’s ownership percentage has effectively been transferred to Calpine Power Limited Partnership (“CPLP”) through a loan from CPLP to the Company’s entity which holds the investment interest in Whitby.

(3)	On March 26, 2004, the Company acquired the remaining 50 percent interest in Aries Power Plant. Accordingly, this plant is consolidated as of September 30, 2004.

The third-party debt on the books of the unconsolidated investments is not reflected on the Company’s Consolidated Condensed Balance Sheets. At September 30, 2004, third-party investee debt is approximately $130.1 million. Based on the Company’s pro rata ownership share of each of the investments, the Company’s share would be approximately $45.7 million. However, all such debt is non-recourse to the Company.

The Company owns a 32.3% interest in the unconsolidated equity method investee AELLC. AELLC has construction debt of $58.6 million outstanding as of September 30, 2004. The debt is non-recourse to the Company (the “AELLC Non-Recourse Financing”). On September 30, 2004, and December 31, 2003, the Company’s investment balance was $15.9 million and $11.8 million, respectively, and the carrying value of its notes receivable, including accrued but unpaid interest, from AELLC was $23.1 million and $14.7 million, respectively. On and after August 8, 2003, AELLC received letters from its lenders claiming that certain events of default had occurred under the credit agreement for the AELLC Non-Recourse Financing, because the lending syndication had declined to extend the date for the conversion of the construction loan to a term loan by a certain date. AELLC has disputed the purported defaults. Also, the steam host for the AELLC project, International Paper Company (“IP”), filed a complaint against AELLC in October 2000, which resulted in a jury verdict for $41 million in favor of IP on November 3, 2004. See Notes 13 and 16 for a further discussion of the IP litigation. The litigation with IP has been a complicating factor in converting the construction debt to long term financing. As a result of these events, the Company reviewed its investment and notes receivable balances and believes that the assets are not impaired.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

The following details the Company’s income and distributions from investments in unconsolidated power projects and oil and gas properties (in thousands):


		Income (Loss) from
		Unconsolidated
		Investments in Power
		Projects and Oil and
		Gas Properties						Distributions

		For the Nine Months Ended September 30,

		2004			2003			2004		2003

Acadia Energy Center		$	9,490		$	70,990		$	14,438	$	124,613
Aries Power Plant			(4,265	)		(539	)		—		—
Grays Ferry Power Plant			(2,436	)		(1,864	)		—		—
Whitby Cogeneration			870			788			1,515		—
Androscoggin Power Plant			(16,680	)		(5,409	)		—		—
Gordonsville Power Plant(1)			—			4,155			—		1,050
CNGT			—			—			6,127		—
Other			518			211			183		16

	Total	$	(12,503	)	$	68,332		$	22,263	$	125,679

Interest income on notes receivable from power projects(2)		$	840		$	252

	Total	$	(11,663	)	$	68,584

The Company provides for deferred taxes on its share of earnings.


(1)	On November 26, 2003, the Company completed the sale of its 50 percent interest in the Gordonsville Power Plant.

(2)	Notes receivable from power projects represented an outstanding loan to the Company’s investment, AELLC, with carrying values of $23.1 million and $14.7 million, including accrued but unpaid interest, respectively, at September 30, 2004, and December 31, 2003.

Related-Party Transactions with Equity Method Affiliates

The Company and certain of its equity method affiliates have entered into various service agreements with respect to power projects and oil and gas properties. Following is a general description of each of the various agreements:

Operation and Maintenance Agreements — The Company operates and maintains the Acadia Power Plant and Androscoggin Power Plant. This includes routine maintenance, but not major maintenance, which is typically performed under agreements with the equipment manufacturers. Responsibilities include development of annual budgets and operating plans. Payments include reimbursement of costs, including Calpine’s internal personnel and other costs, and annual fixed fees.

Administrative Services Agreements — The Company handles administrative matters such as bookkeeping for certain unconsolidated investments. Payment is on a cost reimbursement basis, including Calpine’s internal costs, with no additional fee.

Power Marketing Agreements — Under agreements with the Company’s Androscoggin Power Plant, CES can either market the plant’s power as the power facility’s agent or buy the power directly. Terms of any direct purchase are to be agreed upon at the time and incorporated into a transaction confirmation. Historically, CES has generally bought the power from the power facility rather than acting as its agent.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Gas Supply Agreement — CES can be directed to supply gas to the Androscoggin Power Plant facility pursuant to transaction confirmations between the facility and CES. Contract terms are reflected in individual transaction confirmations.

The power marketing and gas supply contracts with CES are accounted for as either purchase and sale arrangements or as tolling arrangements. In a purchase and sale arrangement, title and risk of loss associated with the purchase of gas is transferred from CES to the project at the gas delivery point. In a tolling arrangement, title to fuel provided to the project does not transfer, and CES pays the project a capacity and a variable fee based on the specific terms of the power marketing and gas supply agreements. In addition to the contracts specified above, CES maintains two tolling agreements with the Acadia facility.

All of the other power marketing and gas supply contracts are accounted for as purchases and sales.

The related party balances with equity method affiliates as of September 30, 2004 and December 31, 2003, reflected in the accompanying Consolidated Condensed Balance Sheets, and the related party transactions with equity method affiliates for the three and nine months ended September 30, 2004, and 2003, reflected in the accompanying Consolidated Condensed Statements of Operations are summarized as follows (in thousands):


	September 30,		December 31,
	2004		2003

Accounts receivable	$	55	$	1,156
Accounts payable		8,056		12,172
Interest receivable		2,261		2,074
Note Receivable, principal amount		20,872		13,262
Other receivables		11,137		8,794


	2004		2003

For the Three Months Ended September 30
Cost of Revenue	$	25,504	$	21,566
Maintenance fee revenue		40		157
Interest income		347		138
For the Nine Months Ended September 30
Revenue	$	699	$	455
Cost of Revenue		89,623		52,649
Maintenance fee revenue		254		460
Interest income		840		252
Gain on sale of assets		6,240		—


7.	Financing

On July 1, 2004, the Company exchanged 4.2 million shares of Calpine common stock in privately negotiated transactions for approximately $20.0 million par value of HIGH TIDES I. The repurchased HIGH TIDES are reflected in our balance sheet in other assets as available for sale securities. See Note 4 for more information regarding the Company’s available-for-sale securities. See Note 16 for the redemption of HIGH TIDES I and II subsequent to September 30, 2004.

On August 5, 2004, the Company announced that its newly created entity, Calpine Energy Management, L.P. (“CEM”), entered into a $250.0 million letter of credit facility with Deutsche Bank (rated Aa3/ AA-) that expires in October 2005. Deutsche Bank will guarantee CEM’s power and gas obligations by issuing

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

letters of credit. Receivables generated through power sales will serve as collateral to support the letters of credit.

On September 1, 2004, the Company, along with Calpine Natural Gas L.P., completed the sale of its Rocky Mountain gas reserves that were primarily concentrated in two geographic areas: the Colorado Piceance Basin and the New Mexico San Juan Basin. Together, these assets represent approximately 120 billion cubic feet equivalent (“Bcfe”) of proved gas reserves, producing approximately 16.3 million net cubic feet equivalent (“MMcfed”) per day of gas. Under the terms of the agreement, the Company received cash payments of approximately $222.8 million, and recorded a pre-tax gain of approximately $102.9 million. Proceeds derived from this sale were applied as a mandatory paydown, pursuant to covenants governing asset sales, under the Company’s First Priority Senior Secured Term Loan B Notes Due 2007 and the $300 million Working Capital Revolver.

On September 2, 2004, the Company completed the sale of its Canadian natural gas reserves and petroleum assets. These Canadian assets represent approximately 221 Bcfe of proved reserves, producing approximately 61 MMcfed. Included in this sale was the Company’s 25 percent interest in approximately 80 Bcfe of proved reserves (net of royalties) and 32 MMcfe of production owned by the Calpine Natural Gas Trust. Under the terms of the agreement, the Company received cash payments of approximately Cdn$825.0 million, or approximately US$625 million, less adjustments of Cdn$15.6 million, on the September 2, 2004, closing date. The Company recorded a pre-tax gain of approximately $100.6 million on the sale of its Canadian assets. A portion of the proceeds derived from this sale were applied as a mandatory paydown under the Company’s First Priority Senior Secured Term Loan B Notes Due 2007 and the $300 million Working Capital Revolver, at which date the remaining obligations under these loan facilities were fully paid down and related letters of credit cash collateralized.

On September 30, 2004, the Company established a new $255 million Cash Collateralized Letter of Credit Facility with Bayerische Landesbank, under which all letters of credit previously issued under the $300 million Working Capital Revolver and the $200 million Cash Collateralized Letter of Credit Facility will be transitioned into that new Facility. Upon completion of this transition, all letters of credit presently collateralized with The Bank of Nova Scotia will be terminated.

On September 30, 2004, the Company closed on $785 million of 9⁵/8% First-Priority Senior Secured Notes Due 2014 (“9⁵/8% Senior Notes”), offered at 99.212% of par. The 9⁵/8% Senior Notes are secured, by substantially all of the assets owned directly by Calpine Corporation, and by the stock of substantially all of its first-tier subsidiaries. Net proceeds from the 9⁵/8% Senior Notes offering were used to make open-market purchases of the Company’s existing indebtedness and any remaining proceeds will be applied toward further open-market purchases (or redemption) of existing indebtedness and as otherwise permitted by the Company’s indentures.

On September 30, 2004, the Company closed on $736 million aggregate principal amount at maturity of Contingent Convertible Notes Due 2014 (“2014 Convertible Notes”), offered at 83.9% of par. The 2014 Convertible Notes will be convertible into cash and into a variable number of shares of Calpine common stock based on a conversion value derived from the conversion price of $3.85 per share. The number of shares to be delivered upon conversion will be determined by the market price of Calpine common shares at the time of conversion. The conversion price of $3.85 per share represents a premium of approximately 23% over The New York Stock Exchange closing price of $3.14 per Calpine common share on September 27, 2004. The 2014 Convertible Notes will pay interest at a rate of 6%, except that in years three, four and five, in lieu of interest, the original principal amount of $839 per note will accrete daily beginning September 30, 2006, to the full principal amount of $1,000 per note at September 30, 2009. Upon conversion of the 2014 Convertible Notes, the Company will deliver the portion of the conversion value equal to the then current principal amount of the 2014 Convertible Notes in cash and any additional conversion value in Calpine common stock.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Net proceeds from the 2014 Convertible Notes offering were used to redeem the Company’s HIGH TIDES I and HIGH TIDES II preferred securities on October 20, 2004, (see Note 16 for more information regarding this redemption) and to repurchase other existing indebtedness through open-market and privately negotiated purchases, and as otherwise permitted by the Company’s indentures.

In conjunction with the 2014 Convertible Notes offering, the Company entered into a ten-year Share Lending Agreement with Deutsche Bank AG London (“DB London”), under which the Company loaned DB London 89 million shares of newly issued Calpine common stock (the “loaned shares”) in exchange for a loan fee of $.001 per share. The entire 89 million shares were sold by DB London on September 30, 2004, at a price of $2.75 per share in a registered public offering. The Company did not receive any of the proceeds of the public offering. DB London is required to return the loaned shares to the Company no later than the end of the ten-year term of the Share Lending Agreement, or earlier under certain circumstances. Once loaned shares are returned, they may not be re-borrowed under the Share Lending Agreement. Under the Share Lending Agreement, DB London is required to post and maintain collateral in the form of cash, government securities, certificates of deposit, high-grade commercial paper of U.S. issuers or money market shares at least equal to 100% of the market value of the loaned shares as security for the obligation of DB London to return the loaned shares to the Company. This collateral is held in an account at a DB London affiliate. The Company has no access to the collateral unless DB London defaults under its obligations.

The Company’s issuance of 89 million shares of its common stock pursuant to the Share Lending Agreement was essentially analogous to a sale of shares coupled with a forward contract for the reacquisition of the shares at a future date. As there will be no cash consideration for the return of the shares, the forward contract is considered to be prepaid. This agreement is similar to the accelerated share repurchase transaction addressed by EITF Issue No. 99-7, “Accounting for an Accelerated Share Repurchase Program,” (“EITF Issue No. 99-7”) which is characterized as two distinct transactions: a treasury stock purchase and a forward sales contract. We have evaluated what is essentially a prepaid forward contract under the guidance of SFAS No. 133 and EITF Issue No. 00-19: “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in , a Company’s Own Stock,” and determined that the instrument meets the requirements to be accounted for in equity and is not required to be bifurcated and accounted for separate from the Share Lending Agreement. The transaction was recorded in equity at the fair market value of the Company’s common stock on the date of issuance in the amount of $258.1 million with an offsetting purchase obligation.

Under SFAS No. 150, entities that have entered into a forward contract that requires physical settlement by repurchase of a fixed number of the issuer’s equity shares of common stock in exchange for cash shall exclude the common shares to be redeemed or repurchased when calculating basic and diluted earnings per share. While the Share Lending Agreement does not provide for cash settlement, physical settlement (i.e. the 89 million shares must be returned by the end of the agreement) is required. Further, EITF Issue No. 99-7 indicates that the “treasury stock transaction” would result in an immediate reduction in number of outstanding shares used to calculate basic and diluted earnings per share. The share loan is analogous to a prepaid forward contract which would cancel the shares issued under the Share Lending Agreement and result in an immediate reduction in the number of outstanding shares used to calculate basic and diluted earnings per share. Consequently, the Company has excluded the 89 million shares of common stock subject to the Share Lending Agreement from the earnings per share calculation.

During the three months ended September 30, 2004, the Company repurchased $734.8 million in principal amount of its outstanding Senior Notes, 2023 Convertible Senior Notes and HIGH TIDES III preferred securities in exchange for $553.8 million in cash. The Company recorded a pre-tax gain on these transactions in the amount of $167.2 million, net of write-offs of unamortized deferred financing costs and the unamortized premiums or discounts.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Annual Debt Maturities

The annual principal repayments or maturities of notes payable and borrowings under lines of credit, notes payable to the Trusts, preferred interests, construction/project financing, 4% Convertible Senior Notes Due 2006 (“2006 Convertible Senior Notes”), 2014 Convertible Notes, 2023 Convertible Senior Notes, senior notes and term loans, CCFC I financing, CalGen/ CCFC II financing and capital lease obligations, net of unamortized premiums and discounts, as of September 30, 2004, are as follows (in thousands):


October through December 2004(1)		$	746,537
2005			482,885
2006			657,529
2007			1,888,584
2008			2,294,280
Thereafter			12,353,265

	Total	$	18,423,080


(1)	Includes $636.0 million in the aggregate of HIGH TIDES I and HIGH TIDES II preferred securities that were redeemed subsequent to September 30, 2004. See Note 16 for more information regarding this redemption.


8.	Unrestricted Subsidiaries and Indenture Compliance

Unrestricted Subsidiaries — The information in this paragraph is required to be provided under the terms of the indentures and credit agreement governing the various tranches of the Company’s second-priority secured indebtedness (collectively, the “Second Priority Secured Debt Instruments”). The Company has designated certain of its subsidiaries as “unrestricted subsidiaries” under the Second Priority Secured Debt Instruments. A subsidiary with “unrestricted” status thereunder generally is not required to comply with the covenants contained therein that are applicable to “restricted subsidiaries.” The Company has designated Calpine Gilroy 1, Inc., Calpine Gilroy 2, Inc. and Calpine Gilroy Cogen, L.P. as “unrestricted subsidiaries” for purposes of the Second Priority Secured Debt Instruments.

Indenture Compliance — The Company’s various indentures place conditions on the Company’s ability to issue indebtedness, including further limitations on the issuance of additional debt if the Company’s interest coverage ratio (as defined in the various indentures) is below 2:1. Currently, the Company’s interest coverage ratio (as so defined) is below 2:1 and, consequently, the Company’s indentures generally would not allow the Company to issue new debt, except for (i) certain types of new indebtedness that refinances or replaces existing indebtedness, and (ii) non-recourse debt and preferred equity interests issued by subsidiaries of the Company for purposes of financing certain types of capital expenditures, including plant development, construction and acquisition expenses. In addition, if and so long as the Company’s interest coverage ratio is below 2:1, the Company’s indentures will limit the Company’s ability to invest in unrestricted subsidiaries and non-subsidiary affiliates and make certain other types of restricted payments.


9.	Asset Disposals and Discontinued Operations

Set forth below are all of the Company’s asset disposals by reportable segment that impacted the Company’s Consolidated Condensed Financial Statements as of September 30, 2004 and December 31, 2003:

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Corporate and Other

On July 31, 2003, the Company completed the sale of its specialty data center engineering business and recorded a pre-tax loss on the sale of $11.6 million.

Oil and Gas Production and Marketing

On November 20, 2003, the Company completed the sale of its Alvin South Field oil and gas assets located near Alvin, Texas for approximately $0.06 million to Cornerstone Energy, Inc. As a result of the sale, the Company recognized a pre-tax loss of $0.2 million.

On September 1, 2004, the Company along with Calpine Natural Gas L.P., a Delaware limited partnership, completed the sale of its Rocky Mountain gas reserves that were primarily concentrated in two geographic areas: the Colorado Piceance Basin and the New Mexico San Juan Basin. Together, these assets represent approximately 120 billion cubic feet equivalent (“Bcfe”) of proved gas reserves, producing approximately 16.3 million net cubic feet equivalent (“Mmcfe”) per day of gas. Under the terms of the agreement Calpine received cash payments of approximately $222.8 million, and recorded a pre-tax gain of approximately $102.9 million.

On September 2, 2004, the Company completed the sale of its Canadian natural gas reserves and petroleum assets. These Canadian assets represent approximately 221 Bcfe of proved reserves, producing approximately 61 Mmcfe. Included in this sale was the Company’s 25 percent interest in approximately 80 Bcfe of proved reserves (net of royalties) and 32 Mmcfe of production owned by the CNGT. In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) the Company’s 25% equity method investment in the CNGT was considered part of the larger disposal group (i.e., assets to be disposed of together as a group in a single transaction to the same buyer), and therefore evaluated and accounted for as discontinued operations. Under the terms of the agreement, Calpine received cash payments of approximately Cdn$825.0 million, or approximately US$625 million, less adjustments of Cdn$15.6 million, to reflect a September 2, 2004, closing date. Calpine recorded a pre-tax gain of approximately $100.6 million on the sale of its Canadian assets.

In connection with the sale of the oil and gas assets in Canada, the Company entered into a seven-year gas purchase agreement beginning on March 31, 2005, and expiring on October 31, 2011, that allows, but does not require, the Company to purchase gas from the buyer at current market index prices. The agreement is not asset specific and can be settled by any production that the buyer has available.

In connection with the sale of the Rocky Mountain gas reserves, the New Mexico San Juan Basin sales agreement allows for the buyer and the Company to execute a ten-year gas purchase agreement for 100% of the underlying gas production of sold reserves, at market index prices. Any agreement would be subject to mutually agreeable collateral requirements and other customary terms and provisions. As of September 30, 2004, no such gas purchase agreement has been finalized between the Company and the buyer.

The Company believes that all final terms of the gas purchase agreements described above, are on a market value and arm’s length basis. If the Company elects in the future to exercise a call option over production from the disposed components, the Company will consider the call obligation to have been met as if the actual production delivered to the Company under the call was from assets other than those constituting the disposed components.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

The Company allocates interest to discontinued operations in accordance with EITF Issue No. 87-24, “Allocation of Interest to Discontinued Operations.” The Company includes interest expense on debt which is required to be repaid as a result of a disposal transaction in discontinued operations. Additionally, other interest expense that cannot be attributed to other operations of the Company is allocated based on the ratio of net assets to be sold less debt that is required to be paid as a result of the disposal transaction to the sum of total net assets of the Company plus consolidated debt of the Company, excluding (a) debt of the discontinued operation that will be assumed by the buyer, (b) debt that is required to be paid as a result of the disposal transaction and (c) debt that can be directly attributed to other operations of the Company.

Using the methodology above, the Company allocated interest expense associated with the debt to be repaid as a result of the sale of the Canadian natural gas reserves and petroleum assets as well as other debt related to the Company’s operations in the amount of $5.2 million and $17.9 million for the three and nine months ended September 30, 2004, respectively, and $5.9 million and $13.3 million for the three and nine months ended September 30, 2003, respectively.

Electric Generation and Marketing

On January 15, 2004, the Company completed the sale of its 50-percent undivided interest in the 545-megawatt Lost Pines 1 Power Project to GenTex Power Corporation, an affiliate of the Lower Colorado River Authority (“LCRA”). Under the terms of the agreement, Calpine received a cash payment of $146.8 million and recorded a pre-tax gain of $35.3 million. In addition, CES entered into a tolling agreement with LCRA providing for the option to purchase 250 megawatts of electricity through December 31, 2004. At December 31, 2003, the Company’s undivided interest in the Lost Pines facility was classified as “held for sale.”

Summary

The Company made reclassifications to current and prior period financial statements to reflect the sale or designation as “held for sale” of these oil and gas and power plant assets and liabilities and to separately classify the operating results of the assets sold and gain on sale of those assets from the operating results of continuing operations to discontinued operations.

The tables below present significant components of the Company’s income from discontinued operations for the three and nine months ended September 30, 2004, and 2003, respectively (in thousands):


	Three Months Ended September 30, 2004

	Electric		Oil and Gas
	Generation		Production			Corporate
	and Marketing		and Marketing			and Other		Total

Total revenue	$	—	$	7,576		$	—	$	7,576

Gain (loss) on disposal before taxes	$	—	$	203,533		$	—	$	203,533
Operating income (loss) from discontinued operations before taxes		—		(258	)		—		(258	)

Income (loss) from discontinued operations before taxes	$	—	$	203,275		$	—	$	203,275
Income tax provision (benefit)		—		76,737			—		76,737

Income (loss) from discontinued operations, net of tax	$	—	$	126,538		$	—	$	126,538

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


	Three Months Ended September 30, 2003

	Electric		Oil and Gas
	Generation		Production			Corporate
	and Marketing		and Marketing			and Other			Total

Total revenue	$	19,238	$	11,301		$	—		$	30,539

Gain (loss) on disposal before taxes	$	—	$	—		$	(8,277	)	$	(8,277	)
Operating income (loss) from discontinued operations before taxes		2,144		(341	)		6,372			8,175

Income (loss) from discontinued operations before taxes	$	2,144	$	(341	)	$	(1,905	)	$	(102	)
Income tax provision (benefit)		751		(64,474	)		2,369			(61,354	)

Income (loss) from discontinued operations, net of tax	$	1,393	$	64,133		$	(4,274	)	$	61,252


	Nine Months Ended September 30, 2004

	Electric		Oil and Gas
	Generation		Production		Corporate
	and Marketing		and Marketing		and Other		Total

Total revenue	$	2,679	$	28,442	$	—	$	31,121

Gain (loss) on disposal before taxes	$	35,327	$	207,120	$	—	$	242,447
Operating income (loss) from discontinued operations before taxes		180		3,090		—		3,270

Income (loss) from discontinued operations before taxes	$	35,507	$	210,210	$	—		245,717
Income tax provision (benefit)		19		53,749		—		53,768

Income (loss) from discontinued operations, net of tax	$	35,488	$	156,461	$	—	$	191,949


	Nine Months Ended September 30, 2003

	Electric		Oil and Gas
	Generation		Production			Corporate
	and Marketing		and Marketing			and Other			Total

Total revenue	$	58,298	$	37,964		$	—		$	96,262

Gain (loss) on disposal before taxes	$	—	$	—		$	(11,571	)	$	(11,571	)
Operating income (loss) from discontinued operations before taxes		5,308		21,853			(6,917	)		20,244

Income (loss) from discontinued operations before taxes	$	5,308	$	21,853		$	(18,488	)	$	8,673
Income tax provision (benefit)		1,859		(44,652	)		(2,819	)		(45,612	)

Income (loss) from discontinued operations, net of tax	$	3,449	$	66,505		$	(15,669	)	$	54,285


10.	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 commodities, the Company enters into derivative commodity instruments. The Company enters into commodity instruments to

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

convert floating or indexed electricity and gas prices to fixed prices in order to lessen its vulnerability to reductions in electric prices for the electricity it generates, and to increases in gas prices for the fuel it consumes in its power plants. The Company seeks to “self-hedge” its gas consumption exposure to an extent with its own gas production position. The hedging, balancing, and 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. The Company also utilizes derivatives to optimize the returns it is able to achieve from these assets. From time to time the Company has entered into contracts considered energy trading contracts under EITF Issue No. 02-3. 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.

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 contracts that are not deemed normal purchases and sales can be designated as hedges of the underlying consumption of gas or production of electricity.

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 and to adjust the mix between fixed and floating rate debt in its capital structure to desired levels. Certain of 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.

Also in conjunction with its capital market activities, the Company enters into various interest rate swap agreements to hedge against the changes in fair value on certain of its fixed rate Senior Notes. These interest rate swap agreements effectively convert fixed rates into floating rates so that the Company can predict with greater assurance what the fair value of its fixed rate Senior Notes will be and protect itself against unfavorable future fair value movements.

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.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Summary of Derivative Values

The table below reflects the amounts (in thousands) that are recorded as assets and liabilities at September 30, 2004, for the Company’s derivative instruments:


							Commodity
			Interest Rate		Currency		Derivative		Total
			Derivative		Derivative		Instruments		Derivative
			Instruments		Instruments		Net		Instruments

Current derivative assets			$	2,711	$	—	$	414,219	$	416,930
Long-term derivative assets				—		—		587,000		587,000

	Total assets		$	2,711	$	—	$	1,001,219	$	1,003,930

Current derivative liabilities			$	28,892	$	12,897	$	482,236	$	524,025
Long-term derivative liabilities				64,815		—		576,465		641,280

	Total liabilities		$	93,707	$	12,897	$	1,058,701	$	1,165,305

		Net derivative liabilities	$	90,996	$	12,897	$	57,482	$	161,375

Of the Company’s net derivative position, $321.3 million and $61.3 million are net derivative assets of PCF and CNEM, respectively, each of which is an entity with its existence separate from the Company and other subsidiaries of the Company. The Company fully consolidates CNEM and, as discussed more fully in Note 3, the Company records the derivative assets of PCF in its balance sheet.

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:

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 or asset account, thereby creating an imbalance between net OCI and net derivative assets and liabilities.

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.

Termination of effective cash flow hedges prior to maturity — Following the termination of a cash flow hedge, changes in the derivative asset or liability are no longer recorded to OCI. At this point, an accumulated OCI balance remains that is not recognized in earnings until the forecasted initially hedged 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.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Below is a reconciliation of the Company’s net derivative assets to its accumulated other comprehensive loss, net of tax from derivative instruments at September 30, 2004 (in thousands):


Net derivative liabilities	$	(161,375	)
Derivatives not designated as cash flow hedges and recognized hedge ineffectiveness		(59,703	)
Cash flow hedges terminated prior to maturity		(83,766	)
Deferred tax asset attributable to accumulated other comprehensive loss on cash flow hedges		89,107
Accumulated OCI from unconsolidated investees		35,947

Accumulated other comprehensive loss from derivative instruments, net of tax(1)	$	(179,790	)


(1)	Amount represents one portion of the Company’s total accumulated OCI balance. See Note 11 for further information

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 September 30, 2004.


			September 30, 2004

			Gross			Net

Current derivative assets			$	1,035,550		$	414,219
Long-term derivative assets				1,207,141			587,000

	Total derivative assets		$	2,242,691		$	1,001,219

Current derivative liabilities			$	1,103,567		$	482,236
Long-term derivative liabilities				1,196,606			576,465

	Total derivative liabilities		$	2,300,173		$	1,058,701

		Net commodity derivative liabilities	$	(57,482	)	$	(57,482	)

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

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

The tables below reflect the impact of unrealized mark-to-market gains (losses) on the Company’s 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 nine months ended September 30, 2004 and 2003, respectively (in thousands):


		Three Months Ended September 30,

		2004								2003

		Hedge		Undesignated						Hedge			Undesignated
		Ineffectiveness		Derivatives			Total			Ineffectiveness			Derivatives			Total

Natural gas derivatives(1)		$	777	$	(8,508	)	$	(7,731	)	$	(4,370	)	$	10,562		$	6,192
Power derivatives(1)			1,142		(17,173	)		(16,031	)		(115	)		(17,007	)		(17,122	)
Interest rate derivatives(2)			2,369		—			2,369			(262	)		—			(262	)
Currency derivatives			—		(12,897	)		(12,897	)		—			—			—

	Total	$	4,288	$	(38,578	)	$	(34,290	)	$	(4,747	)	$	(6,445	)	$	(11,192	)


		Nine Months Ended September 30,

		2004								2003

		Hedge		Undesignated						Hedge			Undesignated
		Ineffectiveness		Derivatives			Total			Ineffectiveness			Derivatives			Total

Natural gas derivatives(1)		$	6,540	$	(11,610	)	$	(5,070	)	$	3,810		$	12,140		$	15,950
Power derivatives(1)			1,268		(53,818	)		(52,550	)		(4,753	)		(30,118	)		(34,871	)
Interest rate derivatives(2)			1,421		6,035			7,456			(746	)		—			(746	)
Currency derivatives			—		(12,897	)		(12,897	)		—			—			—

	Total	$	9,229	$	(72,290	)	$	(63,061	)	$	(1,689	)	$	(17,978	)	$	(19,667	)


(1)	Represents the unrealized portion of mark-to-market activity on gas and power transactions. The unrealized portion of mark-to-market activity is combined with the realized portions of mark-to-market activity and presented in the Consolidated Statements of Operations as mark-to-market activities, net.


(2)	Recorded within Other Income

The table below reflects the contribution of the Company’s cash flow hedge activity to pre-tax earnings based on the reclassification adjustment from OCI to earnings for the three and nine months ended September 30, 2004 and 2003, respectively (in thousands):


		Three Months Ended
		September 30,

		2004			2003

Natural gas and crude oil derivatives		$	(1,746	)	$	(127	)
Power derivatives			(26,975	)		(30,710	)
Interest rate derivatives			(1,320	)		(4,166	)
Foreign currency derivatives			(501	)		(740	)

	Total derivatives	$	(30,542	)	$	(35,743	)

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


		Nine Months Ended
		September 30,

		2004			2003

Natural gas and crude oil derivatives		$	23,487		$	32,037
Power derivatives			(69,998	)		(86,260	)
Interest rate derivatives			(11,286	)		(18,259	)
Foreign currency derivatives			(1,513	)		11,089

	Total derivatives	$	(59,310	)	$	(61,393	)

As of September 30, 2004 the maximum length of time over which the Company was hedging its exposure to the variability in future cash flows for forecasted transactions was 7 and 12.5 years, for commodity and interest rate derivative instruments, respectively. The Company estimates that pre-tax losses of $193.2 million would be reclassified from accumulated OCI into earnings during the twelve months ended September 30, 2005, 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.

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.


																	2009 &
		2004			2005			2006			2007			2008			After			Total

Gas OCI		$	31,928		$	49,610		$	65,916		$	8,420		$	885		$	1,257		$	158,016
Power OCI			(53,933	)		(202,441	)		(77,856	)		(3,046	)		(339	)		106			(337,509	)
Interest rate OCI			(7,771	)		(28,581	)		(13,563	)		(8,068	)		(4,097	)		(21,713	)		(83,793	)
Foreign currency OCI			(359	)		(1,863	)		(1,863	)		(1,472	)		(54	)		—			(5,611	)

	Total pre-tax OCI	$	(30,135	)	$	(183,275	)	$	(27,366	)	$	(4,166	)	$	(3,605	)	$	(20,350	)	$	(268,897	)

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


11.	Comprehensive Income (Loss)

Comprehensive income is the total of net income and all other non-owner changes in equity. Comprehensive income includes the Company’s net income, unrealized gains and losses from derivative instruments that qualify as cash flow hedges and the effects of foreign currency translation adjustments. The Company reports Accumulated Other Comprehensive Income (“AOCI”) in its Consolidated Balance Sheet. The tables below detail the changes during the nine months ended September 30, 2004 and 2003, in the Company’s AOCI balance and the components of the Company’s comprehensive income (in thousands):


														Comprehensive Income
											Total			(Loss) for the Three
											Accumulated			Months Ended
						Available-			Foreign		Other			March 31, 2004,
			Cash Flow			for-Sale			Currency		Comprehensive			June 30, 2004, and
			Hedges			Investments			Translation		Income			September 30, 2004

Accumulated other comprehensive income (loss) at January 1, 2004			$	(130,419	)	$	—		$	187,013	$	56,594
Net loss for the three months ended March 31, 2004														$	(71,192	)
	Cash flow hedges:
		Comprehensive pre-tax gain on cash flow hedges before reclassification adjustment during the three months ended March 31, 2004		4,426
		Reclassification adjustment for loss included in net loss for the three months ended March 31, 2004		15,863
		Income tax provision for the three months ended March 31, 2004		(7,224	)

				13,065								13,065			13,065
	Available-for-sale investments:
		Pre-tax gain on available-for-sale investments for the three months ended March 31, 2004					19,526
		Income tax provision for the three months ended March 31, 2004					(7,709	)

							11,817					11,817			11,817
		Foreign currency translation gain for the three months ended March 31, 2004								2,078		2,078			2,078

Total comprehensive loss for the three months ended March 31, 2004														$	(44,232	)

Accumulated other comprehensive income (loss) at March 31, 2004			$	(117,354	)	$	11,817		$	189,091	$	83,554

Net loss for the three months ended June 30, 2004														$	(28,698	)
	Cash flow hedges:
		Comprehensive pre-tax loss on cash flow hedges before reclassification adjustment during the three months ended June 30, 2004		(54,414	)
		Reclassification adjustment for loss included in net loss for the three months ended June 30, 2004		12,905
		Income tax benefit for the three months ended June 30, 2004		13,369

				(28,140	)							(28,140	)		(28,140	)

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


																Comprehensive Income
													Total			(Loss) for the Three
													Accumulated			Months Ended
							Available-			Foreign			Other			March 31, 2004,
				Cash Flow			for-Sale			Currency			Comprehensive			June 30, 2004, and
				Hedges			Investments			Translation			Income			September 30, 2004

	Available-for-sale investments:
		Pre-tax loss on available-for-sale investments for the three months ended June 30, 2004						(19,762	)
		Income tax benefit for the three months ended June 30, 2004						7,802

								(11,960	)					(11,960	)		(11,960	)
		Foreign currency translation loss for the three months ended June 30, 2004									(21,399	)		(21,399	)		(21,399	)

Total comprehensive loss for the three months ended June 30, 2004																	(90,197	)

Total comprehensive loss for the six months ended June 30, 2004																$	(134,429	)

Accumulated other comprehensive income (loss) at June 30, 2004				$	(145,494	)	$	(143	)	$	167,692		$	22,055

Net income for the three months ended September 30, 2004																$	141,125
	Cash flow hedges:
			Comprehensive pre-tax loss on cash flow hedges before reclassification adjustment during the three months ended September 30, 2004	$	(76,611	)
		Reclassification adjustment for loss included in net income for the three months ended September 30, 2004			30,542
		Income tax benefit for the three months ended September 30, 2004			11,773

					(34,296	)								(34,296	)		(34,296	)
	Available-for-sale investments:
		Pre-tax gain on available-for-sale investments for the three months ended September 30, 2004						6,183
		Income tax provision for the three months ended September 30, 2004						(2,427	)

								3,756						3,756			3,756
		Foreign currency translation gain for the three months ended September 30, 2004									24,941			24,941			24,941

Total comprehensive income for the three months ended September 30, 2004																	135,526

Total comprehensive loss for the nine months ended September 30, 2004																$	1,097

Accumulated other comprehensive income (loss) at September 30, 2004				$	(179,790	)	$	3,613		$	192,633		$	16,456

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


									Total			Income (Loss) for the
									Accumulated			Three Months Ended
						Foreign			Other			March 31, 2004,
			Cash Flow			Currency			Comprehensive			June 30, 2004, and
			Hedges			Translation			Income			September 30, 2004

Accumulated other comprehensive loss at January 1, 2003			$	(224,414	)	$	(13,043	)	$	(237,457	)
Net loss for the three months ended March 31, 2003												$	(52,016	)
	Cash flow hedges:
		Comprehensive pre-tax gain on cash flow hedges before reclassification adjustment during the three months ended March 31, 2003		27,827
		Reclassification adjustment for loss included in net loss for the three months ended March 31, 2003		14,249
		Income tax provision for the three months ended March 31, 2003		(10,927	)

				31,149						31,149			31,149
		Foreign currency translation gain for the three months ended March 31, 2003		—			84,062			84,062			84,062

Total comprehensive income for the three months ended March 31, 2003												$	63,195

Accumulated other comprehensive income (loss) at March 31, 2003			$	(193,265	)	$	71,019		$	(122,246	)

Net loss for the three months ended June 30, 2003												$	(23,366	)
	Cash flow hedges:
		Comprehensive pre-tax gain on cash flow hedges before reclassification adjustment during the three months ended June 30, 2003		47,892
		Reclassification adjustment for loss included in net loss for the three months ended June 30, 2003		11,401
		Income tax provision for the three months ended June 30, 2003		(28,790	)

				30,503						30,503			30,503
		Foreign currency translation gain for the three months ended June 30, 2003		—			63,494			63,494			63,494

Total comprehensive income for the three months ended June 30, 2003													70,631

Total comprehensive income for the six months ended June 30, 2003												$	133,826

Accumulated other comprehensive income (loss) at June 30, 2003			$	(162,762	)	$	134,513		$	(28,249	)

Net income for the three months ended September 30, 2003												$	237,782
	Cash flow hedges:
		Comprehensive pre-tax gain on cash flow hedges before reclassification adjustment during the three months ended September 30, 2003	$	17,732
		Reclassification adjustment for loss included in net income for the three months ended September 30, 2003		35,743
		Income tax provision for the three months ended September 30, 2003		(20,100	)

				33,375			—			33,375			33,375
		Foreign currency translation loss for the three months ended September 30, 2003		—			(2,044	)		(2,044	)		(2,044	)

Total comprehensive income for the three months ended September 30, 2003												$	269,113

Total comprehensive income for the nine months ended September 30, 2003												$	402,939

Accumulated other comprehensive income (loss) at September 30, 2003			$	(129,387	)	$	132,469		$	3,082

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


12.	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 respective periods. The dilutive effect of the potential exercise of outstanding options to purchase shares of common stock is calculated using the treasury stock method. The dilutive effect of the assumed conversion of certain convertible securities into the Company’s common stock is based on the dilutive common share equivalents and the after tax distribution expense avoided upon conversion. The calculation of basic and diluted earnings (loss) per common share is shown in the following table (in thousands, except per share data).


		Periods Ended September 30,

		2004						2003

				Weighted						Weighted
		Net Income		Average						Average
		(Loss)		Shares		EPS		Net Income		Shares		EPS

THREE MONTHS:
Basic earnings (loss) per common share:
Income (loss) before discontinued operations and cumulative effect of a change in accounting principle		$	14,587		444,380	$	0.03	$	176,530		388,161	$	0.45
Discontinued operations, net of tax			126,538		—		0.29		61,252		—		0.16
Cumulative effect of a change in accounting principle, net of tax			—		—		—		—		—		—

	Net income	$	141,125		444,380	$	0.32	$	237,782		388,161	$	0.61

Diluted earnings per common share:
Common shares issuable upon exercise of stock options using treasury stock method					2,542						6,789

Income before dilutive effect of certain convertible securities, discontinued operations and cumulative effect of a change in accounting principle		$	14,587		446,922	$	0.03	$	176,530		394,950	$	0.45
Dilutive effect of certain convertible securities			—		—		—		17,788		106,844		(0.06	)

Income before discontinued operations and cumulative effect of a change in accounting principle			14,587		446,922		0.03		194,318		501,794		0.39
Discontinued operations, net of tax			126,538		—		0.29		61,252		—		0.12
Cumulative effect of a change in accounting principle, net of tax			—		—		—		—		—		—

	Net income	$	141,125		446,922	$	0.32	$	255,570		501,794	$	0.51

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


		Periods Ended September 30,

		2004								2003

					Weighted							Weighted
		Net Income			Average							Average
		(Loss)			Shares		EPS			Net Income		Shares		EPS

NINE MONTHS:
Basic earnings (loss) per common share:
Income (loss) before discontinued operations and cumulative effect of a change in accounting principle		$	(150,714	)		425,682	$	(0.35	)	$	107,586		383,447	$	0.28
Discontinued operations, net of tax			191,949			—		0.45			54,285		—		0.14
Cumulative effect of a change in accounting principle, net of tax			—			—		—			529		—		—

	Net income (loss)	$	41,235			425,682	$	0.10		$	162,400		383,447	$	0.42

Diluted earnings per common share:
Common shares issuable exercise of stock options using treasury stock method						—							5,175

Income before discontinued operations and cumulative effect of a change in accounting principle		$	(150,714	)		425,682	$	(0.35	)	$	107,586		388,622	$	0.28
Discontinued operations, net of tax			191,949			—		0.45			54,285		—		0.14
Cumulative effect of a change in accounting principle, net of tax			—			—		—			529		—		—

Net income		$	41,235			425,682	$	0.10		$	162,400		388,622	$	0.42

The Company incurred losses before discontinued operations and cumulative effect of a change in accounting principle for the nine months ended September 30, 2004. As a result, basic shares were used in the calculations of fully diluted loss per share for this period, under the guidelines of SFAS No. 128, “Earnings per Share,” (“SFAS No. 128”) as using the basic shares produced the more dilutive effect on the loss per share. Potentially convertible securities and unexercised employee stock options to purchase a weighted average of 55,072,925 shares of the Company’s common stock were not included in the computation of diluted shares outstanding during the nine months ended September 30, 2004, because such inclusion would be antidilutive. Potentially convertible securities and unexercised employee stock options to purchase a weighted average of 125,602,661 shares of the Company’s common stock were not included in the computation of diluted shares outstanding during the nine months ended September 30, 2003, because such inclusion would be antidilutive.

For the three and nine months ended September 30, 2004, approximately 4.0 million and 10.6 million weighted common shares of the Company’s outstanding 2006 Convertible Senior Notes were excluded from the diluted EPS calculations as the inclusion of such shares would have been antidilutive. The holders have the right to require the Company to repurchase these securities on December 26, 2004, at a repurchase price equal to the issue price plus any accrued and unpaid interest, payable at the option of the Company in cash or common shares, or a combination of cash and common shares.

In connection with the convertible notes payable to Calpine Capital Trust (“Trust I”), Calpine Capital Trust II (“Trust II”) and Calpine Capital Trust III (“Trust III”), net of repurchases, there were 13.6 million, 11.1 million and 11.9 million weighted average common shares potentially issuable, respectively, that were

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

excluded from the diluted EPS calculation for the three months ended September 30, 2004. For the nine month period then ended, respectively, there were 15.4 million, 13.1 million, and 11.9 million potentially issuable weighted shares that were excluded from the EPS calculation as their inclusion would be antidilutive. These notes are convertible at any time at the applicable holder’s option in connection with the conversion of convertible preferred securities issued by the Trusts, and may be redeemed at any time after their respective initial redemption date. The Company is required to remarket the convertible preferred securities issued by Trust I, Trust II and Trust III no later than November 1, 2004, February 1, 2005 and August 1, 2005, respectively. If the Company is not able to remarket those securities, it will result in additional interest costs and an adjusted conversion rate equal to 105% of the average closing price of our common stock for the five consecutive trading days after the failed remarketing. All of the convertible preferred securities issued by Trust I and Trust II were redeemed after September 30, 2004. In addition, $115.0 million of the convertible preferred securities issued by Trust III were repurchased on September 30, 2004, in a privately negotiated transaction. See Note 16 for a discussion of the redemption of the convertible preferred securities issued by Trust I and Trust II.

For the three and nine months ended September 30, 2004, there were no shares potentially issuable with respect to the Company’s 2023 Convertible Senior Notes. Upon the occurrence of certain contingencies (generally if the average trading price as calculated under the prescribed definition exceeds 120% of $6.50 per share, i.e. $7.80 per share), these securities are convertible at the holder’s option for cash for the face amount and shares of the Company’s common stock for the appreciated value in the Company’s common stock over $6.50 per share. Holders have the right to require the Company to repurchase the 2023 Convertible Senior Notes at various times beginning on November 15, 2009, for the face amount plus any accrued and unpaid interest and liquidated damages, if any. The repurchase price is payable at the option of the Company in cash or common shares, or a combination of both. The Company may redeem the 2023 Convertible Senior Notes at any time on or after November 22, 2009, in cash for the face amount plus any accrued and unpaid interest and liquidated damages. Approximately 138.4 million maximum potential shares are issuable upon conversion of the 2023 Convertible Senior Notes and are excluded from the diluted EPS calculations as there are currently no shares contingently issuable due to the Company’s quarter end stock price being under $7.80.

For the three and nine months ended September 30, 2004, there were no shares potentially issuable with respect to the Company’s 2014 Convertible Notes. Upon the occurrence of certain contingencies (generally if the average trading price as calculated under the prescribed definition exceeds 120% of $3.85 per share, i.e. $4.62 per share), these securities are convertible at the holder’s option for cash for the face amount and shares of the Company’s common stock for the appreciated value in the Company’s common stock over $3.85 per share. Holders may also surrender the 2014 Convertible Notes for conversion into cash and shares of the Company’s common stock prior to the maturity date at any time following September 30, 2013. Upon conversion of the 2014 Convertible Notes, the Company will deliver the portion of the conversion value equal to the then current principal amount of the 2014 Convertible Notes in cash and any additional conversion value in Calpine common stock. Approximately 191.2 million maximum potential shares are issuable upon conversion of these securities and are excluded from the diluted EPS calculations as there are currently no shares contingently issuable due to the Company’s quarter end stock price being under $4.62.

The Company’s issuance of 89 million shares of its common stock pursuant to the Share Lending Agreement was essentially analogous to a sale of shares coupled with a forward contract for the reacquisition of the shares at a future date. As there will be no cash consideration for the return of the shares, the forward contract is considered to be prepaid. This agreement is similar to the accelerated share repurchase transaction addressed by EITF Issue No. 99-7, “Accounting for an Accelerated Share Repurchase Program,” (“EITF Issue No. 99-7”) which is characterized as two distinct transactions: a treasury stock purchase and a forward sales contract. We have evaluated what is essentially a prepaid forward contract under the guidance of SFAS No. 133, and determined that the instrument meets the requirements to be accounted for in equity and is not required to be bifurcated and accounted for separate from the Share Loan Agreement. We recorded the

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

transaction in equity at the fair market value of the Calpine common stock on the date of issuance in the amount of $258.1 million with an offsetting purchase obligation.

Under SFAS No. 150, entities that have entered into a forward contract that requires physical settlement by repurchase of a fixed number of the issuer’s equity shares of common stock in exchange for cash shall exclude the common shares to be redeemed or repurchased when calculating basic and diluted earnings per share. While the Share Lending Agreement does not provide for cash settlement, physical settlement (i.e. the 89 million shares must be returned at the end of the arrangement) is required. Further, EITF Issue No. 99-7 indicates that the “treasury stock transaction” would result in an immediate reduction in number of outstanding shares used to calculate basic and diluted earnings per share. The share loan is analogous to a prepaid forward contract which would cancel the shares issued under the Share Lending Agreement and result in an immediate reduction in the number of outstanding shares used to calculate basic and diluted earnings per share. Consequently, the Company has excluded the 89 million shares of common stock subject to the Share Lending Agreement from the earnings per share calculation. See Note 7 for more information regarding the loan of the 89 million shares.


13.	Commitments and Contingencies

Turbines. The table below sets forth future turbine payments, net of expected project financing proceeds, for construction and development projects, as well as for unassigned turbines. It includes previously delivered turbines, payments and delivery by year for the remaining three turbines to be delivered as well as payment required for the potential cancellation costs of the remaining 39 gas and steam turbines. The table does not include payments that would result if the Company were to release for manufacturing any of these remaining 39 turbines.


				Units to be
Year		Total		Delivered

		(In thousands)
October through December 2004		$	33,870		2
2005			7,932		1
2006			190		—

	Total	$	41,992		3

Litigation

The Company is party to various litigation matters arising out of the normal course of business, the more significant of which are summarized below. The ultimate outcome of each of these matters cannot presently be determined, nor can the liability that could potentially result from a negative outcome be reasonably estimated presently for every case. The liability the Company may ultimately incur with respect to any one of these matters in the event of a negative outcome may be in excess of amounts currently accrued with respect to such matters and, as a result of these matters, may potentially be material to the Company’s Consolidated Condensed Financial Statements.

Securities Class Action Lawsuits. Since March 11, 2002, 14 shareholder lawsuits have been filed against Calpine and certain of its officers in the United States District Court for the 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 CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

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 11 actions are virtually identical–they are filed by three law firms, in conjunction with other law firms as co-counsel. All 11 lawsuits are purported class actions on behalf of purchasers of Calpine’s securities between January 5, 2001 and December 13, 2001.

The complaints in these 14 actions allege that, during the purported class periods, certain Calpine executives issued false and misleading statements about Calpine’s financial condition in violation of Sections 10(b) and 20(1) of the Securities Exchange Act of 1934, as well as Rule 10b-5. These actions seek an unspecified amount of damages, in addition to other forms of relief.

In addition, a fifteenth securities class action, Ser v. Calpine, et al., was filed on May 13, 2002, (the “Ser action”). The underlying allegations in the Ser action are substantially the same as those in the above-referenced actions. However, the Ser action is brought on behalf of a purported class of purchasers of Calpine’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, as amended (the “Securities Act”), the Supplemental Prospectus for the 2011 Notes contained false and misleading statements regarding Calpine’s financial condition. This action names Calpine, 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.

All 15 of these securities class action lawsuits were consolidated in the United States District Court for the Northern District of California. Plaintiffs filed a first amended complaint in October 2002. The amended complaint did not include the Securities Act complaints raised in the bondholders’ complaint, and the number of defendants named was reduced. On January 16, 2003, before the Company’s response was due to this amended complaint, plaintiffs filed a further second complaint. This second amended complaint added three additional Calpine executives and Arthur Andersen LLP as defendants. The second amended complaint set forth additional alleged violations of Section 10 of the Securities Exchange Act of 1934 relating to allegedly false and misleading statements made regarding Calpine’s role in the California energy crisis, the long term power contracts with the California Department of Water Resources, and Calpine’s dealings with Enron, and additional claims under Section 11 and Section 15 of the Securities Act relating to statements regarding the causes of the California energy crisis. The Company filed a motion to dismiss this consolidated action in early April 2003.

On August 29, 2003, the judge issued an order dismissing, with leave to amend, all of the allegations set forth in the second amended complaint except for a claim under Section 11 of the Securities Act relating to statements relating to the causes of the California energy crisis and the related increase in wholesale prices contained in the Supplemental Prospectuses for the 2011 Notes.

The judge instructed plaintiff, Julies Ser, to file a third amended complaint, which he did on October 17, 2003. The third amended complaint names Calpine and three executives as defendants and alleges the Section 11 claim that survived the judge’s August 29, 2003 order.

On November 21, 2003, Calpine and the individual defendants moved to dismiss the third amended complaint on the grounds that plaintiff’s Section 11 claim was barred by the applicable one-year statute of limitations. On February 4, 2004, the judge denied the Company’s motion to dismiss but has asked the parties to be prepared to file summary judgment motions to address the statute of limitations issue. The Company filed its answer to the third amended complaint on February 23, 2004.

In a separate order dated February 4, 2004, the court denied without prejudice Mr. Ser’s motion to be appointed lead plaintiff. Mr. Ser subsequently stated he no longer desired to serve as lead plaintiff. On April 4, 2004, the Policemen and Firemen Retirement System of the City of Detroit (“P&F”) moved to be appointed lead plaintiff, which motion was granted on May 14, 2004.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

In July 2004 the court issued an order for pretrial preparation establishing a trial date on November 7, 2005. On August 31, 2004, Calpine filed a motion for summary judgment, which was denied on November 3, 2004. Discovery is under way. The Company considers the lawsuit to be without merit and intends to continue to defend vigorously against these allegations.

Hawaii Structural Ironworkers Pension Fund v. Calpine, et al. A securities class action, Hawaii Structural Ironworkers Pension Fund v. Calpine, et al., was filed on March 11, 2003, against Calpine, its directors and certain investment banks in state superior court of San Diego County, California. The underlying allegations in the Hawaii Structural Ironworkers Pension Fund action (“Hawaii action”) are substantially the same as the federal securities class actions described above. However, the Hawaii action is brought on behalf of a purported class of purchasers of Calpine’s equity securities sold to public investors in its April 2002 equity offering. The Hawaii action alleges that the Registration Statement and Prospectus filed by Calpine which became effective on April 24, 2002, contained false and misleading statements regarding Calpine’s financial condition in violation of Sections 11, 12 and 15 of the Securities Act. The Hawaii action relies in part on Calpine’s restatement of certain past financial results, announced on March 3, 2003, to support its allegations. The Hawaii action seeks an unspecified amount of damages, in addition to other forms of relief.

The Company removed the Hawaii action to federal court in April 2003 and filed a motion to transfer the case for consolidation with the other securities class action lawsuits in the United States District Court for the Northern District of California in May 2003. Plaintiff sought to have the action remanded to state court, and on August 27, 2003, the United States District Court for the Southern District of California granted plaintiff’s motion to remand the action to state court. In early October 2003 plaintiff agreed to dismiss the claims it has against three of the outside directors.

On November 5, 2003, Calpine, the individual defendants and the underwriter defendants filed motions to dismiss this complaint on numerous grounds. On February 6, 2004, the court issued a tentative ruling sustaining the Company’s motion to dismiss on the issue of plaintiff’s standing. The court found that plaintiff had not shown that it had purchased Calpine stock “traceable” to the April 2002 equity offering. The court overruled the Company’s motion to dismiss on all other grounds. On March 12, 2004, after oral argument on the issues, the court confirmed its February 2, 2004 ruling.

On February 20, 2004, plaintiff filed an amended complaint, and in late March 2004 the Company and the individual defendants filed answers to this complaint. On April 9, 2004, the Company and the individual defendants filed motions to transfer the lawsuit to Santa Clara County Superior Court, which motions were granted on May 7, 2004. Limited document production has taken place. Negotiations have been taking place between counsel and further production of documents will occur once the court enters a protective order governing the use of confidential information in this action. The Company considers this lawsuit to be without merit and intends to continue to defend vigorously against it.

Phelps v. Calpine Corporation, et al. On April 17, 2003, a participant in the Calpine Corporation Retirement Savings Plan (the “401(k) Plan”) filed a class action lawsuit in the United States District Court for the Northern District of California. The underlying allegations in this action (“Phelps action”) are substantially the same as those in the securities class actions described above. However, the Phelps action is brought on behalf of a purported class of participants in the 401(k) Plan. The Phelps action alleges that various filings and statements made by Calpine during the class period were materially false and misleading, and that defendants failed to fulfill their fiduciary obligations as fiduciaries of the 401(k) Plan by allowing the 401(k) Plan to invest in Calpine common stock. The Phelps action seeks an unspecified amount of damages, in addition to other forms of relief. In May 2003 Lennette Poor-Herena, another participant in the 401(k) Plan, filed a substantially similar class action lawsuit as the Phelps action also in the Northern District of California. Plaintiffs’ counsel is the same in both of these actions, and they have agreed to consolidate these two cases and to coordinate them with the consolidated federal securities class actions described above. On January 20, 2004, plaintiff James Phelps filed a consolidated ERISA complaint naming Calpine and numerous

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

individual current and former Calpine Board members and employees as defendants. Pursuant to a stipulated agreement with plaintiff, Calpine filed its response, in the form of a motion to dismiss, on or about August 13, 2004. The Company considers this lawsuit to be without merit and intends to vigorously defend against it.

Johnson v. Peter Cartwright, et al. On December 17, 2001, a shareholder filed a derivative lawsuit on behalf of Calpine against its directors and one of its senior officers. This lawsuit is captioned Johnson v. Cartwright, et al. and is pending in state superior court of Santa Clara County, California. 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. In December 2002 the court dismissed the complaint with respect to certain of the director defendants for lack of personal jurisdiction, though plaintiff may appeal this ruling. In early February 2003 plaintiff filed an amended complaint. In March 2003 Calpine and the individual defendants filed motions to dismiss and motions to stay this proceeding in favor of the federal securities class actions described above. In July 2003 the court granted the motions to stay this proceeding in favor of the consolidated federal securities class actions described above. The Company cannot estimate the possible loss or range of loss from this matter. The Company considers this lawsuit to be without merit and intends to vigorously defend against it.

Gordon v. Peter Cartwright, et al. On August 8, 2002, a shareholder filed a derivative suit in the United States District Court for the Northern District of California on behalf of Calpine against its directors, captioned Gordon v. Cartwright, et al. similar to Johnson v. Cartwright. Motions have been filed to dismiss the action against certain of the director defendants on the grounds of lack of personal jurisdiction, as well as to dismiss the complaint in total on other grounds. In February 2003 plaintiff agreed to stay these proceedings in favor of the consolidated federal securities class action described above and to dismiss without prejudice certain director defendants. On March 4, 2003, plaintiff filed papers with the court voluntarily agreeing to dismiss without prejudice the claims he had against three of the outside directors. The Company cannot estimate the possible loss or range of loss from this matter. The Company considers this lawsuit to be without merit and intends to continue to defend vigorously against it.

Calpine Corporation v. Automated Credit Exchange. On March 5, 2002, Calpine sued Automated Credit Exchange (“ACE”) in state superior court of Alameda County, California for negligence and breach of contract to recover reclaim trading credits, a form of emission reduction credits that should have been held in Calpine’s account with U.S. Trust Company (“US Trust”). Calpine wrote off $17.7 million in December 2001 related to losses that it alleged were caused by ACE. Calpine and ACE entered into a Settlement Agreement on March 29, 2002, pursuant to which ACE made a payment to Calpine of $7 million and transferred to Calpine the rights to the emission reduction credits to be held by ACE. The Company recognized the $7 million as income 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 Calpine’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. By a judgment entered on October 30, 2002, the bankruptcy court consolidated ACE and the other Sholtz controlled entities with the bankruptcy estate of EonXchange. Subsequently, the Trustee of EonXchange filed a separate motion to substantively consolidate Anne Sholtz into the bankruptcy estate of EonXchange. Although Anne Sholtz initially opposed such motion, she entered into a settlement agreement with the Trustee consenting to her being substantively consolidated into the bankruptcy proceeding. The bankruptcy court entered an order approving Anne Sholtz’s settlement agreement with the Trustee on April 3, 2002. On July 10, 2003, Howard Grobstein, the Trustee in the EonXchange bankruptcy, filed a complaint for avoidance against Calpine, seeking recovery of the $7 million (plus interest and costs) paid to Calpine in the March 29, 2002 Settlement Agreement. The complaint claims that the $7 million received by Calpine in the Settlement Agreement was transferred within 90 days of the

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

filing of bankruptcy and therefore should be avoided and preserved for the benefit of the bankruptcy estate. On August 28, 2003, Calpine filed its answer denying that the $7 million is an avoidable preference. Following two settlement conferences, on or about May 21, 2004, Calpine and the Trustee entered into a Settlement Agreement, whereby Calpine agreed to pay $5.85 million, which was approved by the Bankruptcy Court on June 16, 2004. On October 15, 2004, the preference lawsuit was dismissed with prejudice, given that Calpine had made the final settlement payment prior to that date. Additionally, the Trustee returned the original Stipulated Judgment to Calpine. Therefore, this matter has been fully concluded.

International Paper Company v. Androscoggin Energy LLC. In October 2000 International Paper Company (“IP”) filed a complaint in the United States District Court for the Northern District of Illinois against Androscoggin Energy LLC (“AELLC”) alleging that AELLC breached certain contractual representations and warranties arising out of an amended Energy Services Agreement (“ESA”) by failing to disclose facts surrounding the termination, effective May 8, 1998, of one of AELLC’s fixed-cost gas supply agreements. The steam price paid by IP under the ESA is derived from AELLC’s cost of gas under its gas supply agreements. The Company acquired a 32.3% interest in AELLC as part of the SkyGen transaction which closed in October 2000. AELLC filed a counterclaim against IP that has been referred to arbitration that AELLC may commence at its discretion upon further evaluation. On November 7, 2002, the court issued an opinion on the parties’ cross motions for summary judgment finding in AELLC’s favor on certain matters though granting summary judgment to IP on the liability aspect of a particular claim against AELLC. The court also denied a motion submitted by IP for preliminary injunction to permit IP to make payment of funds into escrow (not directly to AELLC) and require AELLC to post a significant bond.

In mid-April of 2003 IP unilaterally availed itself to self-help in withholding amounts in excess of $2.0 million as a set-off for litigation expenses and fees incurred to date as well as an estimated portion of a rate fund to AELLC. Upon AELLC’s amended complaint and request for immediate injunctive relief against such actions, the court ordered that IP must pay the approximately $1.2 million withheld as attorneys’ fees related to the litigation as any such perceived entitlement was premature, but deferred to provide injunctive relief on the incomplete record concerning the offset of $799,000 as an estimated pass-through of the rate fund. IP complied with the order on April 29, 2003, and tendered payment to AELLC of the approximately $1.2 million. On June 26, 2003, the court entered an order dismissing AELLC’s amended counterclaim without prejudice to AELLC refiling the claims as breach of contract claims in a separate lawsuit. On December 11, 2003, the court denied in part IP’s summary judgment motion pertaining to damages. In short, the court:

(i) determined that, as a matter of law, IP is entitled to pursue an action for damages as a result of AELLC’s breach, and (ii) ruled that sufficient questions of fact remain to deny IP summary judgment on the measure of damages as IP did not sufficiently establish causation resulting from AELLC’s breach of contract (the liability aspect of which IP obtained a summary judgment in December 2002). See Note 16 for an update of this case.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

PLC II, LLC) based on a guaranty, and have also filed a motion to dismiss as to the causes of action alleging federal and state securities laws violations. The motion to dismiss is currently pending before the court. On August 17, 2004, the case was transferred to a different judge, which will likely delay the ruling on the motion to dismiss. However, at the present time, the Company cannot estimate the potential loss, if any, that might arise from this matter. The Company considers Panda’s lawsuit to be without merit and intends to defend vigorously against it. The Company stopped accruing interest income on the promissory note due December 1, 2003, as of the due date because of Panda’s default in repayment of the note.

California Business & Professions Code Section 17200 Cases, of which the lead case is T&E Pastorino Nursery v. Duke Energy Trading and Marketing, L.L.C., et al. This purported class action complaint filed in May 2002 against 20 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 eight other similar complaints for violations of Section 17200. All eight cases were removed from the various state courts in which they were originally filed to federal court for pretrial proceedings with other cases in which the Company is not named as a defendant. However, at the present time, the Company cannot estimate the potential loss, if any, that might arise from this matter. The Company considers the allegations to be without merit, and filed a motion to dismiss on August 28, 2003. The court granted the motion, and plaintiffs have appealed.

Prior to the motion to dismiss being granted, one of the actions, captioned Millar v. Allegheny Energy Supply Co., LLP, et al., was remanded to state superior court of Alameda County, California. On January 12, 2004, CES was added as a defendant in Millar. This action includes similar allegations to the other Section 17200 cases, but also seeks rescission of the long-term power contracts with the California Department of Water Resources.

Upon motion from another newly added defendant, Millar was recently removed to federal court. It has now been transferred to the same judge that is presiding over the other Section 17200 cases described above, where it will be consolidated with such cases for pretrial purposes. The Company anticipates filing a timely motion for dismissal of Millar as well.

Nevada Power Company and Sierra Pacific Power Company v. Calpine Energy Services, L.P. before the FERC, filed on December 4, 2001. Nevada Section 206 Complaint. On December 4, 2001, Nevada Power Company (“NPC”) and Sierra Pacific Power Company (“SPPC”) filed a complaint with 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. The administrative law judge issued an Initial Decision on December 19, 2002, that found for Calpine and the other respondents in the case and denied NPC the relief that it was seeking. FERC dismissed the complaint in an order issued on June 26, 2003, and subsequently denied rehearing of that order. The matter is pending on appeal before the United States Court of Appeals for the Ninth Circuit.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Calpine has filed a protest to the petition asserting that Calpine will take service under the TSA if NPC proceeds to execute a purchase power agreement (“PPA”) with MEC based on its winning bid in the Request for Proposals that NPC conducted in 2003. Calpine also has taken the position that if NPC does not execute a PPA with MEC, it will terminate the TSA and any payment by Calpine would be limited to a pro rata allocation of certain costs incurred by NPC in connection with the second phase of the project (approximately $4.5 million in total to date) among the three customers to be served. At this time, Calpine is unable to predict the final outcome of this proceeding or its impact on Calpine.

The bond issued by FFIC, by its terms, expired on May 1, 2004. On or about April 27, 2004, NPC asserted to FFIC that Calpine had committed a default under the bond by failing to agree to renew or replace the bond upon its expiration and made demand on FFIC for the full amount of the surety bond, $33,333,333. On April 29, 2004, FFIC filed a complaint for declaratory relief in state superior court of Marin County, California in connection with this demand. If FFIC is successful in its petition, it will be entitled to recover its costs associated with bringing this action.

FFIC’s superior court complaint asks that an order be issued declaring that it has no obligation to make payment under the bond. Further, if the court were to determine that FFIC does have an obligation to make payment, FFIC asked that an order be issued declaring that (i) Calpine has an obligation to replace it with funds equal to the amount of NPC’s demand against the bond and (ii) Calpine is obligated to indemnify and hold FFIC harmless for all loss, costs and fees incurred as a result of the issuance of the bond. Calpine filed an answer denying the allegations of the complaint and asserting affirmative defenses, including that it has fully performed its obligations under the TSA and surety bond. NPC filed a motion to quash service for lack of personal jurisdiction in California.

On September 3, 2004, the superior court granted NPC’s motion, and NPC was dismissed from the proceeding. Subsequently, FFIC agreed to dismiss the complaint as to Calpine. On September 30, 2004 NPC filed a complaint in state district court of Clark County, Nevada against Calpine, Moapa Energy Center, LLC, FFIC and unnamed parties alleging, among other things, breach by Calpine of its obligations under the TSA and breach by FFIC of its obligations under the surety bond. At this time, Calpine is unable to predict the outcome of this proceeding.

Calpine Canada Natural Gas Partnership v. Enron Canada Corp. On February 6, 2002, Calpine Canada Natural Gas Partnership (“Calpine Canada”) filed a complaint in the Alberta Court of Queens Branch alleging that Enron Canada Corp. (“Enron Canada”) owed it approximately US$1.5 million from the sale of gas in connection with two Master Firm gas Purchase and Sale Agreements. To date, Enron Canada has not sought bankruptcy relief and has counterclaimed in the amount of US$18 million. Discovery is currently in progress, and the Company believes that Enron Canada’s counterclaim is without merit and intends to vigorously defend against it.

Jones v. Calpine Corporation. On June 11, 2003, the Estate of Darrell Jones and the Estate of Cynthia Jones filed a complaint against Calpine in the United States District Court for the Western District of Washington. Calpine purchased Goldendale Energy, Inc., a Washington corporation, from Darrell Jones of National Energy Systems Company (“NESCO”). The agreement provided, among other things, that upon substantial completion of the Goldendale facility, Calpine would pay Mr. Jones (i) $6.0 million and (ii) $18.0 million less $0.2 million per day for each day that elapsed between July 1, 2002, and the date of substantial completion. Substantial completion of the Goldendale facility occurred in September 2004 and the daily reduction in the payment amount has reduced the $18.0 million payment to zero. Calpine has made the $6 million payment to the estates. The complaint alleges that by not achieving substantial completion by July 1, 2002, Calpine breached its contract with Mr. Jones, violated a duty of good faith and fair dealing, and caused an inequitable forfeiture. The complaint seeks damages in an unspecified amount in excess of $75,000. On July 28, 2003, Calpine filed a motion to dismiss the complaint for failure to state a claim upon which relief can be granted. The court granted Calpine’s motion to dismiss the complaint on March 10, 2004. Plaintiffs

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

filed a motion for reconsideration of the decision, which was denied. Subsequently, on June 7, 2004, plaintiffs filed a notice of appeal. Calpine filed a motion to recover attorneys’ fees from NESCO, which was recently granted at a reduced amount. Calpine held back $100,000 of the $6 million payment to ensure payment of these fees.

Calpine Energy Services v. Acadia Power Partners. Calpine, through its subsidiaries, owns 50% of Acadia Power Partners, LLC (“APP”) which company owns the Acadia Energy Center near Eunice, Louisiana (the “Facility”). A Cleco Corp subsidiary owns the remaining 50% of APP. Calpine Energy Services, LP (“CES”) is the purchaser under two power purchase agreements with APP, which agreements entitle CES to all of the Facility’s capacity and energy. In August 2003 certain transmission constraints previously unknown to CES and APP began to severely limit the ability of CES to obtain all of the energy from the Facility. CES has asserted that it is entitled to certain relief under the purchase agreements, to which assertions APP disagrees. Accordingly, the parties are engaging in the initial alternative dispute resolution steps set forth in the power purchase agreements. It is possible that the dispute will result in binding arbitration pursuant to the agreements if a settlement is not reached. In addition, CES and APP are discussing certain billing calculation disputes, which relate to operating efficiency. The period of time for these disputes is also at issue, and could range from six months to June 2002 (commercial operation date of plant). It is expected that the parties will be able to resolve these disputes, and that APP will owe CES approximately $800,000 to $2.5 million.

In addition, 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 its financial position or results of operations.


14.	Operating Segments

The Company is first and foremost an electric generating company. In pursuing this single business strategy, it is the Company’s long-range objective to produce from its own natural gas reserves (“equity gas”) at a level of up to 25% of its fuel consumption requirements. The Company’s oil and gas production and marketing activity has reached the quantitative criteria to be considered a reportable segment under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The Company’s segments are electric generation and marketing, oil and gas production and marketing, and corporate and other activities. Electric generation and marketing includes the development, acquisition, ownership and operation of power production facilities, and hedging, balancing, optimization, and trading activity transacted on behalf of the Company’s power generation facilities. Oil and gas production includes the ownership and operation of gas fields, gathering systems and gas pipelines for internal gas consumption, third party sales and hedging, balancing, optimization, and trading activity transacted on behalf of the Company’s oil and gas operations. Corporate activities and other consists primarily of financing activities, the Company’s specialty data center engineering business, which was divested in the third quarter of 2003 and general and administrative costs. Certain costs related to company-wide functions are allocated to each segment, such as interest expense, distributions on HIGH TIDES prior to October 1, 2003, and interest income, which are allocated based on a ratio of segment assets to total assets.

The Company evaluates performance based upon several criteria including profits before tax. The financial results for the Company’s operating segments have been prepared on a basis consistent with the manner in which the Company’s management internally disaggregates financial information for the purposes of assisting in making internal operating decisions.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Due to the integrated nature of the business segments, estimates and judgments have been made in allocating certain revenue and expense items, and reclassifications have been made to prior periods to present the allocation consistently.


						Oil and Gas
		Electric Generation				Production and
		and Marketing				Marketing					Corporate and Other				Total

		2004		2003		2004			2003		2004		2003		2004		2003

		(In thousands)
For the three months ended September 30,
	Total revenue from external customers	$	2,526,955	$	2,630,430	$	17,687		$	16,578	$	12,558	$	9,580	$	2,557,200	$	2,656,588
	Intersegment revenue		—		—		45,833			63,520		—		—		45,833		63,520
	Segment profit/(loss) before provision for income taxes		9,629		211,015		(19,609	)		21,986		29,788		46,010		19,808		279,011
	Equipment cancellation and impairment cost		7,820		632		—			—		—		—		7,820		632


							Oil and Gas
		Electric Generation					Production and
		and Marketing					Marketing				Corporate and Other					Total

		2004			2003		2004		2003		2004		2003			2004			2003

		(In thousands)
For the nine months ended September 30,
	Total revenue from external customers	$	6,799,228		$	6,891,958	$	47,472	$	45,394	$	47,006	$	24,083		$	6,893,706		$	6,961,435
	Intersegment revenue		—			—		157,738		228,669		—		—			157,738			228,669
	Segment profit/(loss) before provision for income taxes		(426,557	)		206,390		6,886		62,294		162,918		(101,287	)		(256,753	)		167,397
	Equipment cancellation and impairment cost		10,187			19,940		—		—		—		—			10,187			19,940


		Electric		Oil and Gas		Corporate,
		Generation		Production		Other and
		and Marketing		and Marketing		Eliminations		Total

		(In thousands)
Total assets:
	September 30, 2004	$	24,811,792	$	1,011,337	$	2,607,790	$	28,430,919
	December 31, 2003	$	24,067,448	$	1,797,755	$	1,438,729	$	27,303,932

Intersegment revenues primarily relate to the use of internally produced gas for the Company’s power plants. These intersegment revenues have been included in Total Revenue and Income before taxes in the oil and gas production and marketing reporting segment and eliminated in the Corporate and other reporting segment.


15.	California Power Market

California Refund Proceeding. On August 2, 2000, the California Refund Proceeding was initiated by a complaint made at FERC by San Diego Gas & Electric Company under Section 206 of the Federal Power Act alleging, among other things, that the markets operated by the California Independent System Operator (“CAISO”) and the California Power Exchange (“CalPX”) were dysfunctional. In addition to commencing an inquiry regarding the market structure, FERC established a refund effective period of October 2, 2000, to June 19, 2001, for sales made into those markets.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

On December 12, 2002, the Administrative Law Judge (“ALJ”) issued a Certification of Proposed Finding on California Refund Liability (“December 12 Certification”) making an initial determination of refund liability. On March 26, 2003, FERC also issued an order adopting many of the ALJ’s findings set forth in the December 12 Certification (the “March 26 Order”). In addition, as a result of certain findings by the FERC staff concerning the unreliability or misreporting of certain reported indices for gas prices in California during the refund period, FERC ordered that the basis for calculating a party’s potential refund liability be modified by substituting a gas proxy price based upon gas prices in the producing areas plus the tariff transportation rate for the California gas price indices previously adopted in the refund proceeding. The Company believes, based on the available information, that any refund liability that may be attributable to it will increase modestly, from approximately $6.2 million to $8.4 million, after taking the appropriate set-offs for outstanding receivables owed by the CalPX and CAISO to Calpine. The Company has fully reserved the amount of refund liability that by its analysis would potentially be owed under the refund calculation clarification in the March 26 Order. The final determination of the refund liability is subject to further FERC proceedings to ascertain the allocation of payment obligations among the numerous buyers and sellers in the California markets. At this time, the Company is unable to predict the timing of the completion of these proceedings or the final refund liability. Thus the impact on the Company’s business is uncertain at this time.

On April 26, 2004, Dynegy Inc. entered into a settlement of the California Refund Proceeding and other proceedings with California governmental entities and the three California investor-owned utilities. The California governmental entities include the Attorney General, the California Public Utilities Commission (“CPUC”), the California Department of Water Resources (“CDWR”), and the California Electricity Oversight Board. Also, on April 27, 2004, The Williams Companies, Inc. (“Williams”) entered into a settlement of the California Refund Proceeding and other proceedings with the three California investor-owned utilities; previously, Williams had entered into a settlement of the same matters with the California governmental entities. The Williams settlement with the California governmental entities was similar to the settlement that Calpine entered into with the California governmental entities on April 22, 2002. Calpine’s settlement resulted in a FERC order issued on March 26, 2004, which partially dismissed Calpine from the California Refund Proceeding to the extent that any refunds are owed for power sold by Calpine to CDWR or any other agency of the State of California. On June 30, 2004, a settlement conference was convened at the FERC to explore settlements among additional parties.

State of California, Ex. Rel. Bill Lockyer, Attorney General v. Federal Energy Regulatory Commission. On September 9, 2004, the Ninth Circuit Court of Appeals issued a decision on appeal of a Petition for Review of an order issued by FERC in FERC Docket No. EL02-71 wherein the Attorney General had filed a complaint (the “AG Complaint”) under Sections 205 and 206 of the Federal Power Act (the “Act”) alleging that parties who misreported or did not properly report market based transactions were in violation of their market based rate tariff and as a result were not accorded protection under section 206 of the Act from retroactive refund liability. The Ninth Circuit remanded the order to FERC for rehearing. FERC is required to determine whether refunds should be required for violation of reporting requirements prior to October 2, 2000. The proceeding on remand has not yet been established. In connection with its settlement agreement with various State of California entities (including the Attorney General), Calpine and its affiliates settled all claims related to the AG Complaint.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Gas Price Data; and Enron Trading Strategies (the “Initial Report”) summarizing its initial findings in this investigation. There were no findings or allegations of wrongdoing by Calpine set forth or described in the Initial Report. On March 26, 2003, the FERC staff issued a final report in this investigation (the “Final Report”). The FERC staff recommended that FERC issue a show cause order to a number of companies, including Calpine, regarding certain power scheduling practices that may have been be in violation of the CAISO’s or CalPX’s tariff. The Final Report also recommended that FERC modify the basis for determining potential liability in the California Refund Proceeding discussed above. Calpine believes that it did not violate these tariffs and that, to the extent that such a finding could be made, any potential liability would not be material.

Also, on June 25, 2003, FERC issued a number of orders associated with these investigations, including the issuance of two show cause orders to certain industry participants. FERC did not subject Calpine to either of the show cause orders. FERC also issued an order directing the FERC Office of Markets and Investigations to investigate further whether market participants who bid a price in excess of $250 per megawatt hour into markets operated by either the CAISO or the CalPX during the period of May 1, 2000, to October 2, 2000, may have violated CAISO and CalPX tariff prohibitions. No individual market participant was identified. The Company believes that it did not violate the CAISO and CalPX tariff prohibitions referred to by FERC in this order; however, the Company is unable to predict at this time the final outcome of this proceeding or its impact on Calpine.

CPUC Proceeding Regarding QF Contract Pricing for Past Periods. The Company’s Qualifying Facilities (“QF”) contracts with PG&E provide that the CPUC has the authority to determine the appropriate utility “avoided cost” to be used to set energy payments for certain QF contracts by determining the short run avoided cost (“SRAC”) energy price formula. In mid-2000 the Company’s QF facilities elected the option set forth in Section 390 of the California Public Utility Code, which provides QFs the right to elect to receive energy payments based on the CalPX market clearing price instead of the price determined by SRAC. Having elected such option, the Company was paid based upon the PX zonal day-ahead clearing price (“PX Price”) from summer 2000 until January 19, 2001, when the PX ceased operating a day-ahead market. The CPUC has conducted proceedings (R.99-11-022) to determine whether the PX Price was the appropriate price for the energy component upon which to base payments to QFs which had elected the PX-based pricing option. The CPUC at one point issued a proposed decision to the effect that the PX Price was the appropriate price for energy payments under the California Public Utility Code but tabled it, and a final decision has not been issued to date. Therefore, it is possible that the CPUC could order a payment adjustment based on a different energy price determination. On April 29, 2004, PG&E, The Utility Reform Network, which is a consumer advocacy group, and the Office of Ratepayer Advocates, which is an independent consumer advocacy department of the CPUC (collectively, the “PG&E Parties”) filed a Motion for Briefing Schedule Regarding True-Up of Payments to QF Switchers (the “April 29 Motion”). The April 29 Motion requests that the CPUC set a briefing schedule under the R.99-11-022 to determine refund liability of the QFs who had switched to the PX Price during the period of June 1, 2000, until January 19, 2001. The PG&E Parties allege that refund liability be determined using the methodology that has been developed thus far in the California Refund Proceeding discussed above. The Company believes that the PX Price was the appropriate price for energy payments and that the basis for any refund liability based on the interim determination by FERC in the California Refund Proceeding is unfounded, but there can be no assurance that this will be the outcome of the CPUC proceedings.

CALPINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

owners, including Geysers Power Company, LLC, which settlements were also previously approved by the FERC. RMR Contracts require the owner of the specific generation unit to provide energy and ancillary services when called upon to do so by the ISO to meet local transmission reliability needs or to manage transmission constraints. The Buyers Coalition has asked FERC to find that the availability payments under these RMR Contracts are not just and reasonable. Geysers Power Company, LLC filed an answer to the complaint in November 2001. To date, FERC has not established a Section 206 proceeding. The outcome of this litigation and the impact on the Company’s business cannot be determined at the present time.


16.	Subsequent Events

On October 20, 2004, the Company completed the redemption of its outstanding 5³/4% convertible preferred securities issued by Trust I and 5¹/2% convertible preferred securities issued by Trust II. The redemption price paid per each $50 principal amount of such convertible preferred securities was $50 plus accrued and unpaid distributions to the redemption date in the amount of $0.6309 per unit with respect to the convertible preferred securities issued by Trust I and $0.6035 per unit with respect to the convertible preferred securities issued by Trust II. All rights of the holders of such convertible preferred securities have ceased, except the right of such holders to receive the redemption price, which was deposited with The Depository Trust Company, and such convertible preferred securities have ceased to be outstanding. In connection with the redemption of such convertible preferred securities, the entire outstanding principal amount of Calpine’s convertible subordinated debentures held by Trust I and Trust II were also redeemed and have ceased to be outstanding. Calpine intends to cause both Trusts to be terminated.

On October 26, 2004, the Company, through its indirect, wholly owned subsidiary Calpine (Jersey) Limited completed a $360 million offering of two-year, Redeemable Preferred Shares. The Redeemable Preferred Shares will distribute dividends priced at 3-month U.S. LIBOR plus 700 basis points to the shareholders on a quarterly basis. The proceeds of the offering of the Redeemable Preferred Shares were initially loaned to Calpine’s 1,200-megawatt Saltend cogeneration power plant located in Hull, Yorkshire England, and the future payments of principal and interest on such loan will fund payments on the Redeemable Preferred Shares. The net proceeds of the Redeemable Preferred Shares offering will ultimately be used as permitted by the Company’s indentures.

On August 31, 2004, Calpine filed a motion for summary judgment to dismiss the consolidated securities class action lawsuits described above in Note 13. On November 3, 2004, the court issued an order denying such motion for summary judgment. Discovery is underway and a trial is scheduled for November 7, 2005. The Company considers the lawsuit to be without merit and intends to continue to defend vigorously against these allegations.

The AELLC case described above in Note 13 recently proceeded to trial, and on November 3, 2004, a jury verdict in the amount of $41 million was rendered in favor of IP. AELLC was held liable on the misrepresentation claim, but not on the breach of contract claim. The verdict amount was based on calculations proffered by IP’s damages expert, and AELLC is currently reviewing post-trial motions and appellate options. AELLC made an additional accrual to recognize the jury verdict and the Company recognized its 32.3% share.

Subsequent to September 30, 2004, the Company repurchased $200.8 million in principal amount of its outstanding Senior Notes in exchange for $152.7 million in cash. The Company recorded a pre-tax gain on these transactions in the amount of $48.1 million before write-offs of unamortized deferred financing costs and the unamortized premiums or discounts.


Item 2.	*Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations.*

See Note 2 of the Notes to Consolidated Condensed Financial Statements for a discussion of the corrections made in this filing to the original Quarterly Report on Form 10-Q for the period ended September 30, 2004.

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “intend,” “expect,” “anticipate,” “plan,” “may,” “will” and similar expressions to identify forward-looking statements. Such statements include, among others, those concerning our expected financial performance and 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 that a number of risks and uncertainties could cause actual results to differ materially from those anticipated in the forward-looking statements. Such risks and uncertainties include, but are 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, and the impact of related derivatives transactions, (iii) unscheduled outages of operating plants, (iv) unseasonable weather patterns that reduce demand for power, (v) economic slowdowns that can adversely affect consumption of power by businesses and consumers, (vi) various development and construction risks that may delay or prevent commercial operations of new plants, such as failure to obtain the necessary permits to operate, failure of third-party contractors to perform their contractual obligations or failure to obtain project financing on acceptable terms, (vii) uncertainties associated with cost estimates, that actual costs may be higher than estimated, (viii) development of lower-cost power plants or of a lower cost means of operating a fleet of power plants by our competitors, (ix) risks associated with marketing and selling power from power plants in the evolving energy market, (x) factors that impact exploitation of oil or gas resources, such as the geology of a resource, the total amount and costs to develop recoverable reserves, and legal title, regulatory, gas administration, marketing and operational factors relating to the extraction of natural gas, (xi) uncertainties associated with estimates of oil and gas reserves, (xii) the effects on our business resulting from reduced liquidity in the trading and power generation industry, (xiii) our ability to access the capital markets on attractive terms or at all, (xiv) uncertainties associated with estimates of sources and uses of cash, that actual sources may be lower and actual uses may be higher than estimated, (xv) the direct or indirect effects on our business of a lowering of our credit rating (or actions we may take in response to changing credit rating criteria), including increased collateral requirements, refusal by our current or potential counterparties to enter into transactions with us and our inability to obtain credit or capital in desired amounts or on favorable terms, (xvi) present and possible future claims, litigation and enforcement actions, (xvii) effects of the application of regulations, including changes in regulations or the interpretation thereof, and (xviii) other risks identified in this report. You should also carefully review the risks described in other reports that we file with the Securities and Exchange Commission, including without limitation our annual report on Form 10-K/ A, amendment 2, for the year ended December 31, 2003 and our quarterly reports on Form 10-Q for the three-month periods ended March 31, 2004 and June 30, 2004 and any subsequent amendments. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future developments or otherwise.

We file annual, quarterly and periodic 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 room at 450 Fifth Street, N.W., Washington, D.C. 20549. 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. The SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our SEC filings are accessible through the Internet at that website.

Our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, are available for download, free of charge, as soon as reasonably practicable after these reports are filed with the SEC, 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 our SEC 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 for which results are consolidated in our Consolidated Condensed Statements 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 revenues include, 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 steam sales and other thermal revenue (in thousands except production and pricing data).


		Three Months Ended				Nine Months Ended
		September 30,				September 30,

		2004		2003		2004		2003

Power Plants:
Electricity and steam (“E&S”) revenues:
	Energy	$	1,201,448	$	1,011,825	$	3,098,010	$	2,540,872
	Capacity		299,944		277,425		709,608		655,282
	Thermal and other		169,755		127,616		422,386		367,039

	Subtotal	$	1,671,147	$	1,416,866	$	4,230,004	$	3,563,193
Spread on sales of purchased power(1)			79,424		7,121		135,996		14,542

Adjusted E&S revenues (non-GAAP)		$	1,750,571	$	1,423,987	$	4,366,000	$	3,577,735
Megawatt hours produced			29,390		25,449		72,522		62,069
All-in electricity price per megawatt hour generated		$	59.56	$	55.95	$	60.20	$	57.64


(1)	From hedging, balancing and optimization activities related to our generating assets.

Set forth below is a table summarizing the dollar amounts and percentages of our total revenue for the three and nine months ended September 30, 2004 and 2003, that represent purchased power and purchased gas sales for hedging and optimization and the costs we incurred to purchase the power and gas that we resold during these periods (in thousands, except percentage data):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2004			2003			2004			2003

Total revenue	$	2,557,200		$	2,656,588		$	6,893,706		$	6,961,435
Sales of purchased power for hedging and optimization(1)		430,576			843,013			1,307,256			2,269,102
As a percentage of total revenue		16.8	%		31.7	%		19.0	%		32.6	%
Sale of purchased gas for hedging and optimization		423,733			305,706			1,258,441			961,652
As a percentage of total revenue		16.6	%		11.5	%		18.3	%		13.8	%
Total cost of revenue (“COR”)		2,302,797			2,317,716			6,470,300			6,315,176
Purchased power expense for hedging and optimization(1)		351,151			835,892			1,171,260			2,254,560
As a percentage of total COR		15.3	%		36.1	%		18.1	%		35.7	%
Purchased gas expense for hedging and optimization		429,373			293,241			1,243,781			941,312
As a percentage of total COR		18.7	%		12.7	%		19.2	%		14.9	%

(1)

On October 1, 2003, we adopted on a prospective basis Emerging Issues Task Force (“EITF”) Issue No. 03-11 “Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not ‘Held for Trading Purposes’ As defined in EITF Issue No. 02-3: “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” (“EITF Issue No. 03-11”) and netted purchased power expense against sales of purchased power. See Note 3 of the Notes to Consolidated Financial Statements for a discussion of our application of EITF Issue No. 03-11.

The primary reasons for the significant levels of these sales and costs of revenue items include: (a) significant levels of hedging, balancing and optimization activities by our Calpine Energy Services, L.P. (“CES”) risk management organization; (b) particularly volatile markets for electricity and natural gas, which prompted us to frequently adjust our hedge positions by buying power and gas and reselling it; (c) the accounting requirements under Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” and EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Asset,” pursuant to which we show many of our hedging contracts on a gross basis (as opposed to netting sales and cost of revenue); and (d) rules in effect associated with the NEPOOL market in New England, which 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 required 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 until our prospective adoption of EITF Issue No. 03-11 on October 1, 2003. This gross basis presentation increases revenues but not gross profit. The table below details the financial extent of our transactions with NEPOOL for the 2003 financial periods prior to our

adoption in October 2003 of EITF Issue No. 03-11. Our entrance into the NEPOOL market began with our acquisition of the Dighton, Tiverton and Rumford facilities on December 15, 2000.


		Three Months Ended		Nine Months Ended
		September 30, 2003		September 30, 2003

		(In thousands)
Sales to NEPOOL from power we generated		$	88,413	$	258,945
Sales to NEPOOL from hedging and other activity			29,375		117,345

	Total sales to NEPOOL	$	117,788	$	376,290
	Total purchases from NEPOOL	$	99,159	$	310,025

Overview

Our core business and primary source of revenue is the generation and delivery of electric power. We provide power to our U.S., Canadian and U.K. customers through the development and construction, or acquisition, and operation of efficient and environmentally friendly electric power plants fueled primarily by natural gas and, to a much lesser degree, by geothermal resources. We own and produce natural gas and to a lesser extent oil, which we use primarily to lower our costs of power production and provide a natural hedge of fuel costs for our electric power plants, but also to generate some revenue through sales to third parties. We protect and enhance the value of our electric and gas assets with a sophisticated risk management organization. We also protect our power generation assets and control certain of our costs by producing certain of the combustion turbine replacement parts that we use at our power plants, and we generate revenue by providing combustion turbine parts to third parties. Finally, we offer services to third parties to capture value in the skills we have honed in building, commissioning and operating power plants.

Our key opportunities and challenges include:


	•	preserving and enhancing our liquidity while spark spreads (the differential between power revenues and fuel costs) are depressed,

	•	selectively adding new load-serving entities and power users to our customer list as we increase our power contract portfolio,

	•	continuing to add value through prudent risk management and optimization activities, and

	•	lowering our costs of production through various efficiency programs.

Since the latter half of 2001, there has been a significant contraction in the availability of capital for participants in the energy sector. This has been due to a range of factors, including uncertainty arising from the collapse of Enron Corp. and a perceived near-term surplus supply of electric generating capacity in certain market areas. These factors have continued through 2003 and into 2004, during which decreased spark spreads have adversely impacted our liquidity and earnings. While we have been able to continue to access the capital and bank credit markets on reasonably attractive terms, we recognize that the terms of financing available to us in the future may not be attractive. To protect against this possibility and due to current market conditions, we scaled back our capital expenditure program to enable us to conserve our available capital resources.

Set forth below are the Results of Operations for the three and nine months ended September 30, 2004 and 2003 (in millions, except for unit pricing information, percentages and MW volumes; in the comparative tables below, increases in revenue/income or decreases in expense (favorable variances) are shown without brackets. Decreases in revenue/income or increases in expense (unfavorable variances) are shown with brackets).

Results of Operations

Three Months Ended September 30, 2004, Compared to Three Months Ended September 30, 2003.


	*Revenue*


	Three Months Ended
	September 30,

	2004		2003		$ Change			% Change

Total revenue	$	2,557.2	$	2,656.6	$	(99.4	)		(3.7	)%

The decrease in total revenue is explained by category below.


		Three Months Ended
		September 30,

		2004		2003		$ Change			% Change

Electricity and steam revenue		$	1,671.1	$	1,416.9	$	254.2			17.9	%
Transmission sales revenue			4.4		4.0		0.4			10.0	%
Sales of purchased power for hedging and optimization			430.6		843.0		(412.4	)		(48.9	)%

	Total electric generation and marketing revenue	$	2,106.1	$	2,263.9	$	(157.8	)		(7.0	)%

Electricity and steam revenue increased as we completed construction and brought into operation five new baseload power plants and two expansion projects that were completed subsequent to September 30, 2003. Average megawatts in operation of our consolidated plants increased by 21.6% to 26,192 MW while generation increased by 15.5%. In addition, average realized electric price, before the effects of hedging, balancing and optimization, increased from $55.67/ MWh in 2003 to $56.86/ MWh in 2004.

Transmission sales revenue increased during the three months ended September 30, 2004, as compared to the quarter ended September 30, 2003, as we brought more plants on-line subsequent to September 30, 2003.

Sales of purchased power for hedging and optimization decreased in the three months ended September 30, 2004, due primarily to netting approximately $563.3 of sales of purchased power with purchase power expense in the quarter ended September 30, 2004, in connection with the adoption of EITF Issue No. 03-11 on a prospective basis in the fourth quarter of 2003. The decrease was partly offset by higher realized prices on hedging, balancing and optimization activities. Without this netting, sales of purchased power would have increased by $150.9 or 17.9%.


		Three Months
		Ended
		September 30,

		2004		2003		$ Change		% Change

Oil and gas sales		$	17.7	$	16.6	$	1.1		6.6	%
Sales of purchased gas for hedging and optimization			423.7		305.7		118.0		38.6	%

	Total oil and gas production and marketing revenue	$	441.4	$	322.3	$	119.1		37.0	%

Oil and gas sales are net of internal consumption, which is eliminated in consolidation. Internal consumption decreased from $63.5 in 2003 to $45.8 in 2004 primarily as a result of lower production following asset sales in October 2003, and again in February 2004, to the Calpine Natural Gas Trust in Canada and the Canadian and United States asset sales that occurred in September 2004. Before intercompany eliminations oil and gas sales decreased from $80.1 in 2003 to $63.5 in 2004, primarily as a result of reduced production volumes.

Sales of purchased gas for hedging and optimization increased during 2004 due primarily to higher prices of natural gas as compared to the same period in 2003.


		Three Months
		Ended
		September 30,

		2004			2003			$ Change			% Change

Realized gain (loss) on power and gas mark-to-market transactions, net		$	18.7		$	(0.1	)	$	18.8			18,800.0	%
Unrealized loss on power and gas mark-to-market transactions, net			(23.8	)		(10.9	)		(12.9	)		(118.3	)%

	Mark-to-market activities, net	$	(5.1	)	$	(11.0	)	$	5.9			53.6	%

Mark-to-market activities, which are shown on a net basis, result from general market price movements against our open commodity derivative positions, including positions accounted for as trading under EITF Issue No. 02-3, “Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities” (“EITF Issue No. 02-3”) and other mark-to-market activities. These commodity positions represent a small portion of our overall commodity contract position. Realized revenue represents the portion of contracts actually settled and is offset by a corresponding change in unrealized gains or losses as unrealized derivative values are converted from unrealized forward positions to cash at settlement. Unrealized gains and losses include the change in fair value of open contracts as well as the ineffective portion of our cash flow hedges.

During the three months ended September 30, 2004, net losses from mark-to-market activities declined. In the three months ended September 2004 the Company’s exposure to mark-to-market earnings volatility declined commensurate with a corresponding decline in the volume of open commodity positions underlying the exposure. As a result, the magnitude of earnings volatility attributable to any given change in prices declined. Additionally, the Company recorded a hedge ineffectiveness gain of approximately $1.9 million for the three months ended September 2004 versus a hedge ineffectiveness loss of $4.5 million for the corresponding period in 2003.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Other revenue	$	14.7	$	81.5	$	(66.8	)		(82.0	)%

Other revenue decreased during the three months ended September 30, 2004, primarily due to a pre-tax gain of $69.4 realized during the three months ended September 30, 2003, in connection with our settlement with Enron, principally related to the final negotiated settlement of claims and for amounts owed under terminated commodity contracts. This decrease was offset partially by revenue derived from management services performed by our wholly owned subsidiary Calpine Power Services, Inc. (“CPS”) which increased by $3.2 during the three months ended September 30, 2004, as compared to the same period last year.


	*Cost of Revenue*


	Three Months
	Ended
	September 30,

	2004		2003		$ Change		% Change

Cost of revenue	$	2,302.8	$	2,317.7	$	14.9		0.6	%

The decrease in total cost of revenue is explained by category below.


		Three Months
		Ended
		September 30,

		2004		2003		$ Change			% Change

Plant operating expense		$	181.9	$	180.8	$	(1.1	)		(0.6	)%
Transmission purchase expense			25.2		11.1		(14.1	)		(127.0	)%
Royalty expense			8.5		7.0		(1.5	)		(21.4	)%
Purchased power expense for hedging and optimization			351.2		835.9		484.7			58.0	%

	Total electric generation and marketing expense	$	566.8	$	1,034.8	$	468.0			45.2	%

Plant operating expense was relatively flat despite new plants coming on line primarily due to reduced insurance expense in three months ended September 30, 2004.

Transmission purchase expense increased primarily due to additional power plants achieving commercial operation subsequent to September 30, 2003.

Royalty expense increased primarily due to an increase in electric revenues at The Geysers geothermal plants and due to an increase in contingent purchase price payments to the previous owner of the Texas City Power Plant, which are based on a percentage of gross revenues at this plant. At The Geysers royalties are paid mostly as a percentage of geothermal electricity revenues.

Purchased power expense for hedging and optimization decreased during the three months ended September 30, 2004, as compared to the same period in 2003 due primarily to netting $563.3 of purchased power expense against sales of purchased power in the quarter ended September 30, 2004, in connection with the adoption of EITF Issue No. 03-11 in the fourth quarter of 2003, partly offset by higher realized prices on hedging, balancing and optimization activities. Without this netting, purchased power expense would have increased by $78.6 or 9.4%.


			Three Months
			Ended
			September 30,

			2004		2003		$ Change			% Change

Oil and gas production expense			$	12.7	$	13.6	$	0.9			6.6	%
Oil and gas exploration expense				2.0		1.7		(0.3	)		(17.7	)%

	Oil and gas operating expense			14.7		15.3		0.6			3.9	%
Purchased gas expense for hedging and optimization				429.4		293.2		(136.2	)		(46.5	)%

		Total oil and gas operating and marketing expense	$	444.1	$	308.5	$	(135.6	)		(44.0	)%

Oil and gas production expense decreased during the three months ended September 30, 2004, as compared to the same period in 2003 primarily due to lower lease operating expense due to lower volumes.

Oil and gas exploration expense increased primarily as a result of an increase in environmental and reclamation cost.

Purchased gas expense for hedging and optimization increased during the three months ended September 30, 2004, due primarily to higher prices for natural gas as compared to the same period in 2003.


			Three Months
			Ended
			September 30,

			2004			2003			$ Change			% Change

Fuel expense
	Cost of oil and gas burned by power plants		$	1,100.4		$	807.7		$	(292.7	)		(36.2	)%
	Recognized (gain) loss on gas hedges			(2.7	)		(1.1	)		1.6			145.5	%

		Total fuel expense	$	1,097.7		$	806.6		$	(291.1	)		(36.1	)%

Cost of oil and gas burned by power plants increased during the three months ended September 30, 2004 as compared to the same period in 2003 due to a 18% increase in gas consumption and 16% higher prices excluding the effects of hedging, balancing and optimization.

We recognized a gain on gas hedges during the three months ended September 30, 2004, as compared to a loss during the same period in 2003 due to favorable gas price movements against our gas financial instrument positions.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Depreciation, depletion and amortization expense	$	149.3	$	131.0	$	(18.3	)		(14.0	)%

Depreciation, depletion and amortization expense increased primarily due to the additional power facilities in consolidated operations subsequent to September 30, 2003.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change		% Change

Operating lease expense	$	25.8	$	28.4	$	2.6		9.2	%

Operating lease expense decreased from the prior year as the King City lease was restructured in May 2004 and began to be accounted for as a capital lease at that point. As a result, we stopped incurring operating lease expense on that lease and instead began to incur depreciation and interest expense.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Other cost of revenue	$	19.2	$	8.4	$	(10.8	)		(128.6	)%

Other cost of revenue increased during the three months ended September 30, 2004, as compared to the same period in 2003, due primarily to $1.2 of additional expense from Power Systems Mfg., LLC (“PSM”) and $6.2 of amortization expense incurred from the adoption of Derivatives Implementation Group (“DIG”) Issue No. C20 (“DIG Issue No. C20”), “Scope Exceptions: Interpretation of the Meaning of Not Clearly and Closely Related in Paragraph 10(b) regarding Contracts with a Price Adjustment Feature.” In the fourth quarter of 2003, we recorded a pre-tax mark-to-market gain of $293.4 as the cumulative effect of a change in accounting principle. This gain is amortized as expense over the respective lives of the two power sales contracts from which the mark-to-market gains arose. Additionally, we incurred $3.5 of higher expenses at CPS for sale of engineering, construction and operations services to third parties during the three months ended September 30, 2004, as compared to the same period last year.


	*(Income)/ Expenses*


	Three Months
	Ended
	September 30,

	2004		2003			$ Change			% Change

(Income) from unconsolidated investments in power projects	$	10.9	$	(4.1	)	$	(15.0	)		(365.9	)%

During the three months ended September 30, 2004, we recorded our share (approximately $11.6) of a jury award to International Paper at the Androscoggin Joint Venture Company. For further information, see Note 16 of the Notes to Consolidated Condensed Financial Statements. Income from our investment in the Acadia Power Plant decreased by $2.4 from the same period last year partially due to costs associated with an unscheduled outage. Also, we recognized $0.9 less income this quarter in connection with our investment in the Gordonsville Power Plant as we sold our interest in the plant in November 2003.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Equipment cancellation and asset impairment cost	$	7.8	$	0.6	$	(7.2	)		(1,200.0	)%

Equipment cancellation and asset impairment charge increased during the three months ended September 30, 2004, as compared to the same period in 2003 primarily as a result of a loss of $4.3 recognized in connection with the impairment charge for one heat recovery steam generator (“HRSG”), a loss on the sale of 12 tube bundles in the amount of $3.5, and a write-off of $1.8 in connection with the termination of the purchase contract for one steam turbine condenser, which was partially offset by a downward adjustment of $1.8 to the loss recorded on the sale of turbines in 2003.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Long-term service agreement cancellation charge	$	7.6	$	—	$	(7.6	)		(100.0	)%

A long-term service agreement cancellation charge adjustment of $7.6 was recorded during the three months ended September 30, 2004, as a result of settlement negotiations related to the cancellation of long-term service agreements with Siemens-Westinghouse Power Corporation at our Hermiston, Ontelaunee, South Point and Sutter facilities.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Project development expense	$	3.4	$	3.0	$	(0.4	)		(13.3	)%

Project development expense increased during the three months ended September 30, 2004, partially due to costs incurred on oil and gas pipeline and LNG projects.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Research and development expense	$	4.0	$	2.8	$	(1.2	)		(42.9	)%

Research and development expense increased during the three months ended September 30, 2004, as compared to the same period in 2003 primarily due to increased personnel expenses related to new research and development programs at our PSM subsidiary.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Sales, general and administrative expense	$	58.4	$	49.4	$	(9.0	)		(18.2	)%

Sales, general and administrative expense increased during the three months ended September 30, 2004, primarily due to an increase in employees or employee costs, consulting, rent, insurance and other professional fees. Over half of the increase is directly attributable to the Sarbanes-Oxley Section 404 internal controls project and audit work related thereto.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Interest expense	$	293.6	$	198.7	$	(94.9	)		(47.8	)%

Interest expense increased as a result of higher average debt balances, higher average interest rates and lower capitalization of interest expense. Interest capitalized decreased as a result of new plants that entered commercial operations (at which point capitalization of interest expense ceases) from $98.7 for the three months ended September 30, 2003, to $86.8 for the three months ended September 30, 2004. We expect that the amount of interest capitalized will continue to decrease in future periods as our plants in construction are completed. Additionally, during the three months ended September 30, 2004, (i) interest expense related to the Company’s senior notes and term loans increased $9.6; (ii) interest expense related to the Company’s Calpine Generating Company, LLC (“CalGen”) subsidiary (formerly CCFC II) increased $25.8; (iii) interest expense related to the Company’s construction/project financing increased $18.1; (iv) interest expense related to the Company’s Calpine Construction Finance Company L.P. (“CCFC I”) subsidiary increased $6.1; and (v) interest expense related to the Company’s preferred interests increased $5.0. The majority of the remaining increase relates to a increase in average indebtedness due primarily to the deconsolidation of Calpine Capital Trust I (“Trust I”), Calpine Capital Trust II (“Trust II”) and Calpine Capital Trust III (“Trust III” and together with Trust I and Trust II, the “Trusts”) and the recording of debt to the Trusts due to the adoption of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” (“FIN 46”) prospectively on October 1, 2003. See Note 3 of the Notes to Consolidated Condensed Financial Statements for a discussion of our adoption of FIN 46. Interest expense related to the Notes payable to the Trusts during the three months ended September 30, 2004, was $16.5; during the three months ended September 30, 2003, this expense was classified as Distributions on Trust Preferred Securities and amounted to $15.3. As the distributions were excluded from the interest expense caption on the Company’s Consolidated Condensed Statements of Operations for the three months ended September 30, 2003, this represents a $16.5 increase to interest expense during the three months ended September 30, 2004, but there was only a $1.2 increase in the distributions paid during the three months ended September 30, 2004.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Distributions on Trust Preferred Securities	$	—	$	15.3	$	(15.3	)		(100.0	)%

September 30, 2004, were no longer recorded on our books and were replaced prospectively by interest expense on our debt to the Trusts.


	Three Months
	Ended
	September 30,

	2004			2003			$ Change		% Change

Interest (income)	$	(17.2	)	$	(10.7	)	$	6.5		60.7	%

Interest (income) increased during the three months ended September 30, 2004, due primarily to an increase in cash and equivalents and restricted cash balances as compared to the same period in 2003.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Minority interest expense	$	10.0	$	2.6	$	(7.4	)		(284.6	)%

Minority interest expense increased during the three months ended September 30, 2004, as compared to the same period in 2003 primarily due to our reduced ownership percentage in the Calpine Power Limited Partnership (“CPLP”) following the sale of our interest in the Calpine Power Income Fund (“CPIF”), which owns 70% of CPLP.


	Three Months
	Ended
	September 30,

	2004			2003			$ Change			% Change

(Income) from repurchases of various issuances of debt	$	(167.2	)	$	(207.2	)	$	(40.0	)		(19.3	)%

For the three month ended September 30, 2004, income from the repurchases of debt decreased by $40.0 from the corresponding period in the prior year primarily as a result of less open market and privately negotiated transactions.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Other expense	$	23.3	$	9.5	$	(13.8	)		(145.3	)%

Other expense increased by $13.8 in the three months ended September 30, 2004, compared to the prior year due primarily to foreign currency transaction losses increasing by $20.4 from the corresponding period in 2003. This was partially mitigated by lower charges associated with refinancings.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change		% Change

Provision (benefit) for income taxes	$	5.2	$	102.5	$	97.3		94.9	%

For the three months ended September 30, 2004, our effective rate from continuing operations decreased to 26% as compared to 37% for the three months ended September 30, 2003 following a year-to-date true-up following the sale of oil and gas assets in Canada and the reclassification of certain permanent differences relating to cross border financings from continuing operations to discontinued operations.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change		% Change

Discontinued operations, net of tax	$	126.5	$	61.3	$	65.2		106.4	%

During the three months ended September 30, 2004, discontinued operations activity included the sale of our Canadian natural gas reserves and petroleum assets and the sale of our gas reserves in the Colorado

Piceance Basin and New Mexico San Juan Basin, which resulted in the recording of $203.3 of pre-tax discontinued operations income and a tax charge of $76.7.


	Three Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Net income (loss)	$	141.1	$	237.8	$	(96.7	)		(40.7	)%

In the quarter ended September 30, 2004, the Company netted approximately $563.3 of sales of purchased power for hedging and optimization with purchased power expense for hedging and optimization. This was due to the adoption of EITF Issue No. 03-11. Without this netting, total revenue would have grown by approximately 17% versus the reported 4% reduction in revenue. For the three months ended September 30, 2004, the company reported net income of $141.1, compared to net income of $237.8, for the same quarter in the prior year.

We recognized $126.5 in discontinued operations activity associated with the sale of our Canadian natural gas reserves and petroleum assets and the sale of our gas reserves in the Colorado Piceance Basin and New Mexico San Juan Basin. We also recognized a pre-tax gain on the repurchase of certain debt issuances in the amount of $167.2 in the third quarter of 2004.

Gross profit decreased by $84.5, or 25%, to $254.4 in the three months ended September 30, 2004, primarily due to: i) non-recurring other revenue of $69.4 recognized in the third quarter of 2003 from the settlement of contract disputes with, and claims against, Enron Corp.; ii) the amortization of $6.2 in the third quarter of 2004 of the DIG Issue No. C20 gain recorded in the fourth quarter of 2003 due to the cumulative effect of a change in accounting principle; iii) soft market fundamentals, which caused total spark spread to not increase commensurately with additional transmission purchase expense, and depreciation costs associated with new power plants coming on-line. During the three months ended September 30, 2004, financial results were affected by a $79.7 increase in interest expense and distributions on trust preferred securities, as compared to the same period in 2003. This occurred as a result of higher debt balances, higher average interest rates and lower capitalization of interest expense as new plants entered commercial operation. Income before discontinued operations and cumulative effect of a change in accounting principle was $14.6. The reduction in this income compared to the same period in the prior year is due to a reduction in total revenue and gross profit and also increases in operating expenses including interest expense and depreciation, depletion and amortization expense.

For the three months ended September 30, 2004, we generated 29.4 million megawatt-hours, which equated to a baseload capacity factor of 56%, and realized an average spark spread of $21.40 per megawatt-hour. For the same period in 2003, we generated 25.4 million megawatt-hours, which equated to a capacity factor of 60%, and realized an average spark spread of $23.88 per megawatt-hour.

Nine Months Ended September 30, 2004, Compared to Nine Months Ended September 30, 2003.

Revenue


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Total revenue	$	6,893.7	$	6,961.4	$	(67.7	)		(1.0	)%

The increase in total revenue is explained by category below.


		Nine Months
		Ended
		September 30,

		2004		2003		$ Change			% Change

Electricity and steam revenue		$	4,230.0	$	3,563.2	$	666.8			18.7	%
Transmission sales revenue			14.1		13.2		0.9			6.8	%
Sales of purchased power for hedging and optimization			1,307.3		2,269.1		(961.8	)		(42.4	)%

	Total electric generation and marketing revenue	$	5,551.4	$	5,845.5	$	(294.1	)		(5.0	)%

Electricity and steam revenue increased as we completed construction and brought into operation five new baseload power plants and two expansion projects completed subsequent to September 30, 2003. Average megawatts in operation of our consolidated plants increased by 22.8% to 24,108 MW while generation increased by 16.8%. The increase in generation lagged behind the increase in average MW in operation as our baseload capacity factor dropped to 51% in the nine months ended September 30, 2004, from 55% in the nine months ended September 30, 2003, primarily due to the increased occurrence of unattractive off-peak market spark spreads in certain areas reflecting mild weather in the first and third quarters of 2004 and oversupply conditions which are expected to gradually work off over the next several years. This caused us to cycle-off certain of our merchant plants without contracts in off-peak hours. Average realized electric price, before the effects of hedging, balancing and optimization, increased from $57.41/ MWh in 2003 to $58.33/ MWh in 2004.

Sales of purchased power for hedging and optimization decreased in the nine months ended September 30, 2004, due primarily to netting approximately $1,255.8 of sales of purchased power with purchase power expense in the nine months ended September 30, 2004, in connection with the adoption of EITF Issue No. 03-11 on a prospective basis in the fourth quarter of 2003 partly offset by higher volumes and higher realized prices on hedging, balancing and optimization activities. Without this netting, sales of purchased power would have increased by $294.0 or 13.0%.


		Nine Months
		Ended
		September 30,

		2004		2003		$ Change		% Change

Oil and gas sales		$	47.5	$	45.4	$	2.1		4.6	%
Sales of purchased gas for hedging and optimization			1,258.4		961.6		296.8		30.9	%

	Total oil and gas production and marketing revenue	$	1,305.9	$	1,007.0	$	298.9		29.7	%

Oil and gas sales are net of internal consumption, which is eliminated in consolidation. Internal consumption decreased primarily as a result of lower production, from $228.7 in 2003 to $157.7 in 2004. Before intercompany eliminations, oil and gas sales decreased by 25.1% or $68.9 to $205.2 in 2004 from $274.1 in 2003 due to lower production volumes.

Sales of purchased gas for hedging and optimization increased during 2004 due primarily to higher prices of natural gas as compared to the same period in 2003.


		Nine Months
		Ended
		September 30,

		2004			2003			$ Change			% Change

Realized gain on power and gas mark-to-market transactions, net		$	42.4		$	30.2		$	12.2			40.4	%
Unrealized loss on power and gas mark-to-market transactions, net			(57.6	)		(18.9	)		(38.7	)		(204.8	)%

	Mark-to-market activities, net	$	(15.2	)	$	11.3		$	(26.5	)		(234.5	)%

Mark-to-market activities, which are shown on a net basis, result from general market price movements against our open commodity derivative positions, including positions accounted for as trading under EITF Issue No. 02-3, and other mark-to-market activities. These commodity positions represent a small portion of our overall commodity contract position. Realized revenue represents the portion of contracts actually settled and is offset by a corresponding change in unrealized gains or losses as unrealized derivative values are converted from unrealized forward positions to cash at settlement. Unrealized gains and losses include the change in fair value of open contracts as well as the ineffective portion of our cash flow hedges.

Losses from mark-to-market activities increased in the nine months ended September 30, 2004, as compared to the corresponding period in 2004 primarily due to mark-to-market losses incurred on one of our long-term derivative contracts resulting from unfavorable price movements against the contract.


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Other revenue	$	51.6	$	97.6	$	(46.0	)		(47.1	)%

Other revenue decreased during the nine months ended September 30, 2004, primarily due to a pre-tax gain of $69.4 realized during the nine months ended September 30, 2003, in connection with our settlement with Enron, principally related to the final negotiated settlement of claims and amounts owed under terminated commodity contracts. This decrease was partially offset by revenue from TTS which increased by $13.5 as compared to the same period last year. Additionally, revenue from CPS increased $8.5 as compared to the same period last year.


	*Cost of Revenue*


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Cost of revenue	$	6,470.3	$	6,315.2	$	(155.1	)		(2.5	)%

The increase in total cost of revenue is explained by category below.


		Nine Months
		Ended
		September 30,

		2004		2003		$ Change			% Change

Plant operating expense		$	575.8	$	496.1	$	(79.7	)		(16.1	)%
Transmission purchase expense			61.9		37.5		(24.4	)		(65.1	)%
Royalty expense			21.3		18.8		(2.5	)		(13.3	)%
Purchased power expense for hedging and optimization			1,171.3		2,254.6		1,083.3			48.0	%

	Total electric generation and marketing expense	$	1,830.3	$	2,807.0	$	976.7			34.8	%

Plant operating expense increased due to five new baseload power plants and two expansion projects completed subsequent to September 30, 2003, and due to higher maintenance expenses of existing plants as many of our newer plants began their initial major maintenance work.

Transmission purchase expense increased primarily due to additional power plants achieving commercial operation subsequent to September 30, 2003.

Approximately 76% of the royalty expense for the nine months ended September 30, 2004, is attributable to royalties paid to geothermal property owners at The Geysers, mostly as a percentage of geothermal electricity revenues. The increase in royalty expense in the nine months of 2004 was due primarily to an increase in the accrual of contingent purchase price payments to the previous owners of the Texas City and Clear Lake Power Plants based on a percentage of gross revenues at these two plants.

Purchased power expense for hedging and optimization decreased during the nine months ended September 30, 2004, as compared to the same period in 2003 due primarily to netting $1,255.8 of purchased power expense against sales of purchased power in the nine months ended September 30, 2004, in connection with the adoption of EITF Issue No. 03-11 in the fourth quarter of 2003, partly offset by higher volumes and higher realized prices on hedging, balancing and optimization activities. Without this netting, purchased power expense would have increased by $172.5 or 7.7%.


			Nine Months
			Ended
			September 30,

			2004		2003		$ Change			% Change

Oil and gas production expense			$	36.4	$	43.1	$	6.7			15.5	%
Oil and gas exploration expense				6.4		10.5		4.1			39.0	%

	Oil and gas operating expense			42.8		53.6		10.8			20.1	%
Purchased gas expense for hedging and optimization				1,243.8		941.3		(302.5	)		(32.1	)%

		Total oil and gas operating and marketing expense	$	1,286.6	$	994.9	$	(291.7	)		(29.3	)%

Oil and gas production expense decreased during the nine months ended September 30, 2004, as compared to the same period in 2003 primarily due to lower lease operating expense resulting from lower production volumes.

Oil and gas exploration expense decreased primarily as a result of a decrease in dry hole costs.

Purchased gas expense for hedging and optimization increased during the nine months ended September 30, 2004, due primarily to higher prices of natural gas as compared to the same period in 2003.


			Nine Months
			Ended
			September 30,

			2004			2003			$ Change			% Change

Fuel expense
	Cost of oil and gas burned by power plants		$	2,804.1		$	2,040.6		$	(763.5	)		(37.4	)%
	Recognized (gain) on gas hedges			(20.6	)		(5.3	)		15.3			288.7	%

		Total fuel expense	$	2,783.5		$	2,035.3		$	(748.2	)		(36.8	)%

Cost of oil and gas burned by power plants increased during the nine months ended September 30, 2004 as compared to the same period in 2003 due to a 22% increase in gas consumption and 12% higher prices for gas excluding the effects of hedging, balancing and optimization.

We recognized a larger gain on gas hedges during the nine months ended September 30, 2004, as compared to the same period in 2003 due to favorable gas price movements relative to our gas financial instrument positions.


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Depreciation, depletion and amortization expense	$	420.4	$	373.1	$	(47.3	)		(12.7	)%

Depreciation, depletion and amortization expense increased primarily due to the additional power facilities in consolidated operations subsequent to September 30, 2003.


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change		% Change

Operating lease expense	$	80.6	$	84.3	$	3.7		4.4	%

Operating lease expense decreased from the prior year as the King City lease terms were restructured in May 2004 and the lease began to be accounted for as a capital lease at that point. As a result, we ceased incurring operating lease expense on that lease and instead began to incur depreciation and interest expense.


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Other cost of revenue	$	68.2	$	20.5	$	(47.7	)		(232.7	)%

Other cost of revenue increased during the nine months ended September 30, 2004, as compared to the same period in 2003 due primarily to $10.5 of additional expense from TTS and $22.9 of amortization expense incurred from the adoption of DIG Issue No. C20. In the fourth quarter of 2003, we recorded a pre-tax mark-to-market gain of $293.4 as the cumulative effect of a change in accounting principle. This gain is amortized as expense over the respective lives of the two power sales contracts from which the mark-to-market gains arose. Additionally, we incurred $8.8 higher costs at CPS due to a higher level of activity in 2004.


	*(Income)/ Expenses*


	Nine Months
	Ended
	September 30,

	2004		2003			$ Change			% Change

Loss (income) from unconsolidated investments in power projects	$	11.7	$	(68.6	)	$	(80.3	)		(117.1	)%

During the nine months ended September 30, 2003, we recorded a $52.8 gain, our 50% share, on the termination of the tolling arrangement with Aquila Merchant Services, Inc. at the Acadia Power Plant. For the same period, we recognized $4.2 of income on Gordonsville Power Plant. We did not have any income on our Gordonsville investment in 2004, as we sold our interests in this facility in November 2003. In addition, in 2004 we recognized $8.7 less income on the Acadia investment, and $3.7 more loss from the Aries investment, which we began to consolidate in March 2004 when we purchased the remaining 50% interest in March 2004 from Aquila. We also recorded our share (approximately $11.6) of a jury award to International Paper at the Androscoggin Joint Venture Company.


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change		% Change

Equipment cancellation and asset impairment cost	$	10.2	$	19.9	$	9.7		48.7	%

Equipment cancellation and asset impairment charge decreased during the nine months ended September 30, 2004, as compared to the same period in 2003 as a result of a loss recognized in 2003 of $17.2 from the sale of two turbines. During the nine months ended September 30, 2004, we incurred $2.3 in connection with the termination of a purchase contract for heat recovery steam generator components, $4.3 in connection with the impairment charge for one HRSG, a loss on the sale of 12 tube bundles in the amount of $3.5, and a write-off of $1.8 in connection with the termination of the purchase contract for one steam turbine condenser and a downward adjustment of $1.8 for the loss recorded in 2003 on the sale of turbines.


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Long-term service agreement cancellation charge	$	7.6	$	—	$	(7.6	)		(100.0	)%

Long-term service agreement cancellation charge adjustment of $7.6 was recorded during the nine months ended September 30, 2004, as a result of settlement negotiations related to the cancellation of long-term service agreements with Siemens-Westinghouse Power Corporation at our Hermiston, Ontelaunee, South Point and Sutter facilities.


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Project development expense	$	15.1	$	14.1	$	(1.0	)		(7.1	)%

Project development expense increased during the nine months ended September 30, 2004, partly due to higher costs associated with cancelled projects, and due to costs incurred on oil and gas pipeline and LNG projects.


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Research and development expense	$	12.9	$	7.7	$	(5.2	)		(67.5	)%

Research and development expense increased during the nine months ended September 30, 2004, as compared to the same period in 2003 primarily due to increased personnel expenses related to new research and development programs at our PSM subsidiary.


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Sales, general and administrative expense	$	171.0	$	142.8	$	(28.2	)		(19.7	)%

Sales, general and administrative expense increased during the nine months ended September 30, 2004, primarily due to an increase in employees or employee costs, consulting, rent, insurance and other professional fees. Over a third of the variance is directly attributable to the Sarbanes-Oxley Section 404 internal control project and related audit work.


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Interest expense	$	815.4	$	483.2	$	(332.2	)		(68.8	)%

completed. Additionally, during the nine months ended September 30, 2004, (i) interest expense related to the Company’s senior notes and term loans increased $115.9; (ii) interest expense related to the Company’s CalGen financing was responsible for an increase of $78.8; (iii) interest expense related to the Company’s notes payable and borrowings under lines of credit increased $41.6; (iv) interest expense related to the Company’s CCFC I financing increased $23.1; and (v) interest expense related to the Company’s preferred interests increased $25.8. The majority of the remaining increase relates to a increase in average indebtedness due primarily to the deconsolidation of the Trusts and the recording of debt to the Trusts due to the adoption of FIN 46 prospectively on October 1, 2003. See Note 3 of the Notes to Consolidated Condensed Financial Statements for a discussion of our adoption of FIN 46. Interest expense related to the notes payable to the Trusts during the nine months ended September 30, 2004, was $47.8; during the nine months ended September 30, 2003, this expense was classified as Distributions on Trust Preferred Securities and amounted to $46.6. As the distributions were excluded from the interest expense caption on the Company’s Consolidated Condensed Statements of Operations for the nine months ended September 30, 2003, this represents a $47.8 increase to interest expense during the nine months ended September 30, 2004, but there was only a $1.2 increase in the distributions paid during the nine months ended September 30, 2004.


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Distributions on Trust Preferred Securities	$	—	$	46.6	$	(46.6	)		(100.0	)%

As discussed above, as a result of the deconsolidation of the Trusts upon adoption of FIN 46 as of October 1, 2003, the distributions paid on the Trust Preferred Securities during the nine months ended September 30, 2004, were no longer recorded on our books and were replaced prospectively by interest expense on our debt to the Trusts.


	Nine Months
	Ended
	September 30,

	2004			2003			$ Change		% Change

Interest (income)	$	(39.2	)	$	(27.8	)	$	11.4		41.0	%

Interest (income) increased during the nine months ended September 30, 2004, primarily due to an increase in cash and equivalents and restricted cash balances as compared to the same period in 2003.


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Minority interest expense	$	23.1	$	10.2	$	(12.9	)		(126.5	)%

Minority interest expense increased during the nine months ended September 30, 2004, as compared to the same period in 2003 primarily due to an increase in expense of $13.6 related to our reduced ownership percentage in CPLP.


	Nine Months
	Ended
	September 30,

	2004			2003			$ Change			% Change

(Income) from repurchase of various issuances of debt	$	(170.5	)	$	(214.0	)	$	(43.5	)		(20.3	)%

Income from repurchases of various issuances of debt during the nine months ended September 30, 2004, decreased by $43.5 from the corresponding period primarily as a result of less open market and privately negotiated transactions.


	Nine Months
	Ended
	September 30,

	2004			2003		$ Change		% Change

Other expense (income)	$	(177.1	)	$	64.6	$	241.7		374.1	%

Other expense (income) increased by $241.7 during the nine months ended September 30, 2004, as compared to the same period in 2003, primarily due to pre-tax income in the amount of $171.5 associated with the restructuring of a power purchase agreement for our Newark and Parlin power plants and the sale of Utility Contract Funding II, LLC (“UCF”), net of transaction costs and the write-off of unamortized deferred financing costs, $16.4 pre-tax gain from the restructuring of a long-term gas supply contract net of transaction costs, and a $12.3 pre-tax gain from the King City restructuring transaction related to the sale of the Company’s debt securities that had served as collateral under the King City lease, net of transaction costs. Also, during the nine months ended September 30, 2004, foreign currency transaction losses were $7.5 compared to a loss of $36.2 in the corresponding period in 2003. During the nine months ended September 3, 2003, Letter of Credit Fees were $10.5.


	Nine Months
	Ended
	September 30,

	2004			2003		$ Change		% Change

Provision (benefit) for income taxes	$	(106.0	)	$	59.8	$	165.8		277.3	%

For the nine months ended September 30, 2004, the effective rate from continuing operations increased to 41% as compared to 36% for the nine months ended September 30, 2003. This change in the effective rate is primarily due to the sale of oil and gas assets in Canada and the determination that certain permanent tax differences relating to cross border financings, previously reflected in the results of continuing operations, should thereafter be reflected within discontinued operations. This had the effect of increasing the tax rate for continuing operations and reducing the tax rate within discontinued operations.


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change		% Change

Discontinued operations, net of tax	$	191.9	$	54.3	$	137.6		253.4	%

In the nine months ended September 30, 2004, discontinued operations were comprised primarily of the gain, net of tax of $23.0, from the sale of our 50% interest in the Lost Pines 1 Power Project, and a gain, net of tax, of $126.5 from the sale of our Canadian natural gas reserves and petroleum assets, and the sale of our oil and gas reserves in the Colorado Piceance Basin and New Mexico San Juan Basin. During the nine months ended September 30, 2003, discontinued operations activity included the operational reclasses to discontinued operations related to our 50% interest in the Lost Pines 1 Energy Center, the sale of certain of our oil and gas assets in the United States and Canada and the sale of our specialty data center engineering business.


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Cumulative effect of a change in accounting principle, net of tax	$	—	$	0.5	$	(0.5	)		(100.0	)%

The cumulative effect of a change in accounting principle, net of tax effect in 2003 resulted from adopting SFAS No. 143, “Accounting for Asset Retirement Obligations.”


	Nine Months
	Ended
	September 30,

	2004		2003		$ Change			% Change

Net income (loss)	$	41.2	$	162.4	$	(121.2	)		(74.6	)%

In the nine months ended September 30, 2004, the Company netted approximately $1.26 billion of sales of purchased power for hedging and optimization with purchased power expense. This was due to the adoption of EITF Issue No. 03-11. Without this netting, total revenue would have grown by approximately 17% versus the reported 1% reduction in revenue. For the nine months ended September 30, 2004, we reported net income of $41.2, compared to net income of $162.4, for the same period in the prior year.

Gross profit decreased by $222.9, or 34%, to $423.4 in the nine months ended September 30, 2004, primarily due to: i) non-recurring other revenue of $69.4 recognized in the third quarter of 2003 from the settlement of contract disputes with, and claims against, Enron Corp.; ii) the amortization of $22.9 in the first nine months of 2004 of the DIG Issue No. C20 gain recorded in the fourth quarter of 2003 due to the cumulative effect of a change in accounting principle; iii) soft market fundamentals, which caused total spark spread to not increase commensurately with additional plant operating expense and transmission purchase expense, and depreciation costs associated with new power plants coming on-line. During the nine months ended September 30, 2004, financial results were affected by a $285.5 increase in interest expense and distributions on trust preferred securities, as compared to the same period in 2003. This occurred as a result of higher debt balances, higher average interest rates and lower capitalization of interest expense as new plants entered commercial operation. Prior year results benefited from recording $52.8 (in income from unconsolidated investments in power projects) from termination of a power purchase agreement by the Acadia joint venture.

Other income increased by $241.7 during the nine months ended September 30, 2004, as compared to the same period in 2003, primarily due to: i) pre-tax income in the amount of $171.5, net of transaction costs and the write-off of unamortized deferred financing costs associated with the restructuring of power purchase agreements for the company’s Newark and Parlin power plants and the sale of an entity holding a power purchase agreement; ii) a $16.4 pre-tax gain from the restructuring of a long-term gas supply contract net of transaction costs; and iii) a $12.3 pre-tax gain from the King City restructuring transaction related to the sale of the company’s debt securities that had served as collateral under the King City lease, net of transaction costs. Also, during the nine months ended September 30, 2004, foreign currency transaction losses were $7.5, compared to a loss of $36.2 in the corresponding period in 2003. We recognized a gain of $170.5 in the nine months ended September 30, 2004 on the repurchase of certain debt issuances, and loss before discontinued operations and cumulative effect of a change in accounting principle was $150.7 in the nine months ended September 30, 2004.

Discontinued operations, net of tax increased by $137.6 during the nine months ended September 30, 2004, as compared to the same period in 2003, as a result of the sale of oil and gas assets in the United States and Canada during the third quarter of 2004 and the sale of the company’s interest in the Lost Pines facility in the first quarter of 2004.

For the nine months ended September 30, 2004, the company generated 72.5 million megawatt-hours, which equated to a baseload capacity factor of 51%, and realized an average spark spread of $21.19 per megawatt-hour. For the same period in 2003, we generated 62.1 million megawatt-hours, which equated to a capacity factor of 55%, and realized an average spark spread of $23.90 per megawatt-hour.

Liquidity and Capital Resources

Our business is capital intensive. Our ability to capitalize on growth opportunities is dependent on the availability of capital on attractive terms. The availability of such capital in today’s environment is uncertain. To date, we have obtained cash from our operations; borrowings under credit facilities; issuance of debt,

equity, trust preferred securities and convertible debentures and contingent convertible notes; proceeds from sale/leaseback transactions; sale or partial sale of certain assets; contract monetizations; and project financings. We have utilized this cash to fund our operations, service or pay debt obligations, fund acquisitions, develop and construct power generation facilities, finance capital expenditures, support our hedging, balancing, optimization and trading activities, and meet our other cash and liquidity needs. Our strategy is also to reinvest our cash from operations into our business development and construction program or to use it to reduce debt, rather than to pay cash dividends. As discussed below, we have a liquidity-enhancing program underway for funding the completion of our current construction portfolio, for refinancing and for general corporate purposes.

Our $2.5 billion secured revolving construction financing facility through our wholly owned subsidiary Calpine Construction Finance Company II, LLC (“CCFC II”) (renamed Calpine Generating Company, LLC (“CalGen”)) was scheduled to mature in November 2004, requiring us to refinance this indebtedness. As of December 31, 2003, there was $2.3 billion outstanding under this facility including $53.2 million of letters of credit. On March 23, 2004, CalGen completed a secured institutional term loan and secured note financing, which replaced the old CCFC II facility. We realized total proceeds from the financing in the amount of $2.4 billion, before transaction costs and fees.

The holders of our 4% Convertible Senior Notes Due 2006 (“2006 Convertible Senior Notes”) have a right to require us to repurchase them at 100% of their principal amount plus any accrued and unpaid interest on December 26, 2004. We can effect the repurchase with cash, shares of Calpine common stock or a combination of the two. In 2003 and 2004 we repurchased approximately $1,127.9 million of the outstanding principal amount of 2006 Convertible Senior Notes, with proceeds of financings we consummated in July 2003, through equity swaps and with the proceeds of our offerings of our 4.75% Contingent Convertible Senior Notes Due 2023 (“2023 Convertible Senior Notes”) in November 2003. The repurchases were made in open market and privately negotiated transactions and, in February 2004, we initiated a cash tender offer for all of the outstanding 2006 Convertible Senior Notes for a price of par plus accrued interest. Approximately $409.4 million aggregate principal amount of the 2006 Convertible Senior Notes were tendered pursuant to the tender offer, for which we paid a total of $412.8 million (including accrued interest of $3.4 million). At September 30, 2004, an aggregate principal amount of $72.1 million of 2006 Convertible Senior Notes remain outstanding.

Subsequent to September 30, 2004, all of our outstanding HIGH TIDES I and HIGH TIDES II preferred securities were redeemed. See Note 16 of the Notes to Consolidated Condensed Financial Statements for information related to the redemption of all outstanding HIGH TIDES I preferred securities and HIGH TIDES II preferred securities. In addition, $517.5 million of our HIGH TIDES III are scheduled to be remarketed no later than August 1, 2005. We repurchased $115.0 million of HIGH TIDES III during the quarter ended September 30, 2004. In the event of a failed remarketing, the relevant HIGH TIDES will remain outstanding as convertible securities at a term rate equal to the treasury rate plus 6% per annum and with a term conversion price equal to 105% of the average closing price of our common stock for the five consecutive trading days after the applicable final failed remarketing termination date. While a failed remarketing of our HIGH TIDES would not have a material effect on our liquidity position, it would impact our calculation of diluted earnings per share and increase our interest expense. Even with a successful remarketing, we would expect to have an increased dilutive impact on our EPS based on a revised conversion ratio. See Note 4 of the Notes to Consolidated Condensed Financial Statements for a summary of HIGH TIDES repurchased by the Company through September 30, 2004.

See Note 7 of the Notes to Consolidated Condensed Financial Statements for more information related to other financings and repurchases of various issuances of debt in the third quarter of 2004.

We expect to have sufficient liquidity from cash flow from operations, borrowings available under lines of credit, access to sale/leaseback and project financing markets, sale or monetization of certain assets and cash balances to satisfy all current obligations under our outstanding indebtedness, and to fund anticipated capital expenditures and working capital requirements for the next twelve months. On September 30, 2004, our liquidity totaled approximately $2.7 billion. This included cash and cash equivalents on hand of $1.5 billion,

current portion of restricted cash and of approximately $0.9 billion and approximately $0.3 billion of borrowing capacity under our various credit facilities.

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


		Nine Months
		Ended
		September 30,

		2004			2003

		(In thousands)
Beginning cash and cash equivalents		$	991,806		$	579,486
Net cash provided by (used in):
	Operating activities		229,870			171,332
	Investing activities		(381,934	)		(1,836,581	)
	Financing activities		633,703			2,046,489
	Effect of exchange rates changes on cash and cash equivalents		14,377			8,946

	Net increase in cash and cash equivalents		496,016			390,186

Ending cash and cash equivalents		$	1,487,822		$	969,672

Operating activities for the nine months ended September 30, 2004, provided net cash of $229.9 million, compared to $171.3 million for the same period in 2003. Operating cash flows in 2004 benefited from the receipt of $100.6 million from the termination of power purchase agreements for two of our New Jersey power plants and $16.4 million from the restructuring of a long-term gas supply contract. In the first nine months of 2004, there was a $11.3 million use of funds from net changes in operating assets and liabilities. Uses of funds included accounts receivable, which increased by $104.8 million as our total revenues in the first nine months of 2004 (adjusted for the netting of approximately $1.3 billion of purchase power expense with sales of purchased power pursuant to EITF 03-11) increased by approximately $1.2 billion. Also, cash operating lease payments exceeded recognized expense by $53.7 million and accrued liabilities were reduced, through payments, for sales and property taxes. These uses of funds were partially offset by an increase of $218.9 million in accounts payable and accrued liabilities (including an increase in interest expense payable of $44.6 million) and a $14.1 million decrease in net margin deposits posted to support CES contracting activity.

In the first nine months of 2003, operating cash flows benefited from a $105.5 million distribution from the Acadia joint venture, following the termination of the power purchase agreement with Aquila and the restructuring of our interest in the joint venture. We also used $638.0 million of funds for net changes in operating assets and liabilities, which primarily resulted from higher accounts receivable balances, higher net margin deposits and prepaid gas balances to support our contracting activity in 2003, and lower accounts payable balances.

Investing activities for the nine months ended September 30, 2004, consumed net cash of $381.9 million, as compared to $1,836.6 million in the same period of 2003. Capital expenditures for the completion of our power facilities decreased in 2004, as there were fewer projects under construction. Investing activities in 2004 reflect the receipt of $148.6 million from the sale of our 50% interest in the Lost Pines I Power Plant, $626.6 million from the sale of our Canadian oil and gas reserves, $219.1 million from the sale of our Rocky Mountain oil and gas reserves, together with the proceeds from the sale of a subsidiary holding power purchase agreements for two of our New Jersey power plants. These sales compare to $15.2 million of proceeds from disposals in the prior year. We also reported a $181.0 million increase in cash used for acquisitions in 2004 compared to 2003, as we used the proceeds from the Lost Pines sale and cash to purchase the Los Brazos Power Plant, and we used cash on hand to purchase the remaining 50% interest in the Aries Power Plant and the remaining 20% interest in Calpine Cogeneration Corporation. Also, we used $111.6 million to purchase a portion of High Tides III and invested $124.2 million in restricted cash during 2004.

Financing activities for the nine months ended September 30, 2004, provided $633.7 million, compared to $2,046.5 million for the same period in 2003. We continued our refinancing program in 2004, by raising

$2.6 billion to repay $2.3 billion of CalGen project financing. In 2004 we also raised $250 million from the issuance of 2023 Convertible Senior Notes pursuant to an option exercise by one of the initial purchasers and $617.5 from the issuance of the 2014 Convertible Notes. We raised $878.8 from the issuance of Senior Notes and $913.3 million from various project financings. During the period, we repaid $603.9 million in project financing debt, and we used $586.9 million of proceeds from the 2023 Convertible Senior Notes offering to repurchase the majority of the outstanding 2006 Convertible Senior Notes that will be puttable in December 2004 and used $630.3 million to repay and repurchase various Senior Notes.

Non-Cash Activities — See the Schedule of noncash investing and financing activities on the Company’s Consolidated Condensed Statements of Cash Flows.

Counterparties and Customers — Our customer and supplier base is concentrated within the energy industry. Additionally, we have exposure to trends within the energy industry, including declines in the creditworthiness of our marketing counterparties. Currently, multiple companies within the energy industry are in bankruptcy or have below investment grade credit ratings. However, we do not currently have any significant exposures to counterparties that are not paying on a current basis.

Letter of Credit Facilities — At September 30, 2004 and December 31, 2003, we had approximately $477.7 million and $410.8 million, respectively, in letters of credit outstanding under various credit facilities to support CES risk management and other operational and construction activities. Of the total letters of credit outstanding, $243.7 million and $272.1 million in aggregate were issued under our cash collateralized letter of credit facilities at September 30, 2004 and December 31, 2003, respectively. At September 30, 2004, we had $148.7 million in letters of credit outstanding under the $200 million CalGen revolving credit agreement.

In addition, in August 2004, our newly created entity Calpine Energy Management entered into a $250.0 million letter of credit facility with Deutsche Bank. There were no letters of credit issued under this facility at September 30, 2004. See Note 7 of the Notes to Consolidated Condensed Financial Statements for more information regarding this letter of credit facility.

CES Margin Deposits and Other Credit Support — As of September 30, 2004 and December 31, 2003, CES had deposited net amounts of $173.9 million and $188.0 million, respectively, in cash as margin deposits with third parties and had letters of credit outstanding of $3.0 million and $14.5 million, respectively. CES uses these margin deposits and letters of credit as credit support for the gas procurement and risk management activities it conducts on Calpine’s behalf. Future cash collateral requirements may increase based on the extent of our involvement in derivative activities and movements in commodity prices and also based on our credit ratings and general perception of creditworthiness in this market. While we believe that we have adequate liquidity to support CES’s 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.

Capital Availability — Access to capital for many in the energy sector, including us, has been restricted since late 2001. While we have been able to access the capital and bank credit markets in this new environment, it has been on significantly different terms than in the past. In particular, our senior working capital facility and term loan financings and the majority of our debt securities offered and sold in this period, have been secured by certain of our assets and equity interests. While we believe we will be successful in refinancing all debt before maturity, the terms of financing available to us now and in the future may not be attractive to us and the timing of the availability of capital is uncertain and is dependent, in part, on market conditions that are difficult to predict and are outside of our control. We do not have any significant debt obligations due from October 2004 through December 31, 2005. See Note 7 of the Notes to Consolidated Condensed Financial Statements for additional information on debt obligations. We expect to incur capital expenditures in the third and fourth quarters of 2004 of approximately $350 million, net of project financings.

During the nine months ended September 30, 2004:

Our wholly owned subsidiary CalGen, formerly CCFC II, completed a secured institutional term loan and secured note financing, totaling $2.4 billion before transaction costs and fees. Net proceeds from the financing were used to refinance amounts outstanding under the $2.5 billion CCFC II revolving construction

credit facility, which was scheduled to mature in November 2004, and to pay fees and transaction costs associated with the refinancing.

One of the initial purchasers of the 2023 Convertible Senior Notes exercised in full its option to purchase an additional $250.0 million of these notes.

We repurchased approximately $178.5 million in principal amount of the 2006 Convertible Senior Notes in open market and privately negotiated transactions in exchange for approximately $177.5 million in cash in the first quarter of 2004. Additionally, on February 9, 2004, we made a cash tender offer, which expired on March 9, 2004, for any and all of the then still outstanding 2006 Convertible Senior Notes at a price of par plus accrued interest. On March 10, 2004, we paid an aggregate amount of $412.8 million for the tendered 2006 Convertible Senior Notes, which included accrued interest of $3.4 million. At September 30, 2004, $72.1 million aggregate principal amount of 2006 Convertible Senior Notes remained outstanding.

Rocky Mountain Energy Center, LLC and Riverside Energy Center, LLC, wholly owned stand-alone subsidiaries of our subsidiary Calpine Riverside Holdings, LLC, received funding in the aggregate amount of $661.5 million of floating rate secured institutional term loans and a letter of credit-linked deposit.

On September 30, 2004, we established a new $255 million Cash Collateralized Letter of Credit Facility with Bayerische Landesbank, under which all letters of credit previously issued under the $300 million Working Capital Revolver and the $200 million Cash Collateralized Letter of Credit Facility will be transitioned into that new Facility. Upon completion of this transition, all letters of credit presently collateralized with The Bank of Nova Scotia will be terminated.

On September 30, 2004, we closed on $785 million of 9⁵/8% First-Priority Senior Secured Notes Due 2014 (“9⁵/8% Senior Notes”), offered at 99.212% of par. The 9⁵/8% Senior Notes are secured, by substantially all of the assets owned directly by Calpine Corporation and by the stock of substantially all of its first tier subsidiaries. Net proceeds from the 9⁵/8% Senior Notes offering were used to make open-market purchases of our existing indebtedness and any remaining proceeds will be applied toward further open-market purchases (or redemption) of existing indebtedness and as otherwise permitted by our indentures.

On September 30, 2004, we closed on $736 million aggregate principal amount at maturity of Contingent Convertible Notes Due 2014 (“2014 Convertible Notes”), offered at 83.9% of par. The 2014 Convertible Notes will be convertible into cash and into a variable number of shares of Calpine common stock based on a conversion value derived from the conversion price of $3.85 per share. The number of shares to be delivered upon conversion will be determined by the market price of Calpine common shares at the time of conversion. The conversion price of $3.85 per share represents a premium of approximately 23% over The New York Stock Exchange closing price of $3.14 per Calpine common share on September 27, 2004. The 2014 Convertible Notes will pay interest at a rate of 6%, except that in years three, four and five, in lieu of interest, the original principal amount of $839 per note will accrete daily beginning September 30, 2006, to the full principal amount of $1,000 per note at September 30, 2009. Upon conversion of the 2014 Convertible Notes, we will deliver the portion of the conversion value equal to the then current principal amount of the 2014 Convertible Notes in cash and any additional conversion value in Calpine common stock.

Net proceeds from the 2014 Convertible Notes offering were used to redeem our HIGH TIDES I and HIGH TIDES II preferred securities on October 20, 2004, (see Note 16 of the Notes to Consolidated Condensed Financial Statements for more information regarding this redemption), and to repurchase other existing indebtedness through open-market and privately negotiated purchases, and as otherwise permitted by our indentures.

As part of the 2014 Convertible Notes offering, we entered into a ten-year Share Lending Agreement with Deutsche Bank AG London (“DB London”), under which we have loaned to DB London 89 million shares of newly issued Calpine common stock (the “loaned shares”) in exchange for a loan fee of $.001 per share. The entire 89 million shares were sold by DB London on September 30, 2004, at a price of $2.75 per share in a registered public offering. We did not receive any of the proceeds of the public offering. DB London is required to return the loaned shares to us no later than the end of the ten-year term of the Share Lending Agreement, or earlier under certain circumstances. Once loaned shares are returned, they may not be

reborrowed under the Share Lending Agreement. Under the Share Lending Agreement, DB London is required to post and maintain collateral in the form of cash, government securities, certificates of deposit, high-grade commercial paper of U.S. issuers or money market shares at least equal to 100% of the market value of the loaned shares as security for the obligation of DB London to return the loaned shares to us.

The Company’s issuance of 89 million shares of its common stock pursuant to a the Share Lending Agreement was essentially analogous to a sale of shares coupled with a forward contract for the reacquisition of the shares at a future date. As there will be no cash consideration for the return of the shares, the forward contract is considered to be prepaid. This agreement is similar to the accelerated share repurchase transaction addressed by EITF Issue No. 99-7, “Accounting for an Accelerated Share Repurchase Program,” (“EITF Issue No. 99-7”) which is characterized as two distinct transactions: a treasury stock purchase and a forward sales contract. We have evaluated what is essentially a prepaid forward contract under the guidance of SFAS No. 133, and determined that the instrument meets the requirements to be accounted for in equity and is not required to be bifurcated and accounted for separate from the Share Lending Agreement. We recorded the transaction in equity at the fair market value of the Calpine common stock on the date of issuance in the amount of $258.1 million with an offsetting purchase obligation.

Under SFAS No. 150, entities that have entered into a forward contract that requires physical settlement by repurchase of a fixed number of the issuer’s equity shares of common stock in exchange for cash shall exclude the common shares to be redeemed or repurchased in calculating basic and diluted earnings per share. While the Share Lending Agreement does not provide for cash settlement, physical settlement (i.e. the 89 million shares must be returned by the end of the agreement) is required. Further, EITF Issue No. 99-7 indicates that the “treasury stock transaction” would result in an immediate reduction in number of outstanding shares used to calculate basic and diluted earnings per share. The share loan is analogous to a prepaid forward contract which would cancel the shares issued under the Share Lending Agreement and result in an immediate reduction in the number of outstanding shares used to calculate basic and diluted earnings per share. Consequently, we have excluded the 89 million shares of common stock subject to the Share Lending Agreement from the earnings per share calculation.

See Note 7 of the Notes to Consolidated Condensed Financial Statements for more information related to repurchases of various issuances of debt in the third quarter of 2004.

Unrestricted Subsidiaries — The information in this paragraph is required to be provided under the terms of the indentures and credit agreement governing the various tranches of our second-priority secured indebtedness (collectively, the “Second Priority Secured Debt Instruments”). We have designated certain of our subsidiaries as “unrestricted subsidiaries” under the Second Priority Secured Debt Instruments. A subsidiary with “unrestricted” status thereunder generally is not required to comply with the covenants contained therein that are applicable to “restricted subsidiaries.” The Company has designated Calpine Gilroy 1, Inc., Calpine Gilroy 2, Inc. and Calpine Gilroy Cogen, L.P. as “unrestricted subsidiaries” for purposes of the Second Priority Secured Debt Instruments. The following table sets forth selected balance sheet information of Calpine Corporation and restricted subsidiaries and of such unrestricted subsidiaries at September 30, 2004, and selected income statement information for the nine months ended September 30, 2004 (in thousands):


	Calpine
	Corporation
	and Restricted			Unrestricted
	Subsidiaries			Subsidiaries			Eliminations			Total

Assets	$	28,212,673		$	440,506		$	(222,260	)	$	28,430,919

Liabilities	$	23,039,240		$	255,087		$	—		$	23,294,327

Total revenue	$	6,890,770		$	11,404		$	(8,468	)	$	6,893,706
Total cost of revenue		(6,465,283	)		(15,203	)		10,186			(6,470,300	)
Interest income		31,126			21,453			(13,413	)		39,166
Interest expense		(804,953	)		(10,404	)		—			(815,357	)
Other		397,278			(3,258	)		—			394,020

Net income	$	48,938		$	3,992		$	(11,695	)	$	41,235

Bankruptcy-Remote Subsidiaries — Pursuant to applicable transaction agreements, we have established certain of our entities separate from Calpine and our other subsidiaries. At September 30, 2004 these entities included: Rocky Mountain Energy Center, LLC, Riverside Energy Center, LLC, Calpine Riverside Holdings, LLC, Calpine Energy Management, L.P., CES GP, LLC, Power Contracting Finance, LLC, Power Contracting Finance III, LLC, Calpine Northbrook Energy Marketing, LLC, Calpine Northbrook Energy Marketing Holdings, LLC, Gilroy Energy Center, LLC, Calpine Gilroy Cogen, L.P., Calpine Gilroy I, Inc., Calpine King City Cogen LLC, Calpine Securities Company, L.P., a parent company of Calpine King City Cogen LLC, and Calpine King City, LLC, an indirect parent company of Calpine Securities Company, L.P.

Indenture Compliance — Our various indentures place conditions on our ability to issue indebtedness, including further limitations on the issuance of additional debt if our interest coverage ratio (as defined in the various indentures) is below 2:1. Currently, our interest coverage ratio (as so defined) is below 2:1 and, consequently, our indentures generally would not allow us to issue new debt, except for (i) certain types of new indebtedness that refinances or replaces existing indebtedness, and (ii) non-recourse debt and preferred equity interests issued by our subsidiaries for purposes of financing certain types of capital expenditures, including plant development, construction and acquisition expenses. In addition, if and so long as our interest coverage ratio is below 2:1, our indentures will limit our ability to invest in unrestricted subsidiaries and non-subsidiary affiliates and make certain other types of restricted payments.

Asset Sales — On January 15, 2004, we completed the sale of our 50-percent undivided interest in the 545 megawatt Lost Pines 1 Power Project to GenTex Power Corporation, an affiliate of the Lower Colorado River Authority (“LCRA”). Under the terms of the agreement, we received a cash payment of $146.8 and recorded a pre-tax gain of $35.3 million. In addition, CES entered into a tolling agreement with LCRA providing for the option to purchase 250 megawatts of electricity through December 31, 2004. At December 31, 2003, our undivided interest in the Lost Pines facility was classified as “held for sale.”

On September 1, 2004, we, along with Calpine Natural Gas L.P., completed the sale of our Rocky Mountain gas reserves that were primarily concentrated in two geographic areas: the Colorado Piceance Basin

and the New Mexico San Juan Basin. Together, these assets represent approximately 120 billion cubic feet equivalent (“Bcfe”) of proved gas reserves, producing approximately 16.3 million net cubic feet equivalent (“MMcfe”) per day of gas. Under the terms of the agreement, we received cash payments of approximately $222.8 million, and recorded a pre-tax gain of approximately $102.9 million. Proceeds derived from this sale were applied as a mandatory paydown, pursuant to covenants governing asset sales, under our First Priority Senior Secured Term Loan B Notes Due 2007 and the $300 million Working Capital Revolver.

On September 2, 2004, we completed the sale of our Canadian natural gas reserves and petroleum assets. These Canadian assets represent approximately 221 Bcfe of proved reserves, producing approximately 61 MMcfed. Included in this sale was our 25 percent interest in approximately 80 Bcfe of proved reserves (net of royalties) and 32 MMcfed of production owned by the Calpine Natural Gas Trust. Under the terms of the agreement, we received cash payments of approximately Cdn$825.0 million, or approximately US $625 million, less adjustments of Cdn$15.6 million, to reflect a September 2, 2004, closing date. We recorded a pre-tax gain of approximately US$100.6 million on the sale of our Canadian assets. A portion of the proceeds derived from this sale were applied as a mandatory pay-down under our First Priority Senior Secured Term Loan B Notes Due 2007 and the $300 million Working Capital Revolver, at which date the remaining obligations under these loan facilities were fully paid down and related letters of credit cash collateralized.

As a result of the significant contraction in the availability of capital for participants in the energy sector, we have adopted a strategy of conserving our core strategic assets and disposing of certain less strategically important assets, which serves partially to strengthen our balance sheet through repayment of debt.

Effective Tax Rate — Our effective tax rate is significantly impacted by permanent items related to cross-border financings that are deductible for tax purposes but not for book income purposes. Following the sale of our Canadian oil and gas reserves (see Note 9 of the Notes to Consolidated Financial Statements for more information on this sale) we determined that certain of these permanent items should be reflected within discontinued operations rather than in the results of continuing operations. This caused an increase in our effective tax rate from continuing operations for the nine months ended September 30, 2004, compared to the same period in 2003. However, because of significant net operating loss carryforwards at September 30, 2004, we don’t expect the change in the effective tax rate to have a material impact on cash taxes paid for 2004 or 2005.

Off-Balance Sheet Commitments — In accordance with Accounting Principles Board (“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 Consolidated Condensed Balance Sheet. At September 30, 2004, third-party investee debt was approximately $130.1 million. Based on our pro rata ownership share of each of the investments, our share would be approximately $45.7 million. However, all such debt is non-recourse to us. See Note 6 of the Notes to Consolidated Condensed Financial Statements for additional information on our equity method investments in power projects and oil and gas properties.

We own a 32.3% interest in the unconsolidated equity method investee Androscoggin Energy LLC (“AELLC”). AELLC owns the 160-megawatt Androscoggin Energy Center located in Maine and has construction debt of $58.6 million outstanding as of September 30, 2004. The debt is non-recourse to us (the “AELLC Non-Recourse Financing”). On September 30, 2004, and December 31, 2003, our investment balance was $15.9 million and $11.8 million, respectively, and the carrying value of our notes receivable, including accrued but unpaid interest, from AELLC was $23.1 million and $14.7 million, respectively. On and after August 8, 2003, AELLC received letters from its lenders claiming that certain events of default had occurred under the credit agreement for the AELLC Non-Recourse Financing, because the lending syndication had declined to extend the date for the conversion of the construction loan to a term loan by a certain date. AELLC has disputed the purported defaults. Also, the steam host for the AELLC project, International Paper Company (“IP”), filed a complaint against AELLC in October 2000, which resulted in a jury verdict of $41 million in favor of IP on November 3, 2004. See Notes 13 and 16 of the Notes to Consolidated Condensed Financial Statements. The litigation with IP has been a complicating factor in

converting the construction debt to long term financing. As a result of these events, we reviewed our investment and notes receivable balances and believe that the assets are not impaired.

Capital Spending — Development and Construction

Construction and development costs in process consisted of the following at September 30, 2004 (dollars in thousands):


						Equipment		Project
		# of				Included in		Development		Unassigned
		Projects		CIP(1)		CIP		Costs		Equipment

Projects in active construction			10	$	2,935,248	$	1,057,034	$	—	$	—
Projects in advanced development			11		671,594		529,475		122,769		—
Projects in suspended development			6		455,013		195,818		12,904		—
Projects in early development			2		—		—		8,952		—
Other capital projects			NA		45,564		—		—		—
Unassigned equipment			NA		—		—		—		66,133

	Total construction and development costs			$	4,107,419	$	1,782,327	$	144,625	$	66,133


(1)	Construction in Progress (“CIP”).

Projects in Active Construction — The 10 projects in active construction are estimated to come on line from February 2005 to November 2007. These projects will bring on line approximately 4,634 MW of base load capacity (5,244 MW with peaking capacity). Interest and other costs related to the construction activities necessary to bring these projects to their intended use are being capitalized. One additional project, Goldendale, totaling 237 MW (271 MW with peaking capacity) that was in active construction at the beginning of the quarter went on line during the quarter. At September 30, 2004, the estimated funding requirements to complete these 10 projects, net of expected project financing proceeds, is approximately $0.4 billion.

Projects in Advanced Development — There are 11 projects in advanced development. These projects will bring on line approximately 5,585 MW of base load capacity (6,651 MW with peaking capacity). Interest and other costs related to the development activities necessary to bring these projects to their intended use are being capitalized. However, the capitalization of interest has been suspended on two projects for which development activities are complete but construction will not commence until a power purchase agreement and financing are obtained. At September 30, 2004, the estimated cost to complete the 11 projects in advanced development is approximately $3.7 billion. Our current plan is to project finance these costs as power purchase agreements are arranged.

Suspended Development Projects — Due to current electric market conditions, we have ceased capitalization of additional development costs and interest expense on certain development projects on which work has been suspended. Capitalization of costs may recommence as work on these projects resumes, if certain milestones and criteria are met. These projects would bring on line approximately 3,458 MW of base load capacity (3,938 MW with peaking capacity). At September 30, 2004, the estimated cost to complete the six projects is approximately $2.1 billion.

Unassigned Equipment — As of September 30, 2004, we had made progress payments on four turbines, one heat recovery steam generator, and other equipment with an aggregate carrying value of $66.1 million representing unassigned equipment that is classified on the balance sheet as other assets because it is not assigned to specific development and construction projects. We are holding this equipment for potential use on future projects. It is possible that some of this unassigned equipment may eventually be sold, potentially in combination with our engineering and construction services. For equipment that is not assigned to development or construction projects, interest is not capitalized.

Impairment Evaluation — All projects including those in construction and development and unassigned turbines are reviewed for impairment whenever there is an indication of potential reduction in fair value. Equipment assigned to such projects is not evaluated for impairment separately, as it is integral to the assumed future operations of the project to which it is assigned. If it is determined that it is no longer probable that the projects will be completed and all capitalized costs recovered through future operations, the carrying values of the projects would be written down to the recoverable value in accordance with the provisions of SFAS No. 144. We review our unassigned equipment for potential impairment based on probability-weighted alternatives of utilizing the equipment for future projects versus selling the equipment. Utilizing this methodology, we do not believe that the equipment not committed to sale is impaired.

Risk Factor

The following risk factor is listed as an addition to those disclosed in our Annual Report on Form 10-K/ A, amendment 2.

While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks resulting from recent legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.

We are evaluating our internal controls systems in order to allow management to report on, and our Registered Independent Public Accountants to attest to, our internal controls as required by Section 404 of the Sarbanes-Oxley Act. We are performing the system and process evaluation and testing (and any necessary remediation) required in an effort to comply with the management certification and auditor attestation requirements of Section 404. As a result, we are expending significant management and employee time and resources and incurring significant additional expense. While we have discovered a number of deficiencies to date that have required or will require remediation, we believe that we currently have adequate internal controls and that there are no remaining deficiencies that, individually or in the aggregate, constitute material weaknesses While we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 in a timely fashion, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations since there is no precedent available by which to measure compliance adequacy. If we are not able to implement the requirements of Section 404 in a timely manner, including completing our assessment by the filing deadline, our auditors might be required to disclaim an opinion on internal controls and investor confidence in our internal controls over financial reporting may be adversely effected.

Performance Metrics

In understanding our business, we believe that certain non-GAAP operating performance metrics are particularly important. These are described below:

Total deliveries of power. We both generate power that we sell to third parties and purchase power for sale to third parties in hedging, balancing and optimization (“HBO”) transactions. The former sales are recorded as electricity and steam revenue and the latter sales are recorded as sales of purchased power for hedging and optimization. The volumes in megawatt hours (“MWh”) for each are key indicators of our respective levels of generation and HBO activity and the sum of the two, our total deliveries of power, is relevant because there are occasions where we can either generate or purchase power to fulfill contractual sales commitments. Prospectively beginning October 1, 2003, in accordance with EITF 03-11, certain sales of purchased power for hedging and optimization are shown net of purchased

power expense for hedging and optimization in our consolidated statement of operations. Accordingly, we have also netted HBO volumes on the same basis as of October 1, 2003, in the table below.

      Average availability and average baseload 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 baseload capacity factor, sometimes called operating rate, is calculated by dividing (a) total megawatt hours generated by our power plants (excluding peakers) by the product of 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 baseload capacity factor will reflect that decision as well as both scheduled and unscheduled outages due to maintenance and repair requirements.

      Average heat rate for gas-fired fleet of power plants expressed in British Thermal Units (“Btu”) 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.

      Average all-in realized electric price expressed in dollars per MWh generated. Our risk management and optimization activities are integral to our power generation business and directly impact our total realized revenues from generation. Accordingly, we calculate the all-in realized electric price per MWh generated by dividing (a) adjusted electricity and steam revenue, which includes capacity revenues, energy revenues, thermal revenues and the spread on sales of purchased power for hedging, balancing, and optimization activity, by (b) total generated MWh in the period.

      Average cost of natural gas expressed in dollars per millions of Btu’s of fuel consumed. Our risk management and optimization activities related to fuel procurement directly impact our total fuel expense. 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 fuel expense which includes the cost of fuel consumed by our plants (adding back cost of inter-company “equity” gas from Calpine Natural Gas L.P., 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.

      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 fuel expense from (b) adjusted E&S revenue and dividing the difference by (c) total generated MWh in the period.

      Average plant operating expense per normalized MWh. To assess trends in electric power plant operating expense (“POX”) per MWh, we normalize the results from period to period by assuming a constant 70% total company-wide capacity factor (including both base load and peaker capacity) in deriving normalized MWh. By normalizing the cost per MWh with a constant capacity factor, we can better analyze trends and the results of our program to realize economies of scale, cost reductions and efficiencies at our electric generating plants. For comparison purposes we also include POX per actual MWh.

The table below presents, the operating performance metrics discussed above.


			Three Months						Nine Months
			Ended						Ended
			September 30,						September 30,

			2004			2003			2004			2003

			(In thousands)
Operating Performance Metrics:
	Total deliveries of power:
		MWh generated		29,390			25,449			72,522			62,069
		HBO and trading MWh sold		25,458			22,718			65,941			60,886

		MWh delivered		54,848			48,167			138,463			122,955

	Average availability			97	%		98	%		93	%		91	%
	Average baseload capacity factor:
		Average total MW in operation		26,192			21,549			24,108			19,637
		Less: Average MW of pure peakers		2,951			2,889			2,951			2,599

		Average baseload MW in operation		23,241			18,660			21,157			17,038
		Hours in the period		2,208			2,208			6,576			6,552
		Potential baseload generation (MWh)		51,316			41,201			139,128			111,633
		Actual total generation (MWh)		29,390			25,449			72,522			62,069
		Less: Actual pure peakers’ generation (MWh)		557			762			1,130			1,073

		Actual baseload generation (MWh)		28,883			24,687			71,392			60,996
		Average baseload capacity factor		56	%		60	%		51	%		55	%
Average heat rate for gas-fired power plants (excluding peakers) (Btu’s/ KWh):
		Not steam adjusted		8,115			7,827			8,177			7,924
		Steam adjusted		7,140			7,159			7,152			7,202
	Average all-in realized electric price:
		Electricity and steam revenue	$	1,671,147		$	1,416,866		$	4,230,004		$	3,563,193
		Spread on sales of purchased power for hedging and optimization		79,424			7,121			135,996			14,542

		Adjusted electricity and steam revenue (in thousands)	$	1,750,571		$	1,423,987		$	4,366,000		$	3,577,735
		MWh generated (in thousands)		29,390			25,449			72,522			62,069
		Average all-in realized electric price per MWh	$	59.56		$	55.95		$	60.20		$	57.64
	Average cost of natural gas:
		Cost of oil and natural gas burned by power plants (in thousands)	$	1,103,290		$	794,134		$	2,768,910		$	2,014,945
		Fuel cost elimination		45,833			63,520			157,738			228,669

		Adjusted fuel expense	$	1,149,123		$	857,654		$	2,926,648		$	2,243,614
		Million Btu’s (“MMBtu”) of fuel consumed by generating plants (in thousands)		199,812			169,586			505,444			414,944
		Average cost of natural gas per MMBtu	$	5.75		$	5.06		$	5.79		$	5.41
		MWh generated (in thousands)		29,390			25,449			72,522			62,069
		Average cost of adjusted fuel expense per MWh	$	39.10		$	33.70		$	40.35		$	36.15


			Three Months				Nine Months
			Ended				Ended
			September 30,				September 30,

			2004		2003		2004		2003

			(In thousands)
	Average spark spread:
		Adjusted electricity and steam revenue (in thousands)	$	1,750,571	$	1,423,987	$	4,366,000	$	3,577,735
		Less: Adjusted fuel expense (in thousands)		1,149,123		857,654		2,926,648		2,243,614

		Spark spread (in thousands)	$	601,448	$	566,333	$	1,439,352	$	1,334,121
		MWh generated (in thousands)		29,390		25,449		72,522		62,069
		Average spark spread per MWh	$	20.46	$	22.25	$	19.85	$	21.49
		Add: Equity gas contribution(1)	$	27,554	$	41,407	$	97,555	$	149,585
		Spark spread with equity gas benefits (in thousands)	$	629,002	$	607,740	$	1,536,907	$	1,483,706
		Average spark spread with equity gas benefits per MWh	$	21.40	$	23.88	$	21.19	$	23.90
Average plant operating expense (“POX”) per normalized MWh
		(We also show POX per actual MWh for comparison):
	Average total consolidated MW in operations			26,192		21,549		24,108		19,637
		Hours in the period		2,208		2,208		6,576		6,576
		Total potential MWh		57,832		47,580		158,534		129,133
		Normalized MWh (at 70% capacity factor)		40,482		33,306		110,974		90,393
		Plant operating expense (POX)	$	181,907	$	180,772	$	575,830	$	496,119
		POX per normalized MWh	$	4.49	$	5.43	$	5.19	$	5.49
		POX per actual MWh	$	6.19	$	7.10	$	7.94	$	7.99


(1)	Equity gas contribution margin:


		Three Months				Nine Months
		Ended				Ended
		September 30,				September 30,

		2004		2003		2004		2003

		(In thousands)
Oil and gas sales		$	17,687	$	16,578	$	47,472	$	45,394
Add: Fuel cost eliminated in consolidation			45,833		63,520		157,738		228,669

	Subtotal	$	63,520	$	80,098	$	205,210	$	274,063
Less: Oil and gas operating expense			14,719		15,262		42,864		53,642
Less: Depletion, depreciation and amortization			21,247		23,429		64,791		70,836

Equity gas contribution margin		$	27,554		41,407	$	97,555		149,585
MWh generated (in thousands)			29,390		25,449		72,522		62,069
Equity gas contribution margin per MWh		$	0.94	$	1.63	$	1.35	$	2.41

The table below provides additional detail of total mark-to-market activity. For the three and nine months ended September 30, 2004 and 2003, mark-to-market activity, net consisted of (dollars in thousands):


				Three Months						Nine Months
				Ended						Ended
				September 30,						September 30,

				2004			2003			2004			2003

				(In thousands)
Realized:
Power activity
		“Trading Activity” as defined in EITF No. 02-03		$	9,412		$	8,581		$	39,258		$	33,243
		Other mark-to-market activity(1)			(434	)		(8,935	)		(6,378	)		(8,935	)

			Total realized power activity	$	8,978		$	(354	)	$	32,880		$	24,308

	Gas activity
		“Trading Activity” as defined in EITF No. 02-03		$	9,679		$	261		$	9,548		$	5,872
		Other mark-to-market activity(1)			—			—			—			—

			Total realized gas activity	$	9,679		$	261		$	9,548		$	5,872

Total realized activity:
		“Trading Activity” as defined in EITF No. 02-03		$	19,091		$	8,842		$	48,806		$	39,115
		Other mark-to-market activity(1)			(434	)		(8,935	)		(6,378	)		(8,935	)

			Total realized activity	$	18,657		$	(93	)	$	42,428		$	30,180

Unrealized:
	Power activity
		“Trading Activity” as defined in EITF No. 02-03		$	(16,934	)	$	(15,920	)	$	(40,803	)	$	(29,031	)
		Ineffectiveness related to cash flow hedges			1,142			(115	)		1,268			(4,753	)
		Other mark-to-market activity(1)			(240	)		(1,087	)		(13,015	)		(1,087	)

			Total unrealized power activity	$	(16,032	)	$	(17,122	)	$	(52,550	)	$	(34,871	)

	Gas activity
		“Trading Activity” as defined in EITF No. 02-03		$	(8,508	)	$	10,562		$	(11,610	)	$	12,140
		Ineffectiveness related to cash flow hedges			777			(4,370	)		6,540			3,810
		Other mark-to-market activity(1)			—			—			—			—

			Total unrealized gas activity	$	(7,731	)	$	6,192		$	(5,070	)	$	15,950

Total unrealized activity:
		“Trading Activity” as defined in EITF No. 02-03		$	(25,442	)	$	(5,358	)	$	(52,413	)	$	(16,891	)
		Ineffectiveness related to cash flow hedges			1,919			(4,485	)		7,808			(943	)
		Other mark-to-market activity(1)			(240	)		(1,087	)		(13,015	)		(1,087	)

			Total unrealized activity	$	(23,763	)	$	(10,930	)		(57,620	)	$	(18,921	)

Total mark-to-market activity:
		“Trading Activity” as defined in EITF No. 02-03		$	(6,351	)	$	3,484		$	(3,607	)	$	22,224
		Ineffectiveness related to cash flow hedges			1,919			(4,485	)		7,808			(943	)
		Other mark-to-market activity(1)			(674	)		(10,022	)		(19,393	)		(10,022	)

			Total mark-to-market activity	$	(5,106	)	$	(11,023	)	$	(15,192	)	$	11,259

Overview

Summary of Key Activities

Finance — New Issuances


Date		Amount	Description

	8/05/04	$250.0 million	CEM entered into a letter of credit facility with Deutsche Bank that expires October 2005
	9/30/04	$785.0 million	Received funding on offering of 9⁵/8% First Priority Senior Secured Notes due 2014, offered at 99.212% of par
	9/30/04	$736.0 million	Received funding on offering of Contingent Convertible Notes due 2014, offered at 83.9% of par
	9/30/04	$255.0 million	Established a new Cash Collateralized Letter of Credit Facility with Bayerische Landesbank

Finance — Repurchases/ Retirements


Date		Description

	7/27/04	Entered into a five year agreement with Snapping Shoals EMC for 200 megawatts of capacity and energy
	8/3/04	Signed a ten year power sales commitment with Wisconsin Public Service for 235 megawatts of capacity, energy and ancillary services, subject to approval by the Public Service Commission of Wisconsin
	9/1/04	Completed sale of natural gas reserves in the Colorado Piceance Basin and New Mexico San Juan Basin for approximately $223 million
	9/2/04	Completed sale of all Canadian natural gas reserves and petroleum assets for approximately Cdn$825 million (US$625 million)
	9/30/04	Entered into a ten-year Share Lending Agreement, loaning 89 million shares of newly issued Calpine common stock to Deutsche Bank AG London

Power Plant Development and Construction:


Date	Project		Description

9/17/04		Goldendale Energy Center		Commercial Operation

California Power Market

in the December 12 Certification (the “March 26 Order”). In addition, as a result of certain findings by the FERC staff concerning the unreliability or misreporting of certain reported indices for gas prices in California during the refund period, FERC ordered that the basis for calculating a party’s potential refund liability be modified by substituting a gas proxy price based upon gas prices in the producing areas plus the tariff transportation rate for the California gas price indices previously adopted in the refund proceeding. The Company believes, based on the available information, that any refund liability that may be attributable to it will increase modestly, from approximately $6.2 million to $8.4 million, after taking the appropriate set-offs for outstanding receivables owed by the CalPX and CAISO to Calpine. The Company has fully reserved the amount of refund liability that by its analysis would potentially be owed under the refund calculation clarification in the March 26 Order. The final determination of the refund liability is subject to further FERC proceedings to ascertain the allocation of payment obligations among the numerous buyers and sellers in the California markets. At this time, the Company is unable to predict the timing of the completion of these proceedings or the final refund liability. Thus the impact on the Company’s business is uncertain at this time.

FERC Investigation into Western Markets. On February 13, 2002, FERC initiated an investigation of potential manipulation of electric and natural gas prices in the western United States. This investigation was initiated as a result of allegations that Enron and others used their market position to distort electric and natural gas markets in the West. The scope of the investigation is to consider whether, as a result of any manipulation in the short-term markets for electric energy or natural gas or other undue influence on the wholesale markets by any party since January 1, 2000, the rates of the long-term contracts subsequently entered into in the West are potentially unjust and unreasonable. On August 13, 2002, the FERC staff issued the Initial Report on Company-Specific Separate Proceedings and Generic Reevaluations; Published Natural Gas Price Data; and Enron Trading Strategies (the “Initial Report”) summarizing its initial findings in this investigation. There were no findings or allegations of wrongdoing by Calpine set forth or described in the Initial Report. On March 26, 2003, the FERC staff issued a final report in this investigation (the “Final Report”). The FERC staff recommended that FERC issue a show cause order to a number of companies, including Calpine, regarding certain power scheduling practices that may have been be in violation of the CAISO’s or CalPX’s tariff. The Final Report also recommended that FERC modify the basis for determining

potential liability in the California Refund Proceeding discussed above. Calpine believes that it did not violate these tariffs and that, to the extent that such a finding could be made, any potential liability would not be material.

Geysers Reliability Must Run Section 206 Proceeding. CAISO, California Electricity Oversight Board, Public Utilities Commission of the State of California, Pacific Gas and Electric Company, San Diego Gas & Electric Company, and Southern California Edison (collectively referred to as the “Buyers Coalition”) filed a complaint on November 2, 2001 at the FERC requesting the commencement of a Federal Power Act Section 206 proceeding to challenge one component of a number of separate settlements previously reached on the terms and conditions of “reliability must run” contracts (“RMR Contracts”) with certain generation owners, including Geysers Power Company, LLC, which settlements were also previously approved by the FERC. RMR Contracts require the owner of the specific generation unit to provide energy and ancillary services when called upon to do so by the ISO to meet local transmission reliability needs or to manage transmission constraints. The Buyers Coalition has asked FERC to find that the availability payments under these RMR Contracts are not just and reasonable. Geysers Power Company, LLC filed an answer to the complaint in November 2001. To date, FERC has not established a Section 206 proceeding. The outcome of this litigation and the impact on the Company’s business cannot be determined at the present time.

Financial Market Risks

As we are 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.

The change in fair value of outstanding commodity derivative instruments from January 1, 2004 through September 30, 2004, is summarized in the table below (in thousands):


Fair value of contracts outstanding at January 1, 2004		$	76,541
Cash losses recognized or otherwise settled during the period(1)			10,057
Non-cash losses recognized or otherwise settled during the period(2)			(27,152	)
Changes in fair value attributable to new contracts			5,515
Changes in fair value attributable to price movements			(122,443	)

	Fair value of contracts outstanding at September 30, 2004(3)	$	(57,482	)

Realized cash flow from fair value hedges(4)		$	109,544


(1)	Recognized losses from commodity cash flow hedges of $(61.2) million (represents realized value of cash flow hedge activity of $(46.5) million as disclosed in Note 10 of the Notes to Consolidated Condensed Financial Statements, net of non-cash OCI items relating to terminated derivatives of $7.0 million and equity method hedges of $7.7 million) and realized gains of $51.2 million on mark-to-market activity, (represents realized value of mark-to-market activity of $42.4 million, as reported in the Consolidated Condensed Statements of Operations under mark-to-market activities, net of $(8.8) million of non-cash realized mark-to-market activity).

(2)	This represents the non-cash amortization of deferred items embedded in our derivative assets and liabilities.

(3)	Net commodity derivative assets reported in Note 10 of the Notes to Consolidated Condensed Financial Statements.

(4)	Not included as part of the roll-forward of net derivative assets and liabilities because changes in the hedge instrument and hedged item move in equal and offsetting directions to the extent the fair value hedges are perfectly effective.

The fair value of outstanding derivative commodity instruments at September 30 based on price source and the period during which the instruments will mature, are summarized in the table below (in thousands):


Fair Value Source		2004			2005-2006			2007-2008		After 2008			Total

Prices actively quoted		$	41,653		$	155,268		$	—	$	—		$	196,921
Prices provided by other external sources			(44,204	)		(173,840	)		5,720		(16,533	)		(228,857	)
Prices based on models and other valuation methods			—			1,709			2,834		(30,089	)		(25,546	)

	Total fair value	$	(2,551	)	$	(16,863	)	$	8,554	$	(46,622	)	$	(57,482	)

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 group. 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 September 30 and the period during which the instruments will mature are summarized in the table below (in thousands):


Credit Quality		2004			2005-2006			2007-2008			After 2008			Total

(Based on Standard & Poor’s Ratings as of September 30, 2004) Investment grade		$	(3,621	)	$	(28,912	)	$	8,936		$	(46,622	)	$	(70,219	)
Non-investment grade			2,200			13,261			—			—			15,461
No external ratings			(1,130	)		(1,212	)		(382	)		—			(2,724	)

	Total fair value	$	(2,551	)	$	(16,863	)	$	8,554		$	(46,622	)	$	(57,482	)

The fair value of outstanding derivative commodity instruments and the fair value that would be expected after a 10% adverse price change are shown in the table below (in thousands):


						Fair Value
						after 10%
						Adverse
			Fair Value			Price Change

At September 30, 2004:
	Electricity		$	(249,717	)	$	(573,224	)
	Natural gas			192,235			170,134

		Total	$	(57,482	)	$	(403,090	)

Derivative commodity instruments included in the table are those included in Note 10 of the Notes to 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 fair value of electricity derivative commodity instruments after a 10% adverse price change includes the effect of increased power prices versus our derivative forward commitments. Conversely, the fair value of the natural gas derivatives after a 10% adverse price change reflects a general decline in gas prices versus our derivative forward commitments. Derivative commodity instruments offset the price risk exposure of our physical assets. 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 our 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 24% from December 31, 2003, to September 30, 2004, while the total volume of open power derivative positions increased 46% 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 September 30, 2004, a significant component 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 three and nine months ended September 30, 2004, have reflected this. See Notes 10 and 11 of the Notes to Consolidated Condensed Financial Statements for additional information on derivative activity and OCI, respectively.

Available-for-Sale Debt Securities — Through September 30, 2004, we have exchanged 30.8 million Calpine common shares in privately negotiated transactions for approximately $152.5 million par value of HIGH TIDES I and HIGH TIDES II. We have also repurchased $115.0 million par value of HIGH TIDES III. At September 30, 2004, the repurchased HIGH TIDES are classified as available-for-sale and recorded at fair market value. HIGH TIDES I and II are recorded in Other Current Assets and HIGH TIDES III in Other Assets. See Note 16 of the Notes to Consolidated Condensed Financial Statements for more information on the redemption of HIGH TIDES I and II subsequent to September 30, 2004. The following tables present our different classes of debt securities held by expected maturity date and fair market value as of September 30, 2004, (dollars in thousands):


		Weighted
		Average
		Interest
		Rate			2004		2005		2006		2007		2008		Thereafter		Total

HIGH TIDES I			5.75	%	$	77,500	$	—	$	—	$	—	$	—	$	—	$	77,500
HIGH TIDES II			5.50	%		75,000		—		—		—		—		—		75,000
HIGH TIDES III			5.00	%		—		—		—		—		—		115,000		115,000

	Total				$	152,500	$	—	$	—	$	—	$	—	$	115,000	$	267,500


		Fair
		Market
		Value

HIGH TIDES I		$	77,500
HIGH TIDES II			75,000
HIGH TIDES III			110,400

	Total	$	262,900

Interest Rate Swaps — From time to time, we use interest rate swap agreements to mitigate our exposure to interest rate fluctuations associated with certain of our debt instruments and to adjust the mix between fixed and floating rate debt in our capital structure to desired levels. We do not use interest rate swap agreements for speculative or trading purposes. The following tables summarize the fair market values of our existing interest rate swap agreements as of September 30, 2004, (dollars in thousands):


	*Variable to fixed Swaps*


			Weighted Average			Weighted Average
	Notional		Interest Rate			Interest Rate		Fair Market
Maturity Date	Principal Amount		(Pay)			(Receive)		Value

2011	$	58,178		4.5	%		3-month US $LIBOR		(2,488	)
2011		291,897		4.5	%		3-month US $LIBOR		(12,547	)
2011		209,833		4.4	%		3-month US $LIBOR		(7,589	)
2011		41,822		4.4	%		3-month US $LIBOR		(1,513	)
2011		39,612		6.9	%		3-month US $LIBOR		(4,716	)
2012		107,226		6.5	%		3-month US $LIBOR		(13,206	)
2016		21,330		7.3	%		3-month US $LIBOR		(3,951	)
2016		14,220		7.3	%		3-month US $LIBOR		(2,635	)
2016		42,660		7.3	%		3-month US $LIBOR		(7,904	)
2016		28,440		7.3	%		3-month US $LIBOR		(5,269	)
2016		35,550		7.3	%		3-month US $LIBOR		(6,587	)

Total	$	890,768		5.2	%			$	(68,405	)


	*Fixed to Variable Swaps*


		Notional		Weighted Average		Weighted Average
		Principal		Interest Rate		Interest Rate			Fair Market
Maturity Date		Amount		(Pay)		(Receive)			Value

2011		$	100,000	6-month US $	LIBOR		8.5	%	$	(5,252	)
2011			100,000	6-month US $	LIBOR		8.5	%		(3,549	)
2011			200,000	6-month US $	LIBOR		8.5	%		(7,437	)
2011			100,000	6-month US $	LIBOR		8.5	%		(6,353	)

	Total	$	500,000				8.5	%	$	(22,591	)

The fair value of outstanding interest rate swaps and cross currency swaps and the fair value that would be expected after a one percent adverse interest rate change are shown in the table below (in thousands):


	*Variable to Fixed Swaps*


	Fair Value After a
	1.0% (100 basis point)
Fair Value as of September 30, 2004	Adverse Interest Rate Change

$(68,405)	$	(118,545	)


	*Fixed to Variable Swaps*


	Fair Value After a
	1.0% (100 basis point)
Fair Value as of September 30, 2004	Adverse Interest Rate Change

$(22,591)	$	(49,925	)

Currency Exposure — We own subsidiary entities in several countries. These entities generally have functional currencies other than the U.S. dollar. In most cases, the functional currency is consistent with the local currency of the host country where the particular entity is located. In certain cases, we and our foreign subsidiary entities hold monetary assets and/or liabilities that are not denominated in the functional currencies referred to above. In such instances, we apply the provisions of SFAS No. 52, “Foreign Currency Translation,” to account for the monthly re-measurement gains and losses of these assets and liabilities into the functional currencies for each entity. In some cases we can reduce our potential exposures to net income by designating liabilities denominated in non-functional currencies as hedges of our net investment in a foreign subsidiary or by entering into derivative instruments and designating them in hedging relationships against a foreign exchange exposure. Based on our unhedged exposures at September 30, 2004, the impact to our pre-tax earnings that would be expected after a 10% adverse change in exchange rates is shown in the table below (in thousands):


	Impact to Pre-Tax Net Income
	After 10% Adverse Exchange
Currency Exposure	Rate Change

GBP-Euro	$	(22,349	)
$Cdn-$US		(12,357	)
$Cdn-Euro		(1,512	)

Significant changes in exchange rates will also impact our Cumulative Translation Adjustment (“CTA”) balance when translating the financial statements of our foreign operations from their respective functional currencies into our reporting currency, the U.S. dollar. An example of the impact that significant exchange rate movements can have on our Balance Sheet position occurred in 2003. During 2003 CTA increased by approximately $200 million primarily due to a weakening of the U.S. dollar of approximately 18% and 10% against the Canadian dollar and Great British Pound, respectively.

Foreign Currency Transaction Gain (Loss)

Three Months Ended September 30, 2004, Compared to Three Months Ended September 30, 2003:

The major components of our foreign currency transaction loss of $(12.4) million and our foreign currency transaction gain of $8.1 million for the three months ended September 30, 2004 and 2003, respectively, are as follows (amounts in millions):


	2004			2003

Gain (Loss) from $Cdn-$US fluctuations:	$	(7.4	)	$	9.3
Gain (Loss) from GBP-Euro fluctuations:		(4.1	)		(2.1	)
Gain (Loss) from other currency fluctuations:		(0.9	)		0.8

On September 3, 2004, in conjunction with the sale of our Canadian gas assets, our Canadian subsidiary distributed a portion of the sales proceeds to the U.S. parent company, which effectively reduced the size of our investment in our Canadian dollar denominated subsidiaries. As a result, the degree to which we could designate our $Cdn-denominated liabilities as hedges against our investment in Canadian dollar denominated subsidiaries was reduced, creating additional $Cdn-$US exposure. Following the September 2, 2004, sale, the Canadian dollar strengthened considerably against the U.S. dollar, creating re-measurement losses on this exposure.

The significant $Cdn-$US gain for the three months ended September 30, 2003, was driven primarily by the interest receivable on a large intercompany loan between a Calpine U.S. entity and a Calpine Canadian entity, denominated in Canadian dollars. The underlying loan is deemed to be a permanent investment, but the associated interest is generally settled between the two entities on a recurring basis, thereby requiring any re-measurement gains or losses to be recorded as a component of income.

During the three months ended September 30, 2004 and 2003, respectively, the Euro strengthened against the GBP, triggering re-measurement losses associated with our Euro-denominated 8³/8% Senior Notes Due 2008. These Senior Notes were issued by a Calpine subsidiary whose functional currency is GBP. As a result, when the Euro strengthened, the underlying debt was re-measured at a higher GBP value than in previous periods. The increase of the liability in GBP resulted in a foreign currency transaction loss under SFAS No. 52.

Nine Months Ended September 30, 2004, Compared to Nine Months Ended September 30, 2003:

The major components of our foreign currency transaction losses of $7.5 million and $36.2 million, respectively, for the nine months ended September 30, 2004 and 2003, respectively, are as follows (amounts in millions):


	2004			2003

Gain (Loss) from $Cdn-$US fluctuations:	$	(13.1	)	$	(25.6	)
Gain (Loss) from GBP-Euro fluctuations:		6.5			(11.4	)
Gain (Loss) from other currency fluctuations:		(0.9	)		0.8

The $Cdn-$US loss for the nine months ended September 30, 2004, was driven by two factors. First, we recognized re-measurement losses on the translation of the interest receivable associated with our large intercompany loan that has been deemed a permanent investment during the first two quarters of 2004, as the Canadian dollar weakened against the U.S. dollar. Second, we recognized re-measurement losses during the third quarter of 2004 when the Canadian dollar strengthened after the sale of our Canadian gas assets and subsequent repatriation of a portion of the sales proceeds to the U.S. parent company reduced the degree to which we could designate our $Cdn-denominated liabilities as hedges against our investment in Canadian dollar denominated subsidiaries.

The $Cdn-$US loss for the nine months ended September 30, 2003, was driven primarily by a significant strengthening of the Canadian dollar against the U.S. dollar during the first six months of 2003, at a time when the majority of our $Cdn-$US payable exposures were not designated as hedges of the net investment in our

Canadian operations. The losses on these loans were partially offset by re-measurement gains recognized on the translation of the interest receivable associated with our large intercompany loan that has been deemed a permanent investment.

During the nine months ended September 30, 2004, the Euro weakened against the GBP, triggering re-measurement gains associated with our Euro-denominated 8³/8% Senior Notes Due 2008.

During the nine months ended September 30, 2003, the Euro strengthened against the GBP, triggering re-measurement losses associated with these Senior Notes.

Debt Financing — Because of the significant capital requirements within our industry, debt financing is often needed to fund our growth. Certain debt instruments may affect us adversely because of changes in market conditions. We have used two primary forms of debt which are subject to market risk: (1) Variable rate construction/project financing and (2) Other variable-rate instruments. Significant LIBOR increases could have a negative impact on our future interest expense. Our variable-rate construction/project financing is primarily through CalGen. New borrowings under our $200 million CalGen revolving credit agreement is used exclusively to fund the construction of the CalGen power plants still in construction. Other variable-rate instruments consist primarily of our revolving credit and term loan facilities, which are used for general corporate purposes. Both our variable-rate construction/project financing and other variable-rate instruments are indexed to base rates, generally LIBOR, as shown below.

The following table summarizes our variable-rate debt exposed to interest rate risk as of September 30, 2004. All outstanding balances and fair market values are shown net of applicable premium or discount, if any (dollars in thousands):


			2004(8)		2005		2006		2007		2008

3-month US $LIBOR weighted average interest rate basis(4)
	MEP Pleasant Hill Term Loan, Tranche A		$	1,138	$	6,700	$	7,482	$	8,132	$	9,271

		Total of 3-month US $LIBOR rate debt		1,138		6,700		7,482		8,132		9,271
1-month EURLIBOR weighted average interest rate basis(4)
	Thomassen revolving line of credit			—		3,298		—		—		—

		Total of 1-month EURLIBOR rate debt		—		3,298		—		—		—
1-month US $LIBOR weighted average interest rate basis(4)
	First Priority Secured Floating Rate Notes Due 2009 (CalGen)			—		—		—		1,175		2,350
	CalGen Revolver			—		—		—		36,500		—

		Total of 1-month US $LIBOR rate debt		—		—		—		37,675		2,350
6-month US $LIBOR weighted average interest rate basis(4)
	Third Priority Secured Floating Rate Notes Due 2011 (CalGen)			—		—		—		—		—

		Total of 6-month US $LIBOR rate debt		—		—		—		—		—
5-month US $LIBOR weighted average interest rate basis(4)
	Riverside Energy Center project financing			—		3,685		3,685		3,685		3,685
	Rocky Mountain Energy Center project financing			—		2,649		2,649		2,649		2,649

		Total of 6-month US $LIBOR rate debt		—		6,334		6,334		6,334		6,334


				2004(8)		2005		2006		2007		2008

(1)(4)
	First Priority Secured Institutional Term Loan Due 2009 (CCFC I)				—		3,208		3,208		3,208		3,208
	Second Priority Senior Secured Floating Rate Notes Due 2011 (CCFC I)				—		—		—		—		—

		Total of variable rate debt as defined at(1) below			—		3,208		3,208		3,208		3,208
(2)(4)
	Second Priority Senior Secured Term Loan B Notes Due 2007				1,875		7,500		7,500		725,625		—

		Total of variable rate debt as defined at(2) below			1,875		7,500		7,500		725,625		—
(3)(4)
	Second Priority Senior Secured Floating Due 2007				1,250		5,000		5,000		483,750		—
	Blue Spruce Energy Center project financing				—		1,875		3,750		3,750		3,750

		Total of variable rate debt as defined at(3) below			1,250		6,875		8,750		487,500		3,750
(5)(4)
	First Priority Secured Term Loans Due 2009 (CalGen)				—		—		—		3,000		6,000
	Second Priority Secured Floating Rate Notes Due 2010 (CalGen)				—		—		—		—		3,200
	Second Priority Secured Term Loans Due 2010 (CalGen)				—		—		—		—		500

		Total of variable rate debt as defined at(5) below			—		—		—		3,000		9,700

(6)(4)
	Island Cogen				—		6,294		—		—		—

		Total of variable rate debt as defined at(6) below			—		6,294		—		—		—

(6)(4)
	Contra Costa				—		168		175		182		190

		Total of variable rate debt as defined at(6) below			—		168		175		182		190

			Grand total variable-rate debt instruments	$	4,263	$	40,377	$	33,449	$	1,271,656	$	34,803


					Fair Value
			Thereafter		9/30/2004(9)

3-month US $LIBOR weighted average interest rate basis(4)
	MEP Pleasant Hill Term Loan, Tranche A		$	95,235	$	127,958

		Total of 3-month US $LIBOR rate debt		95,235		127,958
1-month EURLIBOR weighted average interest rate basis(4)
Thomassen revolving line of credit				—		3,298

		Total of 1-month EURLIBOR rate debt		—		3,298
1-month US $LIBOR weighted average interest rate basis(4)
First Priority Secured Floating Rate Notes Due 2009 (CalGen)				231,475		235,000
	CalGen Revolver			—		36,500

		Total of 1-month US $LIBOR rate debt		231,475		271,500


					Fair Value
			Thereafter		9/30/2004(9)

6-month US $LIBOR weighted average interest rate basis(4)
Third Priority Secured Floating Rate Notes Due 2011 (CalGen)				680,000		680,000

		Total of 6-month US $LIBOR rate debt		680,000		680,000
5-month US $LIBOR weighted average interest rate basis(4)
Riverside Energy Center project financing				353,760		368,500
	Rocky Mountain Energy Center project financing			254,304		264,900

		Total of 6-month US $LIBOR rate debt		608,064		633,400
(1)(4)
	First Priority Secured Institutional Term Loan Due 2009 (CCFC I)			365,189		378,021
	Second Priority Senior Secured Floating Rate Notes Due 2011 (CCFC I)			408,326		408,326

		Total of variable rate debt as defined at(1) below		773,515		786,347
(2)(4)
	Second Priority Senior Secured Term Loan B Notes Due 2007			—		742,500

		Total of variable rate debt as defined at(2) below		—		742,500
(3)(4)
	Second Priority Senior Secured Floating Due 2007			—		495,000
	Blue Spruce Energy Center project financing			106,675		119,800

		Total of variable rate debt as defined at(3) below		106,675		614,800
(5)(4)
	First Priority Secured Term Loans Due 2009 (CalGen)			591,000		600,000
	Second Priority Secured Floating Rate Notes Due 2010 (CalGen)			628,039		631,239
	Second Priority Secured Term Loans Due 2010 (CalGen)			98,131		98,631

		Total of variable rate debt as defined at(5) below		1,317,170		1,329,870

(6)(4)
	Island Cogen			—		6,294

		Total of variable rate debt as defined at(6) below		—		6,294
(6)(4)
	Contra Costa			1,561		2,276

		Total of variable rate debt as defined at(6) below		1,561		2,276

		Grand total variable-rate debt instruments	$	3,813,695	$	5,198,243


(1)	British Bankers Association LIBOR Rate for deposit in US dollars for a period of six months.

(2)	U.S. prime rate in combination with the Federal Funds Effective Rate.

(3)	British Bankers Association LIBOR Rate for deposit in US dollars for a period of three months.

(4)	Actual interest rates include a spread over the basis amount.

(5)	Choice of 1-month US $LIBOR, 2-month US $LIBOR, 3-month US $LIBOR, 6-month US $LIBOR, 12-month US $LIBOR or a base rate.

(6)	Bankers Acceptance Rate.

(7)	Local Agency Fund.

(8)	For 3 months remaining in 2004.

(9)	Fair value equals carrying value.

New Accounting Pronouncements

EITF 04-7

EITF 04-8

On September 30, 2004, the EITF reached a final consensus on EITF Issue No. 04-8 (“EITF Issue No. 04-8”): “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” The guidance in EITF Issue No. 04-8 is effective for periods ending after December 15, 2004, and must be applied by retroactively restating previously reported earnings per shares. The consensus requires companies that have issued contingently convertible instruments with a market price trigger to include the effects of the conversion in diluted earnings per share, regardless of whether the price trigger had been met. Prior to this consensus, contingently convertible instruments were not included in diluted earnings per share if the price trigger had not been met. Typically, the affected instruments are convertible into common stock of the issuer after the issuer’s common stock price has exceeded a predetermined threshold for a specified time period. Our $634 million outstanding at September 30, 2004, of 4.75% Contingent Convertible Senior Notes Due 2023 (“2023 Convertible Senior Notes”) and $736 million aggregate principal amount at maturity of Contingent Convertible Notes Due 2014 (“2014 Convertible Notes”) will be affected by the new guidance. This new guidance will accelerate the point at which the 2023 Convertible Senior Notes and the 2014 Convertible Notes would potentially impact diluted earnings per share, but once the trigger price is exceeded, there would be no additional dilution.

SFAS No. 128-R

Convertible Notes contain provisions that would require share settlement in the event of conversion, during certain limited events of default, including bankruptcy. Additionally, the 2023 Convertible Senior Notes include a provision allowing us to meet a put with either cash or shares of stock. The revised guidance is expected to increase the potential dilution to our earnings per share, particularly when the price of our common stock is low, since the more dilutive of the calculations would be used considering both: (i) normal conversion assuming a combination of cash and a variable number of shares; and (ii) conversion during certain limited events of default assuming 100% shares at the fixed conversion rate.

Summary of Dilution Potential of Our Contingent Convertible Notes: 2023 Convertible Senior Notes and 2014 Convertible Notes

The table below assumes normal conversion for the 2014 Convertible Notes and the 2023 Convertible Senior Notes in which the principal amount is paid in cash, and the excess up to the conversion value is paid in shares of Calpine common stock. The table shows only the potential impact of our two contingent convertible notes issuances and does not include the potential dilutive effect of HIGH TIDES III, the remaining 4% Convertible Senior Notes Due 2006 that can be put to the Company in December 2004 or employee stock options. Additionally, we are still assessing the potential impact of the SFAS No. 128-R exposure draft on our convertible issues. See Note 3 of the Notes to Consolidated Condensed Financial Statements for more information.


	2014		2023
	Convertible		Convertible
	Notes		Senior Notes

Size of issuance	$	736,000,000	$	633,775,000
Conversion price per share	$	3.85	$	6.50
Conversion rate		259.7403		153.8462
Trigger price (20% over conversion price)	$	4.62	$	7.80


	*Additional Shares*


Future Calpine	2014		2023
Common Stock	Convertible		Convertible		Share					Dilution
Price	Notes*		Senior Notes		SubTotal		Share Increase			in EPS

$5.00		43,968,831		NA		43,968,831		9.9	%		9.0	%
$7.50		93,035,498		13,000,542		106,036,040		23.8	%		19.2	%
$10.00		117,568,831		34,126,375		151,695,207		34.1	%		25.4	%
$20.00		154,368,831		65,815,125		220,183,957		49.5	%		33.1	%
$100.00		183,808,831		91,166,125		274,974,957		61.8	%		38.2	%
Basic earnings per share base at September 30, 2004		445,092,147

In the case of the 2014 Convertible Notes, since the conversion value is set for any given common stock price, more shares would be issued when the accreted value is less than $1,000 than in the table above since the accreted value (initially $839 per bond) is paid in cash, and the balance of the conversion value is paid in shares. The incremental shares assuming conversion when the accreted value is only $839 per bond are shown in the table below:


	Incremental
Future Calpine Common Stock Price	Shares

$5.00		23,699,200
$7.50		15,799,467
$10.00		11,849,600
$20.00		5,924,800
$100.00		1,184,960

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EITF 03-13

At the September 29, 2004, EITF meeting, the EITF reached a tentative conclusion on Issue No. 03-13: Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations. The Issue provides a model to assist in evaluating (a) which cash flows should be considered in the determination of whether cash flows of the disposal component have been or will be eliminated from the ongoing operations of the entity and (b) the types of continuing involvement that constitute significant continuing involvement in the operations of the disposal component. FASB is expected to ratify the consensus at its November 2004 meeting with prospective application to transactions entered into after January 1, 2005. The Company considered the model outlined in EITF Issue No. 03-13 while evaluating the sales of the Canadian and Rockies disposal groups (see Note 8 for more information) and does not expect the new guidance to change the conclusions reached under the existing discontinued operations guidance in SFAS No. 144.


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk.*

See “Financial Market Risks” in Item 2.


Item 4.	*Controls and Procedures.*

Disclosure Controls and Procedures

Calpine Corporation (the “Company”) maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Securities Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Disclosure Committee and management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon, and as of the date of, this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective, because of the material weakness discussed below. In light of this material weakness, the Company performed additional analysis and post-closing procedures to ensure its consolidated financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”). Accordingly, management believes that the financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented.

The management of Calpine Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of September 30, 2004, the Company did not maintain effective controls over the accounting for income taxes and the determination of current income taxes payable, deferred income tax assets and liabilities and the related income tax provision (benefit) for continuing and discontinued operations. Specifically, the Company did not have effective controls in place to (i) identify and evaluate in a timely manner the tax implications of the repatriation of funds from Canada (ii) appropriately determine the allocation of the tax provision between continuing and discontinued operations (iii) ensure there was adequate communication from the tax department to the accounting departments relating to the preparation of the tax provision (iv) ensure all elements of the income tax provision were mathematically correct and (v) ensure the

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rationale for certain tax positions was adequately documented. This control deficiency resulted in the restatement of the Company’s consolidated financial statements for the three and nine months ended September 30, 2004. Additionally, this control deficiency could result in a misstatement of current income taxes payable, deferred income tax assets and liabilities and the related income tax provision (benefit) for continuing and discontinued operations that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency constitutes a material weakness.

Remediation of Material Weakness

During the fourth quarter of 2004, we identified certain deficiencies in our tax accounting processes, procedures and controls. Although we had processes and systems in place relating to the preparation and review of the interim and annual income tax provisions, we subsequently determined that these controls were not adequate.

In 2005, the Company is taking the following steps to improve its internal controls relating to the preparation and review of interim and annual income tax provisions, including the accounting for current income taxes payable, deferred income tax assets and liabilities and the related income tax provision:


	•	Complete the implementation of the CorpTax computer application to automate more of the tax analysis and provision processes and improve clarity of supporting documentation and reports;

	•	Will add resources in the tax and accounting departments as well as additional tax accounting training for key personnel and will continue to monitor staffing levels in the future; and

	•	Engage third party tax experts to review the details of the income tax calculations.

The Company believes it is taking steps necessary to remediate this material weakness and will continue to monitor the effectiveness of these procedures and will continue to make any changes that management deems appropriate.

Changes in Internal Control Over Financial Reporting

Calpine continuously seeks to improve the efficiency and effectiveness of its internal controls. This results in refinements to processes throughout the Company. However, there was no change in our internal control over financial reporting that occurred during the third quarter of 2004 that has materially affected, or is reasonably likely to materially affect, Calpine’s internal control over financial reporting.

PART II — OTHER INFORMATION


Item 1.	*Legal Proceedings.*

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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 11 actions are virtually identical–they are filed by three law firms, in conjunction with other law firms as co-counsel. All 11 lawsuits are purported class actions on behalf of purchasers of Calpine’s securities between January 5, 2001 and December 13, 2001.

The complaints in these fourteen actions allege that, during the purported class periods, certain Calpine executives issued false and misleading statements about Calpine’s financial condition in violation of Sections 10(b) and 20(1) of the Securities Exchange Act of 1934, as well as Rule 10b-5. These actions seek an unspecified amount of damages, in addition to other forms of relief.

In addition, a fifteenth securities class action, Ser v. Calpine, et al., was filed on May 13, 2002 (the “Ser action”). The underlying allegations in the Ser action are substantially the same as those in the above-referenced actions. However, the Ser action is brought on behalf of a purported class of purchasers of Calpine’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, as amended (the “Securities Act”), the Supplemental Prospectus for the 2011 Notes contained false and misleading statements regarding Calpine’s financial condition. This action names Calpine, 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.

In July 2004 the court issued an order for pretrial preparation establishing a trial date on November 7, 2005. On August 31, 2004, Calpine filed a motion for summary judgment to dismiss the consolidated

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securities class action lawsuits described above in Note 13. On November 3, 2004, the court issued an order denying such motion for summary judgment. Discovery is underway and a trial is scheduled for November 7, 2005. The Company considers the lawsuit to be without merit and intends to continue to defend vigorously against these allegations.

104

105

The case recently proceeded to trial, and on November 3, 2004, a jury verdict in the amount of $41 million was rendered in favor of IP. AELLC was held liable on the misrepresentation claim, but not on the breach of contract claim. The verdict amount was based on calculations proffered by IP’s damages expert, and AELLC is currently reviewing post-trial motions and appellate options. AELLC made an additional accrual to recognize the jury verdict and the Company recognized its 32.3% share.”

Panda Energy International, Inc., et al. v. Calpine Corporation, et al. On November 5, 2003, Panda Energy International, Inc. and certain related parties, including PLC II, LLC, (collectively “Panda”) filed suit against Calpine and certain of its affiliates in the United States District Court for the Northern District of Texas, alleging, among other things, that the Company breached duties of care and loyalty allegedly owed to Panda by failing to correctly construct and operate the Oneta Energy Center (“Oneta”), which the Company acquired from Panda, in accordance with Panda’s original plans. Panda alleges that it is entitled to a portion of the profits from Oneta plant and that Calpine’s actions have reduced the profits from Oneta plant thereby undermining Panda’s ability to repay monies owed to Calpine on December 1, 2003, under a promissory note on which approximately $38.6 million (including interest through December 1, 2003) is currently outstanding and past due. The note is collateralized by Panda’s carried interest in the income generated from Oneta, which achieved full commercial operations in June 2003. The company filed a counterclaim against Panda Energy International, Inc. (and PLC II, LLC) based on a guaranty, and have also filed a motion to dismiss as to the causes of action alleging federal and state securities laws violations. The motion to dismiss is currently pending before the court. On August 17, 2004, the case was transferred to a different judge, which will likely delay the ruling on the motion to dismiss. However, at the present time, the Company cannot estimate the potential loss, if any, that might arise from this matter. The Company considers Panda’s lawsuit to be without merit and intends to defend vigorously against it. The Company stopped accruing interest income on the promissory note due December 1, 2003, as of the due date because of Panda’s default in repayment of the note.

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Transmission Service Agreement with Nevada Power Company. On March 16, 2004, NPC filed a petition for declaratory order at FERC (Docket No. EL04-90-000) asking that an order be issued requiring Calpine and Reliant Energy Services, Inc. to pay for transmission service under their Transmission Service Agreements (“TSAs”) with NPC or, if the TSAs are terminated, to pay the lesser of the transmission charges or a pro rata share of the total cost of NPC’s Centennial Project (approximately $33 million for Calpine). Calpine had previously provided security to NPC for these costs in the form of a surety bond issued by Fireman’s Fund Insurance Company (“FFIC”). The Centennial Project involves construction of various transmission facilities in two phases; Calpine’s Moapa Energy Center (“MEC”) is scheduled to receive service under its TSA from facilities yet to be constructed in the second phase of the Centennial Project. Calpine has filed a protest to the petition asserting that Calpine will take service under the TSA if NPC proceeds to execute a purchase power agreement (“PPA”) with MEC based on its winning bid in the Request for Proposals that NPC conducted in 2003. Calpine also has taken the position that if NPC does not execute a PPA with MEC, it will terminate the TSA and any payment by Calpine would be limited to a pro rata allocation of certain costs incurred by NPC in connection with the second phase of the project (approximately $4.5 million in total to date) among the three customers to be served. At this time, Calpine is unable to predict the final outcome of this proceeding or its impact on Calpine.

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On April 29, 2004, FFIC filed a complaint for declaratory relief in state superior court of Marin County, California in connection with this demand. If FFIC is successful in its petition, it will be entitled to recover its costs associated with bringing this action.

Calpine Energy Services v Acadia Power Partners. Calpine, through its subsidiaries, owns 50% of Acadia Power Partners, LLC (“APP”) which company owns the Acadia Energy Center near Eunice, Louisiana (the “Facility”). A Cleco Corp subsidiary owns the remaining 50% of APP. Calpine Energy Services, LP (“CES”) is the purchaser under two power purchase agreements with APP, which agreements entitle CES to all of the Facility’s capacity and energy. In August 2003 certain transmission constraints previously unknown to CES and APP began to severely limit the ability of CES to obtain all of the energy from the Facility. CES has asserted that it is entitled to certain relief under the purchase agreements, to which assertions APP disagrees. Accordingly, the parties are engaging in the initial alternative dispute resolution steps set forth in the power purchase agreements. It is possible that the dispute will result in binding arbitration pursuant to the

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agreements if a settlement is not reached. In addition, CES and APP are discussing certain billing calculation disputes, which relate to operating efficiency. The period of time for these disputes is also at issue, and could range from six months to June 2002 (commercial operation date of plant). It is expected that the parties will be able to resolve these disputes, and that APP will owe CES approximately $800,000 to $2.5 million.


Item 2.	*Unregistered Sales of Equity Securities and Use of Proceeds.*

On July 1, 2004, the Company issued 4.2 million unregistered shares of its common stock in exchange for $20.0 million par value of HIGH TIDES I, which are exchangeable for common stock. All of the shares of Calpine common stock issued in exchange for the HIGH TIDES were issued without registration under the Securities Act of 1933 in reliance upon the exemption afforded by Section 3(a)(9) thereof. On September 30, 2004, the Company repurchased par value of $115.0 million HIGH TIDES III, which are exchangeable for common stock.

The following table sets forth the total units of HIGH TIDES purchased by the Company during the third quarter:


					Total Number of		Maximum Number
					Units Purchased as		of Units that May
					Part of Publicly		Yet Be Purchased
	Total Number of		Average Price Paid		Announced Plans		Under the Plans
Period	Units Purchased		per Share		or Programs		or Programs

7/1/04-7/31/04		400,000	$	50.68		—		—
8/1/04-8/31/04		—		—		—		—
9/1/04-9/30/04		2,300,000	$	48.50		—		—

On September 30, 2004, the Company also repurchased $266.2 million in principal amount of its 4.75% Contingent Convertible Senior Notes Due 2023 (“2023 Convertible Senior Notes”), which are convertible into common stock. The following table sets forth the total units of 2023 Convertible Senior Notes purchased by the Company during the third quarter:


					Total Number of		Maximum Number
					Units Purchased as		of Units that May
					Part of Publicly		Yet Be Purchased
	Total Number of		Average Price Paid		Announced Plans		Under the Plans
Period	Units Purchased		per Note		or Programs		or Programs

7/1/04-7/31/04		—		—		—		—
8/1/04-8/31/04		—		—		—		—
9/1/04-9/30/04		266,225	$	665.02		—		—

109


Item 6.	*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, as amended through June 2, 2004.(a)

	*3	.2	Amended and Restated By-laws of Calpine Corporation.(b)

	*4	.1	Indenture, dated as of September 30, 2004, between Calpine Corporation and Wilmington Trust Company, as Trustee, relating to $785,000,000 in aggregate principal amount of 9.625% First Priority Senior Secured Notes due 2014, including form of Notes.(c)

	*4	.2.1	Indenture, dated as of August 10, 2000, between the Company and Wilmington Trust Company, as Trustee.(d)

	*4	.2.2	First Supplemental Indenture, dated as of September 28, 2000, between the Company and Wilmington Trust Company, as Trustee.(e)

	*4	.2.3	Second Supplemental Indenture, dated as of September 30, 2004, between the Company and Wilmington Trust Company, as Trustee, relating to $736,000,000 in aggregate principal amount at maturity of Contingent Convertible Notes due 2014, including form of Notes.(f)

	*4	.3.1	Amended and Restated Rights Agreement, dated as of September 19, 2001, between Calpine Corporation and Equiserve Trust Company, N.A., as Rights Agent.(g)

	*4	.3.2	Amendment No. 1 to Rights Agreement, dated as of September 28, 2004, between Calpine Corporation and EquiServe Trust Company, N.A., as Rights Agent.(f)

	4	.4	Memorandum and Articles of Association of Calpine (Jersey) Limited.(h)

	*10	.1	Share Lending Agreement, dated as of September 28, 2004, among Calpine Corporation, as Lender, Deutsche Bank AG London, as Borrower, through Deutsche Bank Securities Inc., as agent for the Borrower, and Deutsche Bank Securities Inc., in its capacity as Collateral Agent and Securities Intermediary.(f)

	*10	.2	Purchase and Sale Agreement among Calpine Corporation, Calpine Natural Gas L.P. and Pogo Producing Company dated July 1, 2004.(i)

	*10	.3	Purchase and Sale Agreement among Calpine Corporation, Calpine Natural Gas L.P. and Bill Barrett Corporation dated July 1, 2004.(i)

	*10	.4	Asset and Trust Unit Purchase and Sale Agreement among Calpine Canada Natural Gas Partnership and Calpine Energy Holdings Limited and Calpine Corporation and PrimeWest Gas Corp. and PrimeWest Energy Trust dated July 1, 2004.(i)

	*10	.5.1	Letter of Credit Agreement, dated as of July 16, 2003, among Calpine Corporation, the Lenders named therein, and The Bank of Nova Scotia, as Administrative Agent.(j)

	*10	.5.2	Amendment to Letter of Credit Agreement, dated as of September 30, 2004, between Calpine Corporation and The Bank of Nova Scotia, as Administrative Agent.(k)

	*10	.6	Letter of Credit Agreement, dated as of September 30, 2004, between Calpine Corporation and Bayerische Landesbank, acting through its Cayman Islands Branch, as the Issuer.(k)

	+31	.1	Certification of the Chairman, President and Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	+31	.2	Certification of the Executive Vice President and Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	+32	.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	*99	.1	Term Debenture, issued August 23, 2001, by Calpine Canada Resources Ltd., to Calpine Canada Energy Finance II ULC.(l)

110


	+	Filed herewith.


	*	Incorporated by reference.


(a)		Incorporated by reference to Calpine Corporation’s Quarterly Report on Form 10-Q dated June 30, 2004, filed with the SEC on August 9, 2004.

(b)		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.

(c)		Incorporated by reference to Calpine Corporation’s Current Report on Form 8-K filed with the SEC on October 6, 2004.

(d)		Incorporated by reference to Calpine Corporation’s Registration Statement on Form S-3 (Registration No. 333-76880) filed with the SEC on January 17, 2002.

(e)		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.

(f)		Incorporated by reference to Calpine Corporation’s Current Report on Form 8-K filed with the SEC on September 30, 2004.

(g)		Incorporated by reference to Calpine Corporation’s Registration Statement on Form 8-A/ A (Registration No. 001-12079) filed with the SEC on September 28, 2001.

(h)		This document has been omitted in reliance on Item 601(b)(4)(iii) of Regulation S-K. The Company agrees to furnish a copy of such document to the SEC upon request.

(i)		Incorporated by reference to Calpine Corporation’s Current Report on Form 8-K/ A filed with the SEC on September 14, 2004.

(j)		Incorporated by reference to Calpine Corporation’s Quarterly Report on Form 10-Q dated June 30, 2003, filed with the SEC on August 14, 2003.

(k)		Incorporated by reference to Calpine Corporation’s Quarterly Report on Form 10-Q dated September 30, 2004, filed with the SEC on November 9, 2004.

(l)		Incorporated by reference to Calpine Corporation’s Current Report on Form 8-K filed with the SEC on November 10, 2004.

111

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Calpine Corporation


	By:	/s/ ROBERT D. KELLY



	Robert D. Kelly
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial Officer)

Date: April 13, 2005


	By:	/s/ CHARLES B. CLARK, JR.



	Charles B. Clark, Jr.
	Senior Vice President and Corporate
	Controller (Principal Accounting Officer)

Date: April 13, 2005

112

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, as amended through June 2, 2004.(a)

	*3	.2	Amended and Restated By-laws of Calpine Corporation.(b)

	*4	.1	Indenture, dated as of September 30, 2004, between Calpine Corporation and Wilmington Trust Company, as Trustee, relating to $785,000,000 in aggregate principal amount of 9.625% First Priority Senior Secured Notes due 2014, including form of Notes.(c)

	*4	.2.1	Indenture, dated as of August 10, 2000, between the Company and Wilmington Trust Company, as Trustee.(d)

	*4	.2.2	First Supplemental Indenture, dated as of September 28, 2000, between the Company and Wilmington Trust Company, as Trustee.(e)

	*4	.2.3	Second Supplemental Indenture, dated as of September 30, 2004, between the Company and Wilmington Trust Company, as Trustee, relating to $736,000,000 in aggregate principal amount at maturity of Contingent Convertible Notes due 2014, including form of Notes.(f)

	*4	.3.1	Amended and Restated Rights Agreement, dated as of September 19, 2001, between Calpine Corporation and Equiserve Trust Company, N.A., as Rights Agent.(g)

	*4	.3.2	Amendment No. 1 to Rights Agreement, dated as of September 28, 2004, between Calpine Corporation and EquiServe Trust Company, N.A., as Rights Agent.(f)

	4	.4	Memorandum and Articles of Association of Calpine (Jersey) Limited.(h)

	*10	.1	Share Lending Agreement, dated as of September 28, 2004, among Calpine Corporation, as Lender, Deutsche Bank AG London, as Borrower, through Deutsche Bank Securities Inc., as agent for the Borrower, and Deutsche Bank Securities Inc., in its capacity as Collateral Agent and Securities Intermediary.(f)

	*10	.2	Purchase and Sale Agreement among Calpine Corporation, Calpine Natural Gas L.P. and Pogo Producing Company dated July 1, 2004.(i)

	*10	.3	Purchase and Sale Agreement among Calpine Corporation, Calpine Natural Gas L.P. and Bill Barrett Corporation dated July 1, 2004.(i)

	*10	.4	Asset and Trust Unit Purchase and Sale Agreement among Calpine Canada Natural Gas Partnership and Calpine Energy Holdings Limited and Calpine Corporation and PrimeWest Gas Corp. and PrimeWest Energy Trust dated July 1, 2004.(i)

	*10	.5.1	Letter of Credit Agreement, dated as of July 16, 2003, among Calpine Corporation, the Lenders named therein, and The Bank of Nova Scotia, as Administrative Agent.(j)

	*10	.5.2	Amendment to Letter of Credit Agreement, dated as of September 30, 2004, between Calpine Corporation and The Bank of Nova Scotia, as Administrative Agent.(k)

	*10	.6	Letter of Credit Agreement, dated as of September 30, 2004, between Calpine Corporation and Bayerische Landesbank, acting through its Cayman Islands Branch, as the Issuer.(k)

	+31	.1	Certification of the Chairman, President and Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	+31	.2	Certification of the Executive Vice President and Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	+32	.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	*99	.1	Term Debenture, issued August 23, 2001, by Calpine Canada Resources Ltd., to Calpine Canada Energy Finance II ULC.(l)

+ Filed herewith.


	*	Incorporated by reference.


(a)		Incorporated by reference to Calpine Corporation’s Quarterly Report on Form 10-Q dated June 30, 2004, filed with the SEC on August 9, 2004.

(b)		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.

(c)		Incorporated by reference to Calpine Corporation’s Current Report on Form 8-K filed with the SEC on October 6, 2004.

(d)		Incorporated by reference to Calpine Corporation’s Registration Statement on Form S-3 (Registration No. 333-76880) filed with the SEC on January 17, 2002.

(e)		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.

(f)		Incorporated by reference to Calpine Corporation’s Current Report on Form 8-K filed with the SEC on September 30, 2004.

(g)		Incorporated by reference to Calpine Corporation’s Registration Statement on Form 8-A/ A (Registration No. 001-12079) filed with the SEC on September 28, 2001.

(h)		This document has been omitted in reliance on Item 601(b)(4)(iii) of Regulation S-K. The Company agrees to furnish a copy of such document to the SEC upon request.

(i)		Incorporated by reference to Calpine Corporation’s Current Report on Form 8-K/ A filed with the SEC on September 14, 2004.

(j)		Incorporated by reference to Calpine Corporation’s Quarterly Report on Form 10-Q dated June 30, 2003, filed with the SEC on August 14, 2003.

(k)		Incorporated by reference to Calpine Corporation’s Quarterly Report on Form 10-Q dated September 30, 2004, filed with the SEC on November 9, 2004.

(l)		Incorporated by reference to Calpine Corporation’s Current Report on Form 8-K filed with the SEC on November 10, 2004.


	power expense for hedging and optimization in our consolidated statement of operations. Accordingly, we have also netted HBO volumes on the same basis as of October 1, 2003, in the table below.

	Average availability and average baseload 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 baseload capacity factor, sometimes called operating rate, is calculated by dividing (a) total megawatt hours generated by our power plants (excluding peakers) by the product of 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 baseload capacity factor will reflect that decision as well as both scheduled and unscheduled outages due to maintenance and repair requirements.

	Average heat rate for gas-fired fleet of power plants expressed in British Thermal Units (“Btu”) 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.

	Average all-in realized electric price expressed in dollars per MWh generated. Our risk management and optimization activities are integral to our power generation business and directly impact our total realized revenues from generation. Accordingly, we calculate the all-in realized electric price per MWh generated by dividing (a) adjusted electricity and steam revenue, which includes capacity revenues, energy revenues, thermal revenues and the spread on sales of purchased power for hedging, balancing, and optimization activity, by (b) total generated MWh in the period.

	Average cost of natural gas expressed in dollars per millions of Btu’s of fuel consumed. Our risk management and optimization activities related to fuel procurement directly impact our total fuel expense. 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 fuel expense which includes the cost of fuel consumed by our plants (adding back cost of inter-company “equity” gas from Calpine Natural Gas L.P., 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.

	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 fuel expense from (b) adjusted E&S revenue and dividing the difference by (c) total generated MWh in the period.

	Average plant operating expense per normalized MWh. To assess trends in electric power plant operating expense (“POX”) per MWh, we normalize the results from period to period by assuming a constant 70% total company-wide capacity factor (including both base load and peaker capacity) in deriving normalized MWh. By normalizing the cost per MWh with a constant capacity factor, we can better analyze trends and the results of our program to realize economies of scale, cost reductions and efficiencies at our electric generating plants. For comparison purposes we also include POX per actual MWh.