CALPINE CORP
S-4, 1997-11-28
COGENERATION SERVICES & SMALL POWER PRODUCERS
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<PAGE>   1
 
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 28, 1997
                                                      REGISTRATION NO. 333-
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------
 
                                    FORM S-4
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933

                            ------------------------
 
                              CALPINE CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                   <C>                                   <C>
               DELAWARE                                4911                               77-0212977
       (STATE OF INCORPORATION)            (PRIMARY STANDARD INDUSTRIAL                 (IRS EMPLOYER
                                           CLASSIFICATION CODE NUMBER)               IDENTIFICATION NO.)
</TABLE>
 
                          50 WEST SAN FERNANDO STREET
                               SAN JOSE, CA 95113
                                 (408) 995-5115
    (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                  OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
                            ------------------------
 
                                PETER CARTWRIGHT
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                              CALPINE CORPORATION
                          50 WEST SAN FERNANDO STREET
                               SAN JOSE, CA 95113
                                 (408) 995-5115
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                   INCLUDING AREA CODE, OF AGENT FOR SERVICE)
 
                            ------------------------
 
                                   COPIES TO:
 
<TABLE>
<S>                                           <C>
          JOSEPH E. RONAN, JR., ESQ.                      SCOTT D. LESTER, ESQ.
               GENERAL COUNSEL                       BROBECK, PHLEGER & HARRISON LLP
             CALPINE CORPORATION                                ONE MARKET
         50 WEST SAN FERNANDO STREET                        SPEAR STREET TOWER
              SAN JOSE, CA 95113                         SAN FRANCISCO, CA 94105
                (408) 995-5115                                (415) 442-0900
</TABLE>
 
     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
 
     If the securities being registered on the Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]

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

                        CALCULATION OF REGISTRATION FEE
 
<TABLE>
<CAPTION>
==================================================================================================
                                                   PROPOSED         PROPOSED
                                  AMOUNT           MAXIMUM           MAXIMUM
TITLE OF EACH CLASS OF             TO BE        OFFERING PRICE      AGGREGATE        AMOUNT OF
SECURITIES TO BE REGISTERED     REGISTERED       PER UNIT(1)    OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------
<S>                          <C>               <C>              <C>               <C>
8 3/4% Senior Notes Due
  2007......................   $275,000,000           --          $275,000,000        $83,333
==================================================================================================
</TABLE>
 
(1) Pursuant to Rule 457(f)(2) of the Securities Act of 1933, as amended, the
    registration fee has been estimated based on the book value of the
    securities to be received by Registrant in exchange for the securities to be
    issued hereunder in the Exchange Offer described herein.

                            ------------------------
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
 
================================================================================
<PAGE>   2
 
     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
     SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
     WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
     SECURITIES LAWS OF ANY SUCH JURISDICTION.
 
PROSPECTUS (Subject to Completion)
 
Issued November 28, 1997
 
                               OFFER TO EXCHANGE
                                all outstanding
                          8 3/4% SENIOR NOTES DUE 2007
                  ($275,000,000 PRINCIPAL AMOUNT OUTSTANDING)
 
                                      for

                          8 3/4% SENIOR NOTES DUE 2007

                                       of

[LOGO]
                              CALPINE CORPORATION

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

      THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
                                   , 1997, UNLESS EXTENDED.
 
                            ------------------------

CALPINE CORPORATION, A DELAWARE CORPORATION ("CALPINE" OR THE "COMPANY"), HEREBY
     OFFERS, UPON THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH IN THIS
     PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL (THE "LETTER OF
 TRANSMITTAL"), TO EXCHANGE ITS 8 3/4% SENIOR NOTES DUE 2007 (THE "NEW NOTES"),
 IN AN OFFERING WHICH HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
 AMENDED (THE "SECURITIES ACT"), PURSUANT TO A REGISTRATION STATEMENT OF WHICH
    THIS PROSPECTUS CONSTITUTES A PART, FOR AN EQUAL PRINCIPAL AMOUNT OF ITS
    OUTSTANDING 8 3/4% SENIOR NOTES DUE 2007 (THE "OLD NOTES"), OF WHICH AN
  AGGREGATE OF $275,000,000 IN PRINCIPAL AMOUNT IS OUTSTANDING AS OF THE DATE
  HEREOF (THE "EXCHANGE OFFER"). THE NEW NOTES AND THE OLD NOTES ARE SOMETIMES
REFERRED TO HEREIN COLLECTIVELY AS THE "SENIOR NOTES." THE FORM AND TERMS OF THE
 NEW NOTES WILL BE THE SAME AS THE FORM AND TERMS OF THE OLD NOTES EXCEPT THAT
 THE NEW NOTES WILL NOT BEAR LEGENDS RESTRICTING THE TRANSFER THEREOF. THE NEW
    NOTES WILL BE OBLIGATIONS OF THE COMPANY ENTITLED TO THE BENEFITS OF THE
 INDENTURE, DATED AS OF JULY 8, 1997 (THE "INDENTURE"), RELATING TO THE SENIOR
   NOTES. SEE "DESCRIPTION OF THE NEW NOTES." FOLLOWING THE COMPLETION OF THE
 EXCHANGE OFFER, NONE OF THE SENIOR NOTES WILL BE ENTITLED TO ANY RIGHTS UNDER
THE REGISTRATION RIGHTS AGREEMENT DATED JULY 1, 1997 OR THE REGISTRATION RIGHTS
AGREEMENT DATED AS OF SEPTEMBER 5, 1997 (COLLECTIVELY, THE "REGISTRATION RIGHTS
   AGREEMENT"), INCLUDING, BUT NOT LIMITED TO, THE CONTINGENT INCREASE IN THE
     INTEREST RATE PROVIDED FOR PURSUANT THERETO. SEE "THE EXCHANGE OFFER."
 
                            ------------------------
 
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
  AN INVESTMENT IN THE SENIOR NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE 15.
 
                            ------------------------
 
  THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
 EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
   AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
                               CRIMINAL OFFENSE.
 
                            ------------------------
 
The date of this Prospectus is               , 1997.
<PAGE>   3
 
     The Company will accept for exchange any and all Old Notes that are validly
tendered on or prior to 5:00 p.m., New York City time, on the date the Exchange
Offer expires, which will be             , 1997 unless the Exchange Offer is
extended (the "Expiration Date"). Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of Old Notes
being tendered for exchange. The Company has not entered into any arrangement or
understanding with any person to distribute the New Notes to be received in the
Exchange Offer.
 
     The Old Notes initially sold to Qualified Institutional Buyers (as defined
in Rule 144A) in reliance on Rule 144A under the Securities Act ("Rule 144A")
were initially represented by two, permanent global Notes in definitive, fully
registered form, registered in the name of a nominee of The Depositary Trust
Company ("DTC"), which were deposited with The Bank of New York, the Trustee
under the Indenture (the "Trustee"), as custodian. The New Notes exchanged for
the Old Notes that are represented by the global Old Notes will continue to be
represented by permanent global Old Notes (collectively, the "Global Notes," and
individually, a "Global Note") in definitive, fully registered form, registered
in the name of a nominee of DTC and deposited with the Trustee as custodian,
unless the beneficial holders thereof request otherwise. See "Description of the
New Notes -- Book Entry; Delivery and Form." Old Notes may be tendered only in
denominations of $1,000 and any integral multiple thereof.
 
     Interest on the New Notes will be payable semi-annually in arrears on
January 15 and July 15 of each year (each an "Interest Payment Date"),
commencing on the first such date following their date of issuance. Interest on
the New Notes will accrue from the last Interest Payment Date on which interest
was paid on the Old Notes that are accepted for exchange or, if no interest has
been paid, from July 8, 1997. Accordingly, interest which has accrued since the
last Interest Payment Date or July 8, 1997 on the Old Notes accepted for
exchange will cease to be payable upon issuance of the New Notes. Untendered Old
Notes that are not exchanged for New Notes pursuant to the Exchange Offer will
remain outstanding and bear interest at a rate of 8 3/4% per annum after the
Expiration Date.
 
     Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by a holder thereof (other than (i) a
broker-dealer who acquires such New Notes directly from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
or (ii) a person that is an affiliate of the Company (within the meaning of Rule
405 under the Securities Act)) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the holder
is acquiring the New Notes in the ordinary course of such holder's business and
is not participating, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes. Holders of Old Notes wishing
to accept the Exchange Offer must represent to the Company that such conditions
have been met. Each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale for a period of 180 days from the date of this Prospectus, or such
shorter period as will terminate when all Old Notes acquired by broker-dealers
for their own accounts as a result of market-making activities or other trading
activities have been exchanged for New Notes and resold by such broker-dealers.
See "Plan of Distribution."
 
     Prior to the Exchange Offer, there has been no public market for the Senior
Notes. The Company does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance that an active market for the New Notes will
develop. To the extent that a market for the New Notes develops, the market
value of the New Notes will depend on market conditions (such as yields on
alternative investments) general economic conditions, the Company's financial
condition and other conditions. Such conditions might cause the New Notes, to
the extent that they
 
                                        2
<PAGE>   4
 
are actively traded, to trade at a significant discount from the face value. See
"Risk Factors -- Absence of Public Market."
 
     The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to bear the expenses of the Exchange Offer. No underwriter is
being used in connection with the Exchange Offer.
 
     THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
 
                            ------------------------
 
                DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
 
     This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical facts included in this Prospectus, including, without limitation,
such statements under "Summary," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" and located
elsewhere herein, regarding the Company or any of the transactions described
herein, including the timing, financing, strategies and effects of such
transactions, are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectation will prove to have been correct.
Important factors that could cause actual results to differ materially from
expectations ("Cautionary Statements") are disclosed in this Prospectus,
including, without limitation, in conjunction with the forward-looking
statements in this Prospectus and/or under "Risk Factors." All subsequent
written or oral forward-looking statements attributable to the Company or
persons acting on behalf of the Company are expressly qualified in their
entirety by the Cautionary Statements.
 
                            ------------------------
 
     THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
CALPINE CORPORATION, 50 WEST SAN FERNANDO STREET, SAN JOSE, CALIFORNIA 95113,
ATTENTION: INVESTOR RELATIONS (TELEPHONE NUMBER: 408-995-5115). IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
            , 1997.
 
                                        3
<PAGE>   5
 
     NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE
ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THIS PROSPECTUS, NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR
BOTH TOGETHER, NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF
TRANSMITTAL, OR BOTH TOGETHER, CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
 
                            ------------------------
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
Summary...............................................................................    5
Risk Factors..........................................................................   15
Use of Proceeds.......................................................................   23
The Exchange Offer....................................................................   24
Capitalization........................................................................   31
Selected Consolidated Financial Data..................................................   32
Pro Forma Consolidated Financial Information..........................................   34
Management's Discussion and Analysis of Financial Condition and Results of
  Operations..........................................................................   41
Business..............................................................................   52
Management............................................................................   86
Description of Certain Other Indebtedness.............................................  116
Transfer Restrictions.................................................................  118
Certain Federal Income Tax Considerations.............................................  118
Plan of Distribution..................................................................  120
Legal Matters.........................................................................  120
Experts...............................................................................  121
Available Information.................................................................  121
Incorporation By Reference............................................................  121
Consolidated Financial Statements.....................................................  F-1
</TABLE>
 
                                        4
<PAGE>   6
 
                                    SUMMARY
 
     The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus or incorporated by reference herein.
References in this Prospectus to the "Company" or "Calpine" shall, as the
context requires, include Calpine Corporation and its consolidated subsidiaries.
 
                                  THE COMPANY
 
     Calpine is engaged in the acquisition, development, ownership and operation
of power generation facilities and the sale of electricity and steam in the
United States and selected international markets. The Company currently has
interests in 19 power generation facilities and steam fields having an aggregate
capacity of 2,264 megawatts. In addition, Calpine has a 240 megawatt gas-fired
power generation facility currently under construction in Pasadena, Texas and an
investment in a 169 megawatt gas-fired power generation facility currently under
construction in Dighton, Massachussetts. The Company also currently has a
pending acquisition, subject to the fulfillment of all required conditions, for
the net ownership interests of 120 megawatts of capacity in four gas-fired power
generation facilities located in New York, with an aggregate capacity of 388
megawatts. Since its inception in 1984, Calpine has developed substantial
expertise in all aspects of electric power generation. The Company's vertical
integration has resulted in significant growth over the last five years as
Calpine has applied its extensive engineering, construction management,
operations, fuel management and financing capabilities to successfully implement
its acquisition and development program. Calpine's strategy is to capitalize on
opportunities in the power market through an ongoing program to acquire,
develop, own and operate electric power generation facilities, as well as
marketing power and energy services to utilities and other end users.
 
     Calpine's net interest in power generation facilities has increased from
281 megawatts in 1991 to 1,919 megawatts, including the facilities currently
under construction. Total assets have increased from $41.2 million as of
December 31, 1991 to $1.4 billion on a pro forma basis as of September 30, 1997.
Calpine's revenue on a pro forma basis has increased to $256.6 million for 1996,
representing a five-year compound annual growth rate of 46% since 1991. The
Company's EBITDA (as defined) on a pro forma basis for 1996 increased to $151.6
million from $4.9 million in 1991, representing a five-year compound annual
growth rate of 99%. See "Pro Forma Consolidated Financial Data."
 
THE MARKET
 
     The power generation industry represents the third largest industry in the
United States, with an estimated end user market of approximately $211.9 billion
of electricity sales and 3,100 gigawatt hours of production in 1996. In response
to increasing customer demand for access to low cost electricity and enhanced
services, new regulatory initiatives are currently being adopted or considered
at both state and federal levels to increase competition in the domestic power
generation industry. To date, such initiatives are under consideration at the
federal level and in approximately forty-five states. In April 1996, the Federal
Energy Regulatory Commission ("FERC") adopted Order No. 888, opening wholesale
power sales to competition and providing for open and fair electric transmission
services by public utilities. In addition, the California Public Utilities
Commission ("CPUC") has issued an electric industry restructuring decision which
provides for commencement of deregulation and implementation of customer choice
of electricity supplier by January 1, 1998. Legislation implementing this
decision was adopted in September 1996. Calpine believes that industry trends
and such regulatory initiatives will lead to the transformation of the existing
market, which is largely characterized by electric utility monopolies, having
old, inefficient, high cost generating facilities, selling to a captive customer
base, to a more competitive market where end users may purchase electricity from
a variety of suppliers, including non-utility generators, power marketers,
public utilities and others. The Company believes that these market trends will
create substantial opportunities for companies such as Calpine that are low cost
power producers and have an integrated power services capability which enables
them to produce and sell energy to customers at competitive rates.
 
     The Company also believes that these market trends will result in the
disposition of power generation facilities by utilities, independent power
producers and industrial companies. Utilities such as Pacific Gas & Electric
Company ("PG&E") and Southern California Edison Company have announced their
intentions to
 
                                        5
<PAGE>   7
 
sell power generation facilities totaling approximately 7,300 megawatts and
9,500 megawatts, respectively. In addition, New England Electric System is
currently in the process of selling its entire non-nuclear generating portfolio
of approximately 4,000 megawatts. The independent power industry, which
represents approximately 8% of the installed capacity in the United States, or
approximately 65,000 megawatts, and has accounted for approximately 50% of all
additional capacity in the United States since 1991, is currently undergoing
significant consolidation. Many independent producers operating a limited number
of power plants are seeking to dispose of such plants in response to competitive
pressures, and industrial companies are selling their power plants to redeploy
capital in their core businesses. Over 200 independent power plant and portfolio
sale transactions have occurred in the past three years. The Company believes
that this consolidation will continue in the highly fragmented independent power
industry.
 
     The power generation industry outside the United States is approximately
three times larger than the domestic market, and the demand for electricity is
growing rapidly. It was estimated in 1997 that in excess of 440 gigawatts of new
capacity will be required outside the United States over the ensuing ten-year
period. In order to satisfy this anticipated increase in demand, many countries
have adopted active government programs designed to encourage private investment
in power generation facilities. The Company believes that these market trends
will create significant opportunities to acquire and develop power generation
facilities in such countries.
 
STRATEGY
 
     Calpine's objective is to become a leading power company by capitalizing on
these emerging opportunities in the domestic and international power markets.
The key elements of the Company's strategy are as follows:
 
     Expand and diversify domestic portfolio of power projects. In pursuing its
growth strategy, the Company intends to focus on opportunities where it is able
to capitalize on its extensive management and technical expertise to implement a
fully integrated approach to the acquisition, development and operation of power
generation facilities. This approach includes design, engineering, procurement,
finance, construction management, fuel and resource acquisition, operations and
power marketing, which Calpine believes provides it with a competitive
advantage. By pursuing this strategy, the Company has significantly expanded and
diversified its project portfolio. Since 1993, the Company has completed
transactions involving nine gas-fired cogeneration facilities and two steam
fields. As a result of these transactions, the Company has more than quadrupled
its aggregate power generation capacity and substantially diversified its fuel
mix since 1993.
 
     The Company is also pursuing the development of highly efficient, low cost
power plants that seek to take advantage of inefficiencies in the electricity
market. The Company intends to sell all or a portion of the power generated by
such merchant plants into the competitive market, rather than exclusively
through long-term power sales agreements. As part of Calpine's initial effort to
develop merchant plants, the Company has commenced construction of a 240
megawatt gas-fired cogeneration project located in Pasadena, Texas (the
"Pasadena Cogeneration Project"). Approximately 90 megawatts of electricity
generated by the Pasadena Cogeneration Project will be sold to the Phillips
Houston Chemical Complex, with the remainder to be sold into the competitive
wholesale market through Calpine's power marketing activities. The Company
expects that this project will represent a prototype for future merchant plant
developments. The Company currently plans to develop additional low-cost,
gas-fired facilities in California, Texas, New England and other high priced
power markets. See "Business--Project Development and Acquisitions -- Project
Development."
 
     Enhance the performance and efficiency of existing power projects. The
Company continually seeks to maximize the power generation potential of its
operating assets and minimize its operating and maintenance expenses and fuel
costs. To date, the Company's power generation facilities have operated at an
average availability of approximately 97%. The Company believes that achieving
and maintaining a low cost of production will be increasingly important to
compete effectively in the power generation market.
 
     Continue to develop an integrated power marketing capability. The Company
has established an integrated power marketing capability, conducted through its
wholly owned subsidiary, Calpine Power Services Company ("CPSC"). In 1995, CPSC
received approval from the FERC to conduct power
 
                                        6
<PAGE>   8
 
marketing activities. The Company believes that a power marketing capability
complements its business strategy of providing low cost power generation
services. CPSC's power marketing activities will focus on the development of
long-term customer service relationships, supported primarily by generating
assets that are owned, operated or controlled by Calpine. CPSC will aggregate
the Company's own resources, the resources of its customers, power pool
resources, and market power supply to provide the customized services demanded
by its customers at a competitive price.
 
     Continue to develop a diversified portfolio of fuel resources. The
Company's wholly owned subsidiary, Calpine Fuels Corporation ("Calpine Fuels"),
was formed in 1995 to manage the fuel requirements of the Company's facilities.
Calpine Fuels is aggregating a diversified portfolio of third party gas
supplies, pipeline capacity and gas produced from Company-owned reserves to meet
the Company's needs. The Company anticipates that the direct management and
optimization of its fuel resources will enable the Company to minimize its fuel
costs.
 
     Selectively expand into international markets. Internationally, the Company
intends to utilize its geothermal and gas-fired expertise in selected markets of
Southeast Asia and Latin America, where demand for power is rapidly growing and
private investment is encouraged. In November 1995, the Company made an
investment in the Cerro Prieto steam fields, located in Baja California, Mexico.
In March 1996, the Company entered into a joint venture agreement to pursue the
development of a geothermal resource in Indonesia with an estimated potential
capacity in excess of 500 megawatts. Calpine believes that its investments in
these projects will effectively position it for future expansion in Southeast
Asia and Latin America.
 
BACKGROUND
 
     The Company was incorporated under the laws of the State of California in
1984 and reincorporated in Delaware in 1996. The principal executive offices of
the Company are located at 50 West San Fernando Street, San Jose, California
95113, and its telephone number is (408) 995-5115.
 
                                  RISK FACTORS
 
     See "Risk Factors" for a discussion of certain risks that should be
considered in conjunction with an investment in the Senior Notes.
 
                                        7
<PAGE>   9
 
                   SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
 
The Exchange Offer.........  The Company is offering to exchange $1,000 in
                             principal amount (and any integral multiple
                             thereof) of New Notes for each $1,000 in principal
                             amount (and any integral multiple thereof) of Old
                             Notes that are validly tendered pursuant to the
                             Exchange Offer. The Company will issue the New
                             Notes promptly after the Expiration Date. As of the
                             date of this Prospectus, $275,000,000 in aggregate
                             principal amount of Old Notes are outstanding. The
                             Company has not entered into any arrangement or
                             understanding with any person to distribute the New
                             Notes to be received in the Exchange Offer.
 
Resale.....................  The Company believes that the New Notes issued
                             pursuant to the Exchange Offer generally will be
                             freely transferable by the holders thereof without
                             registration or any prospectus delivery requirement
                             under the Securities Act, except that a "dealer" or
                             any of the Company's "affiliates," as such terms
                             are defined under the Securities Act, that
                             exchanges Old Notes held for its own account may be
                             required to deliver copies of this Prospectus in
                             connection with any resale of the New Notes issued
                             in exchange for such Old Notes. See "The Exchange
                             Offer -- General" and "Plan of Distribution."
 
Expiration Date............  The Exchange Offer will expire at 5:00 p.m., New
                             York City time, on             , 1997, unless
                             extended, in which case the term Expiration Date
                             means the latest date and time to which the
                             Exchange Offer is extended. The Company will accept
                             for exchange any and all Old Notes that are validly
                             tendered in the Exchange Offer prior to 5:00 p.m.,
                             New York City time, on the Expiration Date.
 
Accrued Interest on the New
  Notes and the Old
  Notes....................  Each New Note will bear interest from the last
                             Interest Payment Date on which interest was paid on
                             the Old Notes, or, if interest has not yet been
                             paid on the Old Notes, from July 8, 1997, the date
                             of issuance. Such interest will be paid with the
                             first interest payment on the New Notes.
                             Accordingly, interest, which has accrued since the
                             last Interest Payment Date or July 8, 1997, on the
                             Old Notes accepted for exchange will cease to be
                             payable upon issuance of the New Notes. Untendered
                             Old Notes that are not exchanged for New Notes
                             pursuant to the Exchange Offer will bear interest
                             at a rate of 8 3/4% per annum after the Expiration
                             Date.
 
Termination................  The Company may terminate the Exchange Offer if it
                             determines that its ability to proceed with the
                             Exchange Offer could be materially impaired due to
                             any legal or governmental action, any new law,
                             statute, rule or regulation or any interpretation
                             by the staff of the Commission of any existing law,
                             statute, rule or regulation. Holders of Old Notes
                             will have certain rights against the Company under
                             the Registration Rights Agreement should the
                             Company fail to consummate the Exchange Offer. See
                             "The Exchange Offer -- Termination." No federal or
                             state regulatory requirements must be complied with
                             or approvals obtained in connection with the
                             Exchange Offer, other than applicable requirements
                             under federal and state securities laws.
 
Procedures for Tendering
Old Notes..................  Each holder of Old Notes wishing to accept the
                             Exchange Offer must complete, sign and date the
                             Letter of Transmittal, or a facsimile thereof,
 
                                        8
<PAGE>   10
 
                             in accordance with the instructions contained
                             herein and therein, and mail or otherwise deliver
                             such Letter of Transmittal, or such facsimile,
                             together with such Old Notes and any other required
                             documentation to The Bank of New York, as Exchange
                             Agent (the "Exchange Agent"), at the address set
                             forth herein and therein, or effect a tender of Old
                             Notes pursuant to the procedure for book-entry
                             transfer as provided for herein. By executing the
                             Letter of Transmittal, each holder will represent
                             to the Company that, among other things, the New
                             Notes acquired pursuant to the Exchange Offer are
                             being obtained in the ordinary course of business
                             of the person receiving such New Notes, whether or
                             not such person is the holder, that neither the
                             holder nor any such other person has an arrangement
                             or understanding with any person to participate in
                             the distribution of such New Notes and, except as
                             otherwise disclosed in writing to the Company, that
                             neither the holder nor any such other person is an
                             "affiliate," as defined in Rule 405 under the
                             Securities Act, of the Company.
 
Special Procedures for
Beneficial Owners..........  Any beneficial owner whose Old Notes are registered
                             in the name of a broker, dealer, commercial bank,
                             trust company or other nominee and who wishes to
                             tender such Old Notes in the Exchange Offer should
                             contact such registered holder promptly and
                             instruct such registered holder to tender on such
                             beneficial owner's behalf. If such beneficial owner
                             wishes to tender on such owner's own behalf, such
                             owner must, prior to completing and executing the
                             Letter of Transmittal and delivering such owner's
                             Old Notes, either make appropriate arrangements to
                             register ownership of the Old Notes in such owner's
                             name or obtain a properly completed bond power from
                             the registered holder. The transfer of record
                             ownership may take considerable time and may not be
                             able to be completed prior to the Expiration Date.
 
Guaranteed Delivery
  Procedures...............  Holders of Old Notes who wish to tender their Old
                             Notes and whose Old Notes are not immediately
                             available or who cannot deliver their Old Notes,
                             the Letter of Transmittal or any other documents
                             required by the Letter of Transmittal to the
                             Exchange Agent prior to the Expiration Date must
                             tender their Old Notes according to the guaranteed
                             delivery procedures set forth in "The Exchange
                             Offer -- Guaranteed Delivery Procedures."
 
Withdrawal Rights..........  Tenders of Old Notes may be withdrawn at any time
                             prior to 5:00 p.m., New York City time, on the
                             Expiration Date.
 
Acceptance of Old Notes and
  Delivery of New Notes....  Subject to certain conditions (as summarized above
                             in "Termination" and described more fully in "The
                             Exchange Offer -- Termination"), the Company will
                             accept for exchange any and all Old Notes that are
                             validly tendered in the Exchange Offer prior to
                             5:00 p.m., New York City time, on the Expiration
                             Date. The New Notes issued pursuant to the Exchange
                             Offer will be delivered promptly following the
                             Expiration Date. See "The Exchange
                             Offer -- General."
 
Certain Federal Income Tax
  Considerations...........  The exchange pursuant to the Exchange Offer will
                             generally not be a taxable event for federal income
                             tax purposes. For a discussion of certain
 
                                        9
<PAGE>   11
 
                             federal income tax considerations relating to the
                             exchange of the Old Notes for the New Notes, see
                             "Certain Federal Income Tax Considerations."
 
Exchange Agent.............  The Trustee is also the Exchange Agent. The mailing
                             address of the Exchange Agent is: The Bank of New
                             York, 101 Barclay Street, Floor 7E, New York, New
                             York 10286, Attention: Reorganization Section. The
                             address for deliveries by hand and by overnight
                             courier is: The Bank of New York, 101 Barclay
                             Street, Corporate Trust Services Window, Grand
                             Level, New York, New York 10286. For information
                             with respect to the Exchange Offer, the telephone
                             number for the Exchange Agent is (212) 815-2742 and
                             the facsimile number for the Exchange Agent is
                             (212) 815-6339.
 
Use of Proceeds............  There will be no cash proceeds payable to the
                             Company from the issuance of the New Notes pursuant
                             to the Exchange Offer. Of the net proceeds received
                             by the Company from the sale of the Old Notes,
                             approximately $124.1 million was used to repay
                             outstanding indebtedness and the remainder was used
                             for general corporate purposes. See "Use of
                             Proceeds."
 
                                       10
<PAGE>   12
 
                     SUMMARY OF THE TERMS OF THE NEW NOTES
 
     The Exchange Offer applies to an aggregate principal amount of $275,000,000
of the Old Notes. The form and terms of the New Notes will be the same as the
form and terms of the Old Notes except that the New Notes will not bear legends
restricting the transfer thereof. The New Notes will be obligations of the
Company entitled to the benefits of the Indenture. See "Description of the New
Notes."
 
<TABLE>
<S>                                     <C>
Securities Offered...................   $275,000,000 aggregate principal amount of 8 3/4%
                                        Senior Notes Due 2007.
Maturity Date........................   July 15, 2007.
Interest Payment Dates...............   January 15 and July 15 of each year, commencing
                                        January 15, 1998.
Optional Redemption..................   The New Notes will not be redeemable at the option of
                                        the Company prior to July 15, 2002. Thereafter, the
                                        New Notes will be redeemable, at the Company's option,
                                        in whole or in part from time to time, at the
                                        redemption prices set forth herein, plus accrued and
                                        unpaid interest, if any, to the applicable redemption
                                        date. In addition, at any time from time to time prior
                                        to July 15, 2000, the Company may redeem, at its
                                        option, up to an aggregate of $96.25 million of the
                                        original principal amount of Senior Notes at a
                                        redemption price set forth herein, plus accrued and
                                        unpaid interest, if any, to the date of redemption
                                        with the net proceeds of one or more Public Equity
                                        Offerings (as defined) if at least $178.75 million
                                        principal amount of Senior Notes remain outstanding
                                        after each such redemption. See "Description of the
                                        New Notes -- Optional Redemption."
Ranking..............................   The New Notes will be senior unsecured obligations of
                                        the Company and will rank pari passu in right of
                                        payment with all other existing and future Senior
                                        Indebtedness (as defined herein) of the Company and
                                        senior in right of payment to all Subordinated
                                        Indebtedness (as defined herein) of the Company. The
                                        New Notes will be effectively subordinated to all
                                        liabilities of the Company's subsidiaries, including
                                        trade payables. As of September 30, 1997, after giving
                                        effect to the sale of the Old Notes and the
                                        application of the net proceeds therefrom, the amount
                                        of secured indebtedness, to which the New Notes would
                                        be effectively subordinated, would have been
                                        approximately $309.5 million and the Company would
                                        have had $285.0 million of outstanding indebtedness
                                        ranking pari passu with the New Notes. See "Risk
                                        Factors -- Substantial Leverage," "Risk Fac-
                                        tors -- Risks Related to Holding Company Structure"
                                        and "Description of New Notes -- Ranking."
Change of Control....................   Upon a Change of Control Triggering event (as defined
                                        herein), the Company will be required to make an offer
                                        to purchase the New Notes then outstanding at a
                                        purchase price equal to 101% of the principal amount
                                        thereof, plus accrued and unpaid interest, if any, to
                                        the date of repurchase. See "Description of New
                                        Notes -- Covenants -- Change of Control."
Certain Covenants....................   The Indenture (as defined herein) under which the New
                                        Notes will be issued will contain certain covenants
                                        that, among other things, limit (i) the incurrence of
                                        additional debt by the Company and its subsidiaries,
                                        (ii) the payment of dividends on and redemptions of
                                        capital stock by the Company and its subsidiar-
</TABLE>
 
                                       11
<PAGE>   13
 
<TABLE>
<S>                                     <C>
                                        ies, (iii) the use of proceeds from the sale of assets
                                        and subsidiary stock, (iv) transactions with
                                        affiliates, (v) the creation of liens and (vi) sale
                                        leaseback transactions. The Indenture will also
                                        restrict the Company's ability to consolidate or merge
                                        with or into, or to transfer all or substantially all
                                        of its assets to, another person. However, these
                                        limitations are subject to a number of important
                                        qualifications and exceptions. See "Description of New
                                        Notes -- Covenants."
Exchange Offer; Registration            The Company has agreed to file an Exchange Offer
Rights...............................   Registration Statement or, under certain
                                        circumstances, a Shelf Registration Statement,
                                        pursuant to the Registration Rights Agreement. Upon
                                        the failure of the Company to comply with certain of
                                        its obligations under the Registration Rights
                                        Agreement, additional interest will be payable on each
                                        of the Old Notes. Any Old Notes remaining outstanding
                                        following a consummation of the Exchange Offer will be
                                        treated together with the New Notes as one series for
                                        purposes of the Indenture. Holders of Senior Notes who
                                        do not participate in the Exchange Offer may
                                        thereafter hold a less liquid security. See
                                        "Description of New Notes -- Registration Rights."
</TABLE>
 
                                       12
<PAGE>   14
 
     SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING
                                  INFORMATION
 
     The following table sets forth summary consolidated historical and pro
forma financial and operating information of the Company for the periods
indicated. The Company's summary consolidated historical financial information
were derived from the Company's Consolidated Financial Statements. The summary
pro forma consolidated financial and operating information was derived from the
Unaudited Pro Forma Consolidated Financial Information of the Company and give
effect to certain transactions as described under "Pro Forma Consolidated
Financial Information," as if such transactions had occurred at the beginning of
the period. The information presented below should be read in conjunction with
"Selected Consolidated Historical Financial and Operating Information,"
"Unaudited Pro Forma Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements, included elsewhere in this
Prospectus.
 
<TABLE>
<CAPTION>
                                                                                                           NINE MONTHS
                                               YEAR ENDED DECEMBER 31,                                 ENDED SEPTEMBER 30,
                        ---------------------------------------------------------------------   ---------------------------------
                          1992        1993        1994        1995              1996               1996              1997
                        ---------   ---------   ---------   ---------   ---------------------   ----------   --------------------
                                                                                       PRO                                 PRO
                                                                         ACTUAL     FORMA(1)                  ACTUAL    FORMA(1)
                                                                        ---------   ---------                ---------  ---------
                                                                 (DOLLARS IN THOUSANDS)
<S>                     <C>         <C>         <C>         <C>         <C>         <C>         <C>          <C>        <C>
STATEMENT OF
  OPERATIONS DATA:
  Total revenue.......  $  39,577   $  69,915   $  94,762   $ 132,098   $ 214,554   $256,562    $  152,891   $ 199,880  $211,645
  Cost of revenue.....     25,921      42,501      52,845      77,388     129,200    153,635        87,172     110,934   114,961
  Gross profit........     13,656      27,414      41,917      54,710      85,354    102,927        65,719      88,496    96,684
  Project development
    expenses..........        806       1,280       1,784       3,087       3,867      3,867         2,454       5,711     5,711
  General and
    administrative
    expenses..........      3,924       5,080       7,323       8,937      14,696     14,882        10,777      13,202    13,211
  Income from
    operations........      6,902      21,054      31,772      42,686      66,791     84,178        52,488      70,033    77,762
  Interest expense....      1,225      13,825      23,886      32,154      45,294     76,019        31,099      43,364    57,939
  Other income, net...       (310)     (1,133)     (1,988)     (1,895)     (6,259)    (8,790)       (1,628)    (11,789)  (11,788) 
  Net income..........  $   3,460   $   3,754   $   6,021   $   7,378   $  18,692   $ 11,830    $   15,155   $  24,507  $ 20,225
OTHER FINANCIAL DATA
  AND RATIOS:
  Depreciation and
    amortization......  $     232   $  12,540   $  21,580   $  26,896   $  40,551   $ 48,025    $   27,699   $  36,919  $ 37,031
  EBITDA(2)...........  $   9,898   $  42,370   $  53,707   $  69,515   $ 117,379   $151,571    $   86,441   $ 127,398  $139,114
  EBITDA to
    Consolidated
    Interest
    Expense(3)........      4.73x       2.98x       2.23x       2.11x       2.41x      1.88x         2.55x       2.70x     2.25x
  Total debt to
    EBITDA............      3.70x       6.24x       6.23x       5.87x       5.12x      5.80x            --          --        --
  Ratio of earnings to
    fixed
    charges(4)........      3.41x       2.09x       1.52x       1.46x       1.45x      1.23x         1.59x       1.77x     1.56x
SELECTED OPERATING
  INFORMATION(5):
  Power plants:
    Electricity
      revenue(6):
      Energy..........  $  38,325   $  37,088   $  45,912   $  54,886   $  93,851   $ 98,715    $   60,561   $  77,451  $ 77,451
      Capacity........  $   7,707   $   7,834   $   7,967   $  30,485   $  65,064   $ 84,038    $   50,095   $  67,048  $ 67,048
    Megawatt hours
      produced........    403,274     378,035     447,177   1,033,566   1,985,404   2,225,867    1,332,594   1,551,078  1,551,078
    Average energy
      price per
      kilowatt
      hour(7).........     9.503c      9.811c     10.267c      5.310c      4.727c     4.435c        4.545c      4.993c    4.993c
  Steam fields:
    Steam revenue:
      Calpine.........  $  33,385   $  31,066   $  32,631   $  39,669   $  40,549   $ 40,549    $   29,655   $  31,268  $ 31,268
      Other
        interest......  $   2,501   $   2,143   $   2,051          --          --         --            --          --        --
    Megawatt hours
      produced........  2,105,345   2,014,758   2,156,492   2,415,059   2,528,874   2,528,874    1,811,449   1,972,439  1,972,439
    Average price per
      kilowatt hour...     1.705c      1.648c      1.608c      1.643c      1.603c     1.603c        1.637c      1.585c    1.585c
</TABLE>
 
                                       13
<PAGE>   15
 
<TABLE>
<CAPTION>
                                                            AS OF DECEMBER 31,                     AS OF SEPTEMBER 30, 1997
                                           -----------------------------------------------------   -------------------------
                                            1992       1993       1994       1995        1996        ACTUAL     PRO FORMA(1)
                                           -------   --------   --------   --------   ----------   ----------   ------------
                                                                        (DOLLARS IN THOUSANDS)
<S>                                        <C>       <C>        <C>        <C>        <C>          <C>          <C>
BALANCE SHEET DATA:
  Cash and cash equivalents..............  $ 2,160   $  6,166   $ 22,527   $ 21,810   $  100,010   $  198,550    $  155,924
  Total assets...........................   55,370    302,256    421,372    554,531    1,030,215    1,367,967     1,367,967
  Short-term debt........................    1,200     17,200     27,300     85,885       37,492      123,095       123,095
  Long-term line of credit...............   35,467     52,595         --     19,851           --           --            --
  Non-recourse debt......................       --    194,746    196,806    190,642      278,640      186,403       186,403
  Notes payable..........................       --         --      5,296      6,348           --           --            --
  Senior Notes...........................       --         --    105,000    105,000      285,000      560,043       560,043
  Total debt.............................   36,667    264,541    334,402    407,726      601,132      869,541       869,541
  Stockholders' equity...................   10,505     13,429     18,649     25,227      203,127      229,551       229,551
</TABLE>
 
- ---------------
 
(1) For a description of the transactions reflected in the pro forma information
    set forth in the table, see "Pro Forma Consolidated Financial Data,"
    "Management's Discussion and Analysis of Financial Condition and Results of
    Operations" and "Business -- Description of Facilities."
 
(2) EBITDA is defined as income from operations plus depreciation, capitalized
    interest, other income, non-cash charges and cash received from investments
    in power projects, reduced by the income from unconsolidated investments in
    power projects. See "Description of the New Notes -- Certain Definitions."
    EBITDA is presented not as a measure of operating results but rather as a
    measure of the Company's ability to service debt. EBITDA should not be
    construed as an alternative either (i) to income from operations (determined
    in accordance with generally accepted accounting principles) or (ii) to cash
    flows from operating activities (determined in accordance with generally
    accepted accounting principles).
 
(3) For purposes of calculating the EBITDA to Consolidated Interest Expense
    ratio, Consolidated Interest Expense is defined as total interest expense
    plus one-third of all operating lease obligations, dividends paid in respect
    of preferred stock and cash contributions to any employee stock ownership
    plan used to pay interest on loans incurred to purchase capital stock of the
    Company. See "Description of the New Notes -- Certain Definitions." The pro
    forma EBITDA to Consolidated Interest Expense ratio presented gives effect
    to the sale of the Old Notes and the application of the net proceeds
    therefrom as if such transaction had occurred on January 1, 1997.
 
(4) Earnings are defined as income before provision for taxes, extraordinary
    item and cumulative effect of changes in accounting principle plus cash
    received from investments in power projects and fixed charges reduced by the
    equity in income from investments in power projects and capitalized
    interest. Fixed charges consist of interest expense, capitalized interest,
    amortization of debt issuance costs and the portion of rental expenses
    representative of the interest expense component.
 
(5) For an explanation of such selected operating information, see "Management's
    Discussion and Analysis of Financial Condition and Results of
    Operations -- Selected Operating Information."
 
(6) Electricity revenue is comprised of fixed capacity payments, which are not
    related to production, and variable energy payments, which are related to
    production.
 
(7) Represents energy revenue divided by the megawatt hours produced.
 
                                       14
<PAGE>   16
 
                                  RISK FACTORS
 
     Prospective purchasers of the New Notes should carefully consider the
factors set forth below, as well as the other information contained in this
Prospectus, in evaluating an investment in the New Notes.
 
SUBSTANTIAL LEVERAGE
 
     The Company is substantially leveraged as a result of outstanding
indebtedness of the Company and non-recourse debt financing of certain of the
Company's subsidiaries incurred to finance the acquisition and development of
power generation facilities. As of September 30, 1997, the Company's total
consolidated indebtedness was $869.5 million, its total consolidated assets were
$1.4 billion and its stockholders' equity was $229.6 million. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The ability of the Company to meet its
debt service obligations and to repay outstanding indebtedness according to its
terms will be dependent primarily upon the performance of the power generation
facilities in which the Company has an interest.
 
     The Indenture dated July 8, 1997 (the "Indenture") relating to the Senior
Notes, the Indenture dated as of May 16, 1996 (the "10 1/2% Indenture") relating
to the Company's 10 1/2% Senior Notes Due 2006 (the "10 1/2% Senior Notes") and
the Indenture dated as of February 17, 1994 (the "9 1/4% Indenture") relating to
the Company's 9 1/4% Senior Notes Due 2004 (the "9 1/4% Senior Notes")
(collectively, the "Indentures") contain certain restrictive covenants. Such
restrictions affect, and in many respects significantly limit or prohibit, among
other things, the ability of the Company or its subsidiaries or such other
entities, as the case may be, to incur indebtedness, make prepayments of certain
indebtedness, pay dividends, make investments, engage in transactions with
affiliates, create liens, sell assets and engage in mergers and consolidations.
The Indentures also contain provisions that require the Company, in the event of
a Change of Control Triggering Event (as such term is defined in the
Indentures), to make an offer to purchase the Senior Notes, the 10 1/2% Senior
Notes and the 9 1/4% Senior Notes. There can be no assurance that the Company
will have the financial resources necessary to purchase the Senior Notes, the
10 1/2% Senior Notes and the 9 1/4% Senior Notes upon a Change of Control (as
such term is defined in the Indentures). Such Change of Control provisions
contained in the Indentures may not be waived by the Board of Directors of the
Company. See "Description of the New Notes" and "Description of Certain Other
Indebtedness."
 
     The Company believes that, based on current levels of operations and
anticipated growth, cash flow from operations, together with other available
sources of funds, including borrowings under the Company's existing borrowing
arrangements, will be adequate to make required payments of principal and
interest on the Company's debt, including the Senior Notes, the 10 1/2% Senior
Notes and the 9 1/4% Senior Notes, and to enable the Company to comply with the
terms of its debt agreements, although there can be no assurance that this will
be the case. If the Company is unable to comply with the terms of its debt
agreements and fails to generate sufficient cash flow from operations in the
future, the Company may be required to refinance all or a portion of its
existing debt or to obtain additional financing. There can be no assurance that
any such refinancing would be possible or that any additional financing could be
obtained, particularly in view of the Company's high levels of debt and the debt
incurrence restrictions under existing debt agreements. If cash flow is
insufficient and no such refinancing or additional financing is available, the
Company may be forced to default on its debt obligations. In the event of a
default under the terms of any of the indebtedness of the Company, subject to
the terms of such indebtedness, the obligees thereunder would be permitted to
accelerate the maturity of such obligations, which could cause defaults under
other obligations of the Company. See "-- Risks Related to Holding Company
Structure," "-- Possible Unavailability of Financing" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
 
RISKS RELATED TO HOLDING COMPANY STRUCTURE
 
     The Senior Notes will be exclusively the obligations of Calpine and not of
any of its subsidiaries or other affiliates. Because the operations of the
Company are conducted primarily by its subsidiaries and other affiliates, the
Company's cash flow and its ability to service its indebtedness, including its
ability to pay the interest on and principal of the Senior Notes, are almost
entirely dependent upon the earnings of its subsidiaries and other affiliates
and the distribution of those earnings to the Company. The non-recourse debt
agreements of certain of the Company's subsidiaries and other affiliates
generally restrict their ability to pay
 
                                       15
<PAGE>   17
 
dividends, make distributions or otherwise transfer funds to the Company. The
restrictions in such agreements generally require that, prior to the payment of
dividends, distributions or other transfers, the subsidiary or other affiliate
proposing to make the distribution must provide for the payment of other
obligations, including operating expenses, debt service and reserves. Calpine's
subsidiaries and other affiliates are separate and distinct legal entities and
have no obligation, contingent or otherwise, to pay any amounts due on the
Senior Notes or to make any funds available therefor, whether by dividends,
loans or other payments, and do not guarantee the payment of interest on or
principal of the Senior Notes. Any right of Calpine to receive any assets of any
of its subsidiaries or other affiliates upon any liquidation or reorganization
of Calpine (and the consequent right of the holders of the Senior Notes to
participate in the distribution of, or to realize proceeds from, those assets)
will be effectively subordinated to the claims of any such subsidiaries' or
other affiliates' creditors (including trade creditors and holders of debt
issued by such subsidiaries or affiliates). After giving effect to the sale of
the Old Notes and the application of the net proceeds therefrom, as of September
30, 1997, approximately $309.5 million of indebtedness of certain of the
Company's subsidiaries would be effectively senior to the Senior Notes, all of
which represents non-recourse project financing secured by the assets of such
subsidiaries.
 
     While the Indentures impose limitations on the ability of the Company and
its subsidiaries to incur additional indebtedness, the Indentures do not limit
the amount of non-recourse debt that the Company's subsidiaries may incur to
finance new facilities. See "Description of the New Notes -- Covenants --
Limitation on Incurrence of Indebtedness."
 
POSSIBLE UNAVAILABILITY OF FINANCING
 
     Each power generation facility acquired or developed by the Company will
require substantial capital investment. The Company's ability to arrange
financing and the cost of such financing are dependent upon numerous factors,
including general economic and capital market conditions, conditions in energy
markets, regulatory developments, credit availability from banks or other
lenders, investor confidence in the industry and the Company, the continued
success of the Company's current facilities, and provisions of tax and
securities laws that are conducive to raising capital. There can be no assurance
that financing for new facilities will be available to the Company on acceptable
terms in the future.
 
     On September 25, 1996, the Company entered into a $50.0 million three-year
revolving credit facility with The Bank of Nova Scotia (the "Revolving Credit
Facility"). The Revolving Credit Facility contains certain restrictions that
limit or prohibit, among other things, the ability of the Company or its
subsidiaries to incur indebtedness, make prepayments of certain indebtedness,
pay dividends, make investments, engage in transactions with affiliates, create
liens, sell assets and engage in mergers and consolidations. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
 
     The Company's power generation facilities have been financed using a
variety of leveraged financing structures, primarily consisting of non-recourse
debt and lease obligations. As of September 30, 1997, the Company had
approximately $869.5 million of total consolidated indebtedness, of which
approximately 36% represented non-recourse subsidiary debt. Each non-recourse
debt and lease obligation is structured to be fully paid out of cash flow
provided by the facility or facilities, the assets of which (together with
pledges of stock or partnership interests in the entity owning the facility)
collateralize such obligations, without any claim against the Company's general
corporate funds. Such leveraged financing permits the development of larger
facilities, but also increases the risk to the Company that its interest in a
particular facility could be impaired or that fluctuations in revenues could
adversely affect the Company's ability to meet its lease or debt obligations.
The debt collateralized by the interests of the Company in each operating
facility reduces the liquidity of such assets since any sale or transfer of a
facility would be subject both to the lien securing the facility indebtedness
and to transfer restrictions in the financing agreements. While the Company
intends to utilize non-recourse or lease financing when appropriate, there can
be no assurance that market conditions and other factors will permit the same
limited equity investment by the Company or the same substantially nonrecourse
nature of financings for future facilities. In the event of a default under a
financing agreement, and assuming the Company or the other equity investors in a
facility are unable or choose not to cure such default within applicable cure
periods, if any, the lenders or lessors would generally have rights to the
facility, any related
 
                                       16
<PAGE>   18
 
geothermal resource or natural gas reserves, related contracts and cash flows
and all licenses and permits necessary to operate the facility. In the event of
foreclosure after such a default, the Company might not retain any interest in
such facility. The Company does not believe the existence of non-recourse or
lease financing will materially affect its ability to continue to borrow funds
in the future in order to finance new facilities. There can be no assurance,
however, that the Company will continue to be able to obtain the financing
required to develop its power facilities on terms satisfactory to the Company.
See "-- Power Project Development and Acquisition Risks" and
"Business -- Description of Facilities."
 
     The Company has from time to time guaranteed certain obligations of its
subsidiaries and other affiliates. There can be no assurance that, in respect of
any financings of facilities in the future, lenders or lessors will not require
the Company to guarantee the indebtedness of such future facilities, rendering
the Company's general corporate funds vulnerable in the event of a default by
such facility or related subsidiary. If the lenders or lessors were to require
such guarantees, and the Company were unable to incur indebtedness in respect of
such guarantees under the restrictions on indebtedness (including guarantees)
contained in the Indentures, the Company's ability to fund new facilities could
be adversely affected. The Indentures do not limit the ability of the Company's
subsidiaries to incur non-recourse or lease financing for investment in new
facilities.
 
IMPACT OF AVOIDED COST PRICING; ENERGY PRICE FLUCTUATIONS
 
     The Company has a net interest of 421 megawatts in the aggregate capacity
generated by nine power plants that deliver electricity to PG&E under separate
long-term power sales agreements. Each of these agreements provides for both
capacity payments and energy payments for the term of the agreement. During the
initial ten-year period of certain of the agreements, PG&E pays a fixed price
for each unit of electrical energy according to schedules set forth in such
agreements (which represent 17%, or 73 megawatts, of such net interest). The
fixed price periods under these power sales agreements expire at various times
in 1998 through 2000. After the fixed price periods expire, while the basis for
the capacity and capacity bonus payments under these power sales agreements
remains the same, the energy payments adjust to PG&E's then prevailing avoided
cost of energy, which is determined and published each month by the utility. The
term "avoided cost" refers to the incremental costs that an electric utility
would incur to produce or purchase an amount of power equivalent to that
purchased from qualifying facilities ("QFs") (as defined under the Public
Utility Regulatory Policies Act of 1978, as amended ("PURPA")). On December 9,
1996, the CPUC approved a new methodology for the calculation of short-run
avoided cost ("SRAC"), which is effective retroactive to October 1, 1996 and
will continue until the independent power exchange has commenced operations and
is functioning properly. The independent power exchange is scheduled to commence
operations on January 1, 1998. Thereafter, the SRAC will become the energy
clearing price of the independent power exchange. The currently prevailing SRAC
is substantially lower than the fixed energy prices under these power sales
agreements and is expected to remain so. While SRAC does not affect capacity
payments under the power sales agreements, the Company's energy revenue under
these power sales agreements is expected to be materially reduced at the
expiration of the fixed price period. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- General" and
"Business -- Description of Facilities." Such reduction may have a material
adverse effect on the Company's results of operations. Prices paid for the steam
delivered by the Company's steam fields are based on a formula that partially
reflects the price levels of nuclear and fossil fuels, and, therefore, a
reduction in the price levels of such fuels may reduce revenue under the steam
sales agreements for the steam fields. See "Business -- Description of
Facilities -- Steam Fields."
 
PROJECT DEVELOPMENT AND ACQUISITION RISKS
 
     The development of power generation facilities is subject to substantial
risks. In connection with the development of a power generation facility, the
Company must generally obtain power and/or steam sales agreements, governmental
permits and approvals, fuel supply and transportation agreements, sufficient
equity capital and debt financing, electrical transmission agreements, site
agreements and construction contracts, and there can be no assurance that the
Company will be successful in doing so. In addition, project development is
subject to certain environmental, engineering and construction risks relating to
cost-overruns, delays and performance. Although the Company may attempt to
minimize the financial risks in the development of a project by securing a
favorable long-term power sales agreement, entering into power marketing
transactions,
 
                                       17
<PAGE>   19
 
obtaining all required governmental permits and approvals and arranging adequate
financing prior to the commencement of construction, the development of a power
project may require the Company to expend significant sums for preliminary
engineering, permitting and legal and other expenses before it can be determined
whether a project is feasible, economically attractive or financeable. If the
Company were unable to complete the development of a facility, it would
generally not be able to recover its investment in such a facility. The process
for obtaining initial environmental, siting and other governmental permits and
approvals is complicated and lengthy, often taking more than one year, and is
subject to significant uncertainties. As a result of competition, it may be
difficult to obtain a power sales agreement for a proposed project, and the
prices offered in new power sales agreements for both electric capacity and
energy may be less than the prices in prior agreements. There can be no
assurance that the Company will be successful in the development of power
generation facilities in the future.
 
     The Company has grown substantially in recent years as a result of
acquisitions of interests in power generation facilities and steam fields. The
Company believes that although the domestic power industry is undergoing
consolidation and that significant acquisition opportunities are available, the
Company is likely to confront significant competition for acquisition
opportunities. In addition, there can be no assurance that the Company will
continue to identify attractive acquisition opportunities at favorable prices
or, to the extent that any opportunities are identified, that the Company will
be able to consummate such acquisitions.
 
START-UP RISKS
 
     The commencement of operation of a newly constructed power plant or steam
field involves many risks, including startup problems, the breakdown or failure
of equipment or processes and performance below expected levels of output or
efficiency. New plants have no operating history and may employ recently
developed and technologically complex equipment. Insurance is maintained to
protect against certain of these risks, warranties are generally obtained for
limited periods relating to the construction of each project and its equipment
in varying degrees, and contractors and equipment suppliers are obligated to
meet certain performance levels. Such insurance, warranties or performance
guarantees may not be adequate to cover lost revenues or increased expenses and,
as a result, a project may be unable to fund principal and interest payments
under its financing obligations and may operate at a loss. A default under such
a financing obligation could result in the Company losing its interest in such
power generation facility or steam field. See "-- Possible Unavailability of
Financing."
 
     In addition, power sales agreements, which may be entered into with a
utility early in the development phase of a project, often enable the utility to
terminate such agreement, or to retain security posted as liquidated damages, in
the event that a project fails to achieve commercial operation or certain
operating levels by specified dates or fails to make certain specified payments.
In the event such a termination right is exercised, a project may not commence
generating revenues, the default provisions in a financing agreement may be
triggered (rendering such debt immediately due and payable) and the project may
be rendered insolvent as a result.
 
GENERAL OPERATING RISKS
 
     The Company currently operates all of the power generation facilities and
steam fields in which it has an interest, except for two steam fields. See
"Business -- Description of Facilities." The continued operation of power
generation facilities and steam fields involves many risks, including the
breakdown or failure of power generation equipment, transmission lines,
pipelines or other equipment or processes and performance below expected levels
of output or efficiency. To date, the Company's power generation facilities have
operated at an average availability of approximately 97%, and although from time
to time the Company's power generation facilities and steam fields have
experienced certain equipment breakdowns or failures, such breakdowns or
failures have not had a material adverse effect on the operation of such
facilities or on the Company's results of operations. Although the Company's
facilities contain certain redundancies and back-up mechanisms, there can be no
assurance that any such breakdown or failure would not prevent the affected
facility or steam field from performing under applicable power and/or steam
sales agreements. In addition, although insurance is maintained to protect
against certain of these operating risks, the proceeds of such insurance may not
be adequate to cover lost revenues or increased expenses, and, as a result, the
entity owning such power
 
                                       18
<PAGE>   20
 
generation facility or steam field may be unable to service principal and
interest payments under its financing obligations and may operate at a loss. A
default under such a financing obligation could result in the Company losing its
interest in such power generation facility or steam field. See "-- Possible
Unavailability of Financing."
 
RISKS RELATED TO THE DEVELOPMENT AND OPERATION OF GEOTHERMAL ENERGY RESOURCES
 
     The development and operation of geothermal energy resources are subject to
substantial risks and uncertainties similar to those experienced in the
development of oil and gas resources. The successful exploitation of a
geothermal energy resource ultimately depends upon the heat content of the
extractable fluids, the geology of the reservoir, the total amount of
recoverable reserves and operational factors relating to the extraction of
fluids, including operating expenses, energy price levels and capital
expenditure requirements relating primarily to the drilling of new wells. In
connection with the development of a project, the Company estimates the
productivity of the geothermal resource and the expected decline in such
productivity. The productivity of a geothermal resource may decline more than
anticipated, resulting in insufficient recoverable reserves being available for
sustained generation of the electrical power capacity desired. An incorrect
estimate by the Company or an unexpected decline in productivity could have a
material adverse effect on the Company's results of operations.
 
     Geothermal reservoirs are highly complex, and, as a result, there exist
numerous uncertainties in determining the extent of the reservoirs and the
quantity and productivity of the steam reserves. Reservoir engineering is an
inexact process of estimating underground accumulations of steam or fluids that
cannot be measured in any precise way, and depends significantly on the quantity
and accuracy of available data. As a result, the estimates of other reservoir
specialists may differ materially from those of the Company. Estimates of
reserves are generally revised over time on the basis of the results of
drilling, testing and production that occur after the original estimate was
prepared. While the Company has extensive experience in the operation and
development of geothermal energy resources and in preparing such estimates,
there can be no assurance that the Company will be able to successfully manage
the development and operation of its geothermal reservoirs or that the Company
will accurately estimate the quantity or productivity of its steam reserves.
 
DEPENDENCE ON THIRD PARTIES
 
     The nature of the Company's power generation facilities is such that each
facility generally relies on one power or steam sales agreement with a single
electric utility customer for substantially all, if not all, of such facility's
revenue over the life of the project. During 1996, approximately 86% and 7% of
the Company's total revenue was attributable to revenue received pursuant to
power and steam sales agreements with PG&E and Sacramento Municipal Utility
District ("SMUD"), respectively. The power and steam sales agreements are
generally long-term agreements, covering the sale of electricity or steam for
initial terms of 20 or 30 years. However, the loss of any one power or steam
sales agreement with any of these utility customers could have a material
adverse effect on the Company's results of operations. In addition, any material
failure by any utility customer to fulfill its obligations under a power or
steam sales agreement could have a material adverse effect on the cash flow
available to the Company and, as a result, on the Company's results of
operations. During 1996, an additional 4% of the Company's revenue was
attributable to operating and maintenance services performed by the Company for
power generation facilities that sell electricity to PG&E. PG&E has recently
announced its intention to sell all of its power generating facilities in The
Geysers that purchase steam from Thermal Power Company and the PG&E Unit 13 and
PG&E Unit 16 Steam Fields. Although there can be no assurance, the Company does
not expect that such sale, if consummated, would have a material adverse impact
on the Company's results of operations or financial condition.
 
     Furthermore, each power generation facility may depend on a single or
limited number of entities to purchase thermal energy, or to supply or transport
natural gas to such facility. The failure of any one utility customer, steam
host, gas supplier or gas transporter to fulfill its contractual obligations
could have a material adverse effect on a power project and on the Company's
business and results of operations.
 
                                       19
<PAGE>   21
 
INTERNATIONAL INVESTMENTS
 
     The Company has made an investment in the Cerro Prieto geothermal steam
fields located in Mexico and intends to pursue investments primarily in Latin
America and Southeast Asia. Such investments are subject to risks and
uncertainties relating to the political, social and economic structures of those
countries. Risks specifically related to investments in non-United States
projects may include risks of fluctuations in currency valuation, currency
inconvertibility, expropriation and confiscatory taxation, increased regulation
and approval requirements and governmental policies limiting returns to foreign
investors.
 
POWER MARKETING BUSINESS
 
     It is part of the Company's strategy to continue to develop an integrated
nationwide power marketing business to market power generated both by the
Company's generation facilities and power generated by third parties. However,
the power marketing industry is only in its early stages of development, and
there are no assurances that the industry will develop in such a way as to
permit the Company to achieve these goals. Furthermore, the Company has only
recently commenced its power marketing business, and there can be no assurance
that its power marketing strategy will be successful or that the Company's goals
will be achieved.
 
GOVERNMENT REGULATION
 
     The Company's activities are subject to complex and stringent energy,
environmental and other governmental laws and regulations. The construction and
operation of power generation facilities require numerous permits, approvals and
certificates from appropriate federal, state and local governmental agencies, as
well as compliance with environmental protection legislation and other
regulations. While the Company believes that it has obtained the requisite
approvals for its existing operations and that its business is operated in
accordance with applicable laws, the Company remains subject to a varied and
complex body of laws and regulations that both public officials and private
individuals may seek to enforce. There can be no assurance that existing laws
and regulations will not be revised or that new laws and regulations will not be
adopted or become applicable to the Company that may have a material adverse
effect on the Company's business or results of operations, nor can there be any
assurance that the Company will be able to obtain all necessary licenses,
permits, approvals and certificates for proposed projects or that completed
facilities will comply with all applicable permit conditions, statutes or
regulations. In addition, regulatory compliance for the construction of new
facilities is a costly and time consuming process, and intricate and changing
environmental and other regulatory requirements may necessitate substantial
expenditures to obtain permits and may create a significant risk of expensive
delays or significant loss of value in a project if the project is unable to
function as planned due to changing requirements or local opposition. See
"Business -- Government Regulation."
 
     The Company's operations are subject to the provisions of various energy
laws and regulations, including PURPA, PUHCA, and state and local regulations.
See "Business -- Government Regulation." PUHCA provides for the extensive
regulation of public utility holding companies and their subsidiaries. PURPA
provides to QFs and owners of QFs certain exemptions from certain federal and
state regulations, including rate and financial regulations.
 
     Under present federal law, the Company is not and will not be subject to
regulation as a holding company under PUHCA as long as the power plants in which
it has an interest are QFs under PURPA or are subject to another exemption. In
order to be a QF, a facility must be not more than 50% owned by an electric
utility or electric utility holding company. A QF that is a cogeneration
facility must produce not only electricity, but also useful thermal energy for
use in an industrial or commercial process or heating or cooling applications in
certain proportions to the facility's total energy output, and it must meet
certain energy efficiency standards. Therefore, loss of a thermal energy
customer could jeopardize a cogeneration facility's QF status. All geothermal
power plants up to 80 megawatts that meet PURPA's ownership requirements and
certain other standards are considered QFs. If one of the power plants in which
the Company has an interest were to lose its QF status and not otherwise receive
a PUHCA exemption, the project subsidiary or partnership in which the Company
has an interest owning or leasing that plant could become a public utility
company, which could subject the Company to significant federal, state and local
laws, including rate regulation and regulation as a public utility holding
company under PUHCA. This loss of QF status, which may be prospective or
retroactive, in turn, could cause all of the Company's other power plants to
lose QF status because, under
 
                                       20
<PAGE>   22
 
FERC regulations, a QF cannot be owned by an electric utility or electric
utility holding company. In addition, a loss of QF status could, depending on
the power sales agreement, allow the power purchaser to cease taking and paying
for electricity or to seek refunds of past amounts paid and thus could cause the
loss of some or all contract revenues or otherwise impair the value of a project
and could trigger defaults under provisions of the applicable project contracts
and financing agreements (rendering such debt immediately due and payable). If a
power purchaser ceased taking and paying for electricity or sought to obtain
refunds of past amounts paid, there can be no assurance that the costs incurred
in connection with the project could be recovered through sales to other
purchasers. See "Business -- Government Regulation -- Federal Energy
Regulation."
 
     Currently, Congress is considering proposed legislation that would amend
PURPA by eliminating the requirement that utilities purchase electricity from
QFs at avoided costs. The Company does not know whether such legislation will be
passed or what form it may take. The Company believes that if any such
legislation is passed, it would apply to new projects. As a result, although
such legislation may adversely affect the Company's ability to develop new
projects, the Company believes it would not affect the Company's existing QFs.
There can be no assurance, however, that any legislation passed would not
adversely impact the Company's existing projects.
 
     Many states are implementing or considering regulatory initiatives designed
to increase competition in the domestic power generation industry. In a December
20, 1995 policy decision, the CPUC outlined a new market structure that would
provide for a competitive power generation industry and direct access to
generation for all consumers within five years. On May 6, 1997, the CPUC issued
decisions which provided for direct access for all customers beginning January
1, 1998 and the unbundling of all electric services. As part of its policy
decision, the CPUC indicated that power sales agreements of existing QFs would
be honored. The Company cannot predict the final form or timing of the proposed
restructuring and the impact, if any, that such restructuring would have on the
Company's existing business or results of operations.
 
SEISMIC DISTURBANCES
 
     Areas in which the Company operates and is developing many of its
geothermal and gas-fired projects are subject to frequent low-level seismic
disturbances, and more significant seismic disturbances are possible. While the
Company's existing power generation facilities are built to withstand relatively
significant levels of seismic disturbances, and the Company believes it
maintains adequate insurance protection, there can be no assurance that
earthquake, property damage or business interruption insurance will be adequate
to cover all potential losses sustained in the event of serious seismic
disturbances or that such insurance will continue to be available to the Company
on commercially reasonable terms.
 
AVAILABILITY OF NATURAL GAS
 
     To date, the Company's fuel acquisition strategy has included various
combinations of Company-owned gas reserves, gas prepayment contracts and short-,
medium- and long-term supply contracts. In its gas supply arrangements, the
Company attempts to match the fuel cost with the fuel component included in the
facility's power sales agreements, in order to minimize a project's exposure to
fuel price risk. The Company believes that there will be adequate supplies of
natural gas available at reasonable prices for each of its facilities when
current gas supply agreements expire. There can be no assurance, however, that
gas supplies will be available for the full term of the facilities' power sales
agreements, or that gas prices will not increase significantly. If gas is not
available, or if gas prices increase above the fuel component of the facilities'
power sales agreements, there could be a material adverse impact on the
Company's net revenues.
 
COMPETITION
 
     The power generation industry is characterized by intense competition, and
the Company encounters competition from utilities, industrial companies and
other power producers. In recent years, there has been increasing competition in
an effort to obtain new power sales agreements, and this competition has
contributed to a reduction in electricity prices. In this regard, many utilities
often engage in "competitive bid" solicitations to satisfy new capacity demands.
This competition affects the ability of the Company to obtain power sales
agreements and the price paid for electricity. There also is increasing
competition between electric utilities, particularly in California where the
CPUC and the California legislature have launched an initiative designed
 
                                       21
<PAGE>   23
 
to give all electric consumers the ability to choose between competing suppliers
of electricity. See "Business -- Government Regulation -- State Regulation."
This competition has put pressure on electric utilities to lower their costs,
including the cost of purchased electricity, and increasing competition in the
future will increase this pressure. See "Business -- Competition."
 
DEPENDENCE ON SENIOR MANAGEMENT
 
     The Company's success is largely dependent on the skills, experience and
efforts of its senior management. The loss of the services of one or more
members of the Company's senior management could have a material adverse effect
on the Company's business and development. To date, the Company generally has
been successful in retaining the services of its senior management. See
"Management."
 
QUARTERLY FLUCTUATIONS; SEASONALITY
 
     The Company's quarterly operating results have fluctuated in the past and
may continue to do so in the future as a result of a number of factors,
including but not limited to the timing and size of acquisitions, the completion
of development projects, the timing and amount of curtailment, if any, and
variations in levels of production. Furthermore, the majority of capacity
payments under certain of the Company's power sales agreements are received
during the months of May through October.
 
ABSENCE OF PUBLIC MARKET
 
     There has previously been no public market for the Senior Notes. The
Company does not intend to list the New Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. There can be
no assurance that an active trading market will develop or be sustained in the
New Notes. To the extent that a market for the New Notes does develop, the
market value of the New Notes will depend on market conditions (such as yields
on alternative investments), general economic conditions, the Company's
financial condition and other conditions. Such conditions might cause the New
Notes, to the extent they are actively traded, to trade at a significant
discount from face value.
 
CONSEQUENCES OF FAILURE TO EXCHANGE
 
     Untendered Old Notes that are not exchanged for New Notes pursuant to the
Exchange Offer will remain subject to the existing restrictions on transfer of
such Old Notes. Additionally, holders of any Old Notes not tendered in the
Exchange Offer will not have any rights under the Registration Rights Agreement
to cause the Company to register the Old Notes, and the interest rate on the Old
Notes will remain at its initial rate of 8 3/4% per annum.
 
                                       22
<PAGE>   24
 
                                USE OF PROCEEDS
 
     The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes as contemplated
in this Prospectus, the Company will receive in exchange Old Notes in like
principal amount, the terms of which are identical to the New Notes. The Old
Notes surrendered in exchange for the New Notes will be retired and canceled and
cannot be reissued. Accordingly, issuance of the New Notes will not result in
any increase in the indebtedness of the Company.
 
     The net proceeds received by the Company from the sale of the Old Notes
(after deducting the discount to the Initial Purchasers and other expenses in
connection with such sale) were used as follows: (i) $102.7 million to repay in
full the non-recourse loan from a syndicate of banks with Deutsche Bank AG, as
agent, to Calpine Geysers Company, L.P., a wholly owned subsidiary of the
Company, which currently matures in 2004 (the "Deutsche Bank Loan"); (ii) $6.4
million to repay in full the Seller Note payable to Natomas Energy Company from
Calpine, which matures September 9, 1997 (the "Natomas Promissory Note"); (iii)
$14.3 million to repay amounts outstanding under the Revolving Credit Facility;
(iv) $728,000 to repay amounts outstanding under a Seller Note payable to Santa
Fe Geothermal, Inc. from Calpine which matures in December 1997 (the "Santa Fe
Note"); (v) $42.6 million to finance the purchase price for the Gordonsville and
Auburndale Power Plants; and (vi) the remainder for acquisitions and general
corporate purposes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
 
                                       23
<PAGE>   25
 
                               THE EXCHANGE OFFER
 
GENERAL
 
     In connection with the sale of the Old Notes, the Company entered into the
Registration Rights Agreement, which requires the Company to file with the
Commission a registration statement (the "Exchange Offer Registration
Statement") under the Securities Act with respect to an issue of senior notes of
the Company with terms identical to the Old Notes (except with respect to
restrictions on transfer) and to use its best efforts to cause such registration
statement to become effective under the Securities Act and, upon the
effectiveness of such registration statement, to offer to the holders of the Old
Notes the opportunity, for a period of 30 days from the date the notice of the
Exchange Offer is mailed to holders of the Old Notes, to exchange their Old
Notes for a like principal amount of New Notes. The Exchange Offer is being made
pursuant to the Registration Rights Agreement to satisfy the Company's
obligations thereunder. The Company has not entered into any arrangement or
understanding with any person to distribute the New Notes to be received in the
Exchange Offer.
 
     Under existing interpretations of the staff of the Commission, the New
Notes would, in general, be freely transferable after the Exchange Offer without
further registration under the Securities Act by holders thereof (other than (i)
a broker-dealer who acquires such New Notes directly from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
or (ii) a person that is an affiliate of the Company within the meaning of Rule
405 under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangements with any person to participate in the distribution
of such New Notes. Eligible holders wishing to accept the Exchange Offer must
represent to the Company that such conditions have been met. Each broker-dealer
that receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes.
 
     In the event that applicable interpretations of the staff of the Commission
would not permit the Company to effect the Exchange Offer or, if for any other
reason the Exchange Offer is not consummated on or prior to January 4, 1998, the
Company has agreed to use its best efforts to cause to become effective a shelf
registration statement (the "Shelf Registration Statement") with respect to the
resale of the Old Notes and to keep the Shelf Registration Statement effective
until three years after the date of the initial sale of the Old Notes or until
all the Old Notes covered by the Shelf Registration Statement have been sold
pursuant to such Shelf Registration Statement.
 
TERMS OF THE EXCHANGE OFFER
 
     Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to make certain representations, including
that (i) it is neither an affiliate of the Company nor a broker-dealer tendering
Old Notes acquired directly from the Company for its own account, (ii) any New
Notes to be received by it were acquired in the ordinary course of its business
and (iii) at the time of commencement of the Exchange Offer, it has no
arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the New Notes. In addition, in connection with
any resales of New Notes, any broker-dealer (a "Participating Broker-Dealer")
who acquired Old Notes for its own account as a result of market-making
activities or other trading activities must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of the New
Notes. The Commission has taken the position that Participating Broker-Dealers
may fulfill their prospectus delivery requirements with respect to the New Notes
(other than a resale of an unsold allotment from the original sales of Old
Notes) with the prospectus contained in the Exchange Offer Registration
Statement. Under the Registration Rights Agreement, the Company is required to
allow Participating Broker-Dealers (and other persons, if any, subject to
similar prospectus delivery requirements) to use the prospectus contained in the
Exchange Offer Registration Statement in connection with the resale of such New
Notes, provided, however, the Company shall not be required to amend or
supplement such prospectus for a period exceeding 180 days after the
consummation of the Exchange Offer. The Company has also agreed that in the
event that either the Exchange Offer is not consummated or a Shelf Registration
Statement is not declared effective on or prior to January 4, 1998, the interest
rate borne by the Old Notes will be increased by one-half of one percent per
 
                                       24
<PAGE>   26
 
annum until the earlier of the consummation of the Exchange Offer or the
effectiveness of the Shelf Registration Statement, as the case may be.
 
     In the event an exchange offer is consummated on or before January 4, 1998,
the Company will not be required to file a Shelf Registration Statement to
register any outstanding Old Notes, and the interest rate on such Old Notes will
remain at its initial level of 8 3/4% per annum. The Exchange Offer shall be
deemed to have been consummated upon the Company's having exchanged, pursuant to
the Exchange Offer, New Notes for all Old Notes that have been properly tendered
and not withdrawn by the Expiration Date. In such event, holders of Old Notes
not participating in the Exchange Offer who are seeking liquidity in their
investment would have to rely on exemptions to registration requirements under
the securities laws, including the Securities Act.
 
     Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept all Old
Notes validly tendered prior to 5:00 p.m., New York City time, on the Expiration
Date. The Company will issue $1,000 in principal amount of New Notes (and any
integral multiple thereof) in exchange for an equal principal amount of
outstanding Old Notes tendered and accepted in the Exchange Offer. Holders may
tender some or all of their Old Notes pursuant to the Exchange Offer in any
denomination of $1,000 or in integral multiples thereof.
 
     Based on no-action letters issued by the staff of the Commission to third
parties, the Company believes that the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such New
Notes. Any holder of Old Notes who tenders in the Exchange Offer for the purpose
of participating in a distribution of the New Notes cannot rely on such
interpretation by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes.
 
     The form and terms of the New Notes will be the same as the form and terms
of the Old Notes except that the New Notes will not bear legends restricting the
transfer thereof. The New Notes will evidence the same debt as the Old Notes.
The New Notes will be issued under and entitled to the benefits of the Note
Indenture.
 
     As of the date of this Prospectus, $275,000,000 aggregate principal amount
of the Old Notes are outstanding and there is one registered holder thereof. In
connection with the issuance of the Old Notes, the Company arranged for the Old
Notes to be eligible for trading in the Private Offering, Resale and Trading
through Automated Linkages (PORTAL) Market, the National Association of
Securities Dealers' screen based, automated market trading of securities
eligible for resale under Rule 144A and to be issued and transferable in
book-entry form through the facilities of DTC. The New Notes will also be
issuable and transferable in book-entry form through DTC.
 
     This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of             , 1997 (the "Record
Date").
 
     The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. See "Exchange Agent." The Exchange Agent will act as agent for
the tendering holders of Old Notes for the purpose of receiving New Notes from
the Company and delivering New Notes to such holders.
 
     If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted Old Notes will be returned, without
expense, to the tendering holder thereof as promptly as practicable after the
Expiration Date.
 
                                       25
<PAGE>   27
 
     Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"Fees and Expenses."
 
     Holders of Old Notes do not have any appraisal or dissenters' rights under
the California Corporations Code or the Note Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the provisions of the Registration Rights Agreement and the applicable
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder. Old Notes that are not tendered for exchange in the Exchange Offer
will remain outstanding and continue to accrue interest, but will not be
entitled to any rights or benefits under the Registration Rights Agreement.
 
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
 
     The term "Expiration Date" shall mean 5:00 p.m. New York City time, on
            , 1997 unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date to which the Exchange Offer is extended.
 
     In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time.
 
     The Company reserves the right (i) to delay acceptance of any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and to refuse to
accept Old Notes not previously accepted, if any of the conditions set forth
herein under "Termination" shall have occurred and shall not have been waived by
the Company (if permitted to be waived by the Company), by giving oral or
written notice of such delay, extension or termination to the Exchange Agent,
and (ii) to amend the terms of the Exchange Offer in any manner deemed by it to
be advantageous to the holders of the Old Notes. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment in a manner reasonably calculated to inform the
holders of the Old Notes of such amendment.
 
     Without limiting the manner in which the Company may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the Exchange Offer, the Company shall have no obligation to publish, advertise,
or otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
 
INTEREST ON THE NEW NOTES
 
     The New Notes will bear interest from the last Interest Payment Date on
which interest was paid on the Old Notes, or if interest has not yet been paid
on the Old Notes, from July 8, 1997. Such interest will be paid with the first
interest payment on the New Notes. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the New Notes.
 
     The New Notes will bear interest at a rate of 8 3/4% per annum. Interest on
the New Notes will be payable semi-annually, in arrears, on each Interest
Payment Date following the consummation of the Exchange Offer. Untendered Old
Notes that are not exchanged for New Notes pursuant to the Exchange Offer will
bear interest at a rate of 8 3/4% per annum after the Expiration Date.
 
PROCEDURES FOR TENDERING
 
     To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes (unless the book-entry transfer procedures described below are used) and
any other required documents, to the Exchange Agent for receipt prior to 5:00
p.m., New York City time, on the Expiration Date.
 
                                       26
<PAGE>   28
 
     Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account via the
ATOP system in accordance with DTC's procedure for such transfer. Although
delivery of Old Notes may be effected through book-entry transfer into the
Exchange Agent's account at DTC, the Letter of Transmittal (or facsimile
thereof), with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received or confirmed by the
Exchange Agent at its addresses set forth in this Prospectus prior to 5:00 p.m.,
New York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO DTC IN
ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
 
     The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
 
     Delivery of all documents must be made to the Exchange Agent at its address
set forth herein. Holders may also request that their respective brokers,
dealers, commercial banks, trust companies or nominees effect such tender for
such holders.
 
     The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Letter of Transmittal should be sent to
the Company.
 
     Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder or
any person whose Old Notes are held of record by DTC who desires to deliver such
Old Notes by book-entry transfer at DTC.
 
     Any beneficial holder whose Old Notes are registered in the name of such
holder's broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on such holder's behalf. If such beneficial
holder wishes to tender on such holder's own behalf, such beneficial holder
must, prior to completing and executing the Letter of Transmittal and delivering
such holder's Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such holder's name or obtain a properly completed
bond power from the registered holder. The transfer of record ownership may take
considerable time.
 
     Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution") that is a participant
in a recognized medallion signature guarantee program unless the Old Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution.
 
     If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by appropriate bond powers which authorize such person
to tender the Old Notes on behalf of the registered holder, in either case
signed as the name of the registered holder or holders appears on the Old Notes.
 
     If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
submit evidence satisfactory to the Company of their authority to so act with
the Letter of Transmittal.
 
     All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be
 
                                       27
<PAGE>   29
 
unlawful. The Company also reserves the absolute right to waive any
irregularities or conditions of tender as to particular Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine.
Neither the Company, the Exchange Agent nor any other person shall be under any
duty to give notification of defects or irregularities with respect to tenders
of Old Notes nor shall any of them incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering holder of such Old Notes unless otherwise
provided in the Letter of Transmittal as soon as practicable following the
Expiration Date.
 
     In addition, the Company reserves the right in its sole discretion to (a)
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date, or, as set forth under "Termination," to terminate the
Exchange Offer and (b) to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers may differ from the terms of the Exchange
Offer.
 
GUARANTEED DELIVERY PROCEDURES
 
     Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or if such holder cannot complete the procedure for book-entry
transfer on a timely basis, may effect a tender if:
 
          (a) the tender is made through an Eligible Institution;
 
          (b) prior to the Expiration Date, the Exchange Agent receives from
     such Eligible Institution a properly completed and duly executed Notice of
     Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
     setting forth the name and address of the holder of the Old Notes, the
     certificate number or numbers of such Old Notes and the principal amount of
     Old Notes tendered, stating that the tender is being made thereby, and
     guaranteeing that, within three business days after the Expiration Date,
     the Letter of Transmittal (or facsimile thereof), together with the
     certificate(s) representing the Old Notes (unless the book-entry transfer
     procedures are to be used) to be tendered in proper form for transfer and
     any other documents required by the Letter of Transmittal, will be
     deposited by the Eligible Institution with the Exchange Agent; and
 
          (c) such properly completed and executed Letter of Transmittal (or
     facsimile thereof), together with the certificate(s) representing all
     tendered Old Notes in proper form for transfer (or confirmation of a
     book-entry transfer into the Exchange Agent's account at DTC of Old Notes
     delivered electronically) and all other documents required by the Letter of
     Transmittal are received by the Exchange Agent within three business days
     after the Expiration Date.
 
     Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
 
WITHDRAWAL OF TENDERS
 
     Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
 
     To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) be signed by the
Depositor in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
permit the Trustee with respect to the Old Notes to register the transfer of
 
                                       28
<PAGE>   30
 
such Old Notes into the name of the Depositor withdrawing the tender and (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such withdrawal notices will be
determined by the Company, whose determination shall be final and binding on all
parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer, and no New Notes will be issued
with respect thereto unless the Old Notes so withdrawn are validly retendered.
Any Old Notes that have been tendered but which are not accepted for exchange
will be returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described above under "Procedures for Tendering" at any time prior to
the Expiration Date.
 
TERMINATION
 
     Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange New Notes for any Old Notes not
theretofore accepted for exchange, and may terminate or amend the Exchange Offer
as provided herein before the acceptance of such Old Notes if: (i) any action or
proceeding is instituted or threatened in any court or by or before any
governmental agency with respect to the Exchange Offer, which, in the Company's
judgment, might materially impair the Company's ability to proceed with the
Exchange Offer or (ii) any law, statute, rule or regulation is proposed, adopted
or enacted, or any existing law, statute, rule or regulation is interpreted by
the staff of the Commission in a manner, which, in the Company's judgment, might
materially impair the Company's ability to proceed with the Exchange Offer.
 
     If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Old Notes and return any
Old Notes that have been tendered to the holders thereof, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject to the rights of such holders of tendered Old Notes to
withdraw their tendered Old Notes, or (iii) waive such termination event with
respect to the Exchange Offer and accept all properly tendered Old Notes that
have not been withdrawn. If such waiver constitutes a material change in the
Exchange Offer, the Company will disclose such change by means of a supplement
to this Prospectus that will be distributed to each registered holder of Old
Notes, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered holders of the Old Notes, if the Exchange Offer
would otherwise expire during such period.
 
EXCHANGE AGENT
 
     The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance and requests for additional copies
of this Prospectus or of the Letter of Transmittal should be directed to the
Exchange Agent addressed as follows:
 
<TABLE>
<S>                                         <C>
                By Mail:                         By Hand or Overnight Courier:
          The Bank of New York                        The Bank of New York
      101 Barclay Street, Floor 7E                     101 Barclay Street
        New York, New York 10286                Corporate Trust Services Window
   Attention: Reorganization Section                      Grand Level
                                                    New York, New York 10286
                                               Attention: Reorganization Section
                           Telephone Number: 212-815-2742
                       Facsimile Transmission: (212) 815-6339
</TABLE>
 
FEES AND EXPENSES
 
     The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and its affiliates in person, by
telegraph or by telephone.
 
                                       29
<PAGE>   31
 
     The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable customary fees for its services and will reimburse the
Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this Prospectus, Letters of Transmittal and related
documents to the beneficial owners of the Old Notes and in handling or
forwarding tenders for exchange.
 
     The expenses to be incurred in connection with the Exchange Offer,
including fees and expenses of the Exchange Agent and Trustee and accounting and
legal fees, will be paid by the Company.
 
     The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes not tendered or accepted for exchange are to
be delivered to, or are to be registered or issued in the name of, any person
other than the registered holder of the Old Notes tendered, or if tendered Old
Notes are registered in the name of any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other than
the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
 
ACCOUNTING TREATMENT
 
     The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of the exchange. Accordingly, no gain or loss for accounting purposes will
be recognized by the Company upon the consummation of the Exchange Offer. The
expenses of the Exchange Offer will be amortized by the Company over the term of
the New Notes under generally accepted accounting principles.
 
                                       30
<PAGE>   32
 
                                 CAPITALIZATION
 
     The following table sets forth, as of September 30, 1997, the actual
consolidated capitalization of the Company, which reflects the sale of the Old
Notes and the application of the net proceeds therefrom. This table should be
read in conjunction with the consolidated financial statements and related notes
thereto appearing elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                                              SEPTEMBER 30, 1997
                                                                              ------------------
                                                                                (IN THOUSANDS)
<S>                                                                           <C>
SHORT-TERM DEBT:
  Current portion of non-recourse project financing.........................       $123,095
                                                                                 ==========
LONG-TERM DEBT:
  Non-recourse project financing, net of current portion....................        186,403
  Senior Notes..............................................................        560,043
                                                                                 ----------
     Total long-term debt...................................................        746,446
                                                                                 ----------
STOCKHOLDERS' EQUITY:
  Preferred Stock, $0.001 par value: 10,000,000 shares authorized; no shares
     outstanding............................................................             --
  Common Stock, $0.001 par value: 100,000,000 shares authorized; 19,905,233
     shares outstanding(1)..................................................             20
  Additional paid-in capital................................................        167,329
  Retained earnings.........................................................         62,202
                                                                                 ----------
     Total stockholders' equity.............................................        229,551
                                                                                 ----------
     Total capitalization...................................................       $975,997
                                                                                 ==========
</TABLE>
 
- ---------------
 
(1) Does not include 2,555,945 shares of Common Stock subject to issuance upon
    exercise of options previously granted and outstanding as of October 31,
    1997 under the Company's 1996 Stock Incentive Plan.
 
                                       31
<PAGE>   33
 
                      SELECTED CONSOLIDATED FINANCIAL DATA
 
     The consolidated financial data set forth below for the five years ended
and as of December 31, 1996 have been derived from the audited consolidated
financial statements of the Company. The consolidated financial data for the
nine months ended and as of September 30, 1996 and September 30, 1997 are
unaudited, but have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments necessary for the fair
presentation of the financial position and results of operations for these
periods. Consolidated operating results for the nine months ended September 30,
1997 should not be considered indicative of the results that may be expected for
the entire year. The following selected consolidated financial data should be
read in conjunction with the consolidated financial statements and the related
notes thereto appearing elsewhere in this Prospectus, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
 
<TABLE>
<CAPTION>
                                                                                                              NINE MONTHS ENDED
                                                               YEAR ENDED DECEMBER 31,                          SEPTEMBER 30,
                                              ---------------------------------------------------------     ---------------------
                                               1992        1993        1994         1995         1996         1996         1997
                                              -------     -------     -------     --------     --------     --------     --------
                                                                            (DOLLARS IN THOUSANDS)
<S>                                           <C>         <C>         <C>         <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
  Electricity and steam sales.............         --     $53,000     $90,295     $127,799     $199,464     $140,311     $175,767
  Service contract revenue................    $29,817      16,896       7,221        7,153        6,455        5,606        6,871
  Income (loss) from unconsolidated
    investments in power projects.........      9,760          19      (2,754)      (2,854)       6,537        2,871        7,477
  Interest income on loans to power
    projects..............................         --          --          --           --        2,098        4,103        9,765
                                              -------     -------     -------     --------     --------      -------     --------
        Total revenue.....................     39,577      69,915      94,762      132,098      214,554      152,891      199,880
Cost of revenue...........................     25,921      42,501      52,845       77,388      129,200       87,172      110,934
                                              -------     -------     -------     --------     --------      -------     --------
Gross profit..............................     13,656      27,414      41,917       54,710       85,354       65,719       88,946
Project development expenses..............        806       1,280       1,784        3,087        3,867        2,454        5,711
General and administrative expenses.......      3,924       5,080       7,323        8,937       14,696       10,777       13,202
Compensation expense related to stock
  options(1)..............................      1,224          --          --           --           --           --           --
Provision for write-off of project
  development costs(2)....................        800          --       1,038           --           --           --           --
                                              -------     -------     -------     --------     --------      -------     --------
Income from operations....................      6,902      21,054      31,772       42,686       66,791       52,488       70,033
Interest expense..........................      1,225      13,825      23,886       32,154       45,294       31,099       43,364
Other income, net.........................       (310)     (1,133)     (1,988)      (1,895)      (6,259)      (1,628)     (11,789)
                                              -------     -------     -------     --------     --------      -------     --------
  Income before provision for income taxes
    and cumulative effect of change in
    accounting principle..................      5,987       8,362       9,874       12,427       27,756       23,017       38,458
Provision for income taxes................      2,527       4,195       3,853        5,049        9,064        7,862       13,951
                                              -------     -------     -------     --------     --------      -------     --------
  Income before cumulative effect of
    change in accounting principle........      3,460       4,167       6,021        7,378       18,692       15,155       24,507
Cumulative effect of adoption of SFAS No.
  109.....................................         --        (413)         --           --           --           --           --
                                              -------     -------     -------     --------     --------      -------     --------
  Net income..............................    $ 3,460     $ 3,754     $ 6,021     $  7,378     $ 18,692     $ 15,155     $ 24,507
                                              =======     =======     =======     ========     ========      =======     ========
OTHER FINANCIAL DATA AND RATIOS:
Depreciation and amortization.............    $   232     $12,540     $21,580     $ 26,896     $ 40,551     $ 27,699     $ 36,919
EBITDA(3).................................    $ 9,898     $42,370     $53,707     $ 69,515     $117,379     $ 86,441     $127,398
EBITDA to Consolidated Interest
  Expense(4)..............................       4.73x       2.98x       2.23x        2.11x        2.41x        2.55x        2.70x
Total debt to EBITDA......................       3.70x       6.24x       6.23x        5.87x        5.12x          --           --
Ratio of earnings to fixed charges(5).....       3.41x       2.09x       1.52x        1.46x        1.45x        1.59x        1.77x
</TABLE>
 
                                       32
<PAGE>   34
 
<TABLE>
<CAPTION>
                                                                  AS OF DECEMBER 31,
                                             -------------------------------------------------------------           AS OF
                                              1992         1993         1994         1995          1996        SEPTEMBER 30, 1997
                                             -------     --------     --------     --------     ----------     ------------------
                                                                (DOLLARS IN THOUSANDS)
<S>                                          <C>         <C>          <C>          <C>          <C>            <C>
BALANCE SHEET DATA:
Cash and cash equivalents................    $ 2,160     $  6,166     $ 22,527     $ 21,810     $  100,010         $  198,550
Property, plant and equipment, net.......        424      251,070      335,453      447,751        650,053            710,599
Investments in power projects............     47,646       13,894       11,114        8,218         13,937             74,224
Notes receivable.........................         --        1,716       16,882       25,785         36,143            150,542
Total assets.............................     55,370      302,256      421,372      554,531      1,030,215          1,367,967
Short-term debt..........................      1,200       17,200       27,300       85,885         37,492            123,095
Long-term line of credit.................     35,467       52,595           --       19,851             --                 --
Non-recourse debt........................         --      194,746      196,806      190,642        278,640            186,403
Notes payable............................         --           --        5,296        6,348             --                 --
Senior Notes.............................         --           --      105,000      105,000        285,000            560,043
Total debt...............................     36,667      264,541      334,402      407,726        601,132            869,541
Stockholders' equity.....................     10,505       13,429       18,649       25,227        203,127            229,551
</TABLE>
 
- ---------------
 
(1) Represents a non-cash charge for compensation expense associated with the
    grant of certain stock options.
 
(2) Represents a write-off of certain capitalized project costs.
 
(3) EBITDA is defined as income from operations plus depreciation, capitalized
    interest, other income, non-cash charges and cash received from investments
    in power projects, reduced by the income from unconsolidated investments in
    power projects. See "Description of the New Notes -- Certain Definitions."
    EBITDA is presented here not as a measure of operating results but rather as
    a measure of the Company's ability to service debt. EBITDA should not be
    construed as an alternative either (i) to income from operations (determined
    in accordance with generally accepted accounting principles) or (ii) to cash
    flows from operating activities (determined in accordance with generally
    accepted accounting principles).
 
(4) For purposes of calculating the EBITDA to Consolidated Interest Expense
    ratio, Consolidated Interest Expense is defined as total interest expense
    plus one-third of all operating lease obligations, dividends paid in respect
    of preferred stock and cash contributions to any employee stock ownership
    plan used to pay interest on loans incurred to purchase capital stock of the
    Company. See "Description of the New Notes -- Certain Definitions."
 
(5) Earnings are defined as income before provision for taxes, extraordinary
    item and cumulative effect of change in accounting principle plus cash
    received from investments in power projects and fixed charges reduced by the
    equity in income from investments in power projects and capitalized
    interest. Fixed charges consist of interest expense, capitalized interest,
    amortization of debt issuance costs and the portion of rental expenses
    representative of the interest expense component.
 
                                       33
<PAGE>   35
 
                  PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
 
     The following unaudited pro forma consolidated statement of operations for
the year ended December 31, 1996 gives effect to the following transactions as
if such transactions had occurred on January 1, 1996: (i) the entry by the
Company into a transaction involving an operating lease for the King City Power
Plant, which became effective on May 2, 1996 (the "King City Transaction"); (ii)
the acquisition by the Company of the Gilroy Power Plant on August 29, 1996 (the
"Gilroy Transaction"); (iii) the acquisition of the Montis Niger Gas Fields on
January 30, 1997 (the "Montis Niger Transaction"); (iv) the acquisition by the
Company of a 50% interest in the Texas City Power Plant and the Clear Lake Power
Plant and the related purchase of $155.6 million of non-recourse project debt on
June 23, 1997 (the "Texas City/Clear Lake Transaction"); (v) the acquisition by
the company of 50% interests in the Gordonsville Power Plant and the Auburndale
Power Plant on October 9, 1997 (the "Gordonsville/Auburndale Transaction") (the
King City Transaction, the Gilroy Transaction, the Montis Niger Transaction, the
Texas City/Clear Lake Transaction, and the Gordonsville/Auburndale Transaction
being collectively referred to as the "Transactions"); (vi) the sale of the
Company's 10 1/2% Senior Notes Due 2006 in May 1996 and the application of the
net proceeds therefrom; (vii) the sale of $200,000,000 of Old Notes on July 8,
1997 and the application of the net proceeds therefrom; and (viii) the sale of
$75,000,000 of Old Notes on September 10, 1997 and the application of the net
proceeds therefrom.
 
     The following unaudited pro forma consolidated statement of operations for
the nine months ended September 30, 1997 gives effect to the following
transactions as if such transactions had occurred on January 1, 1997: (i) the
Montis Niger Transaction; (ii) the Texas City/Clear Lake Transaction; (iii) the
Gordonsville/Auburndale Transaction; (iv) the sale of $200,000,000 of Old Notes
on July 8, 1997 and the application of the net proceeds therefrom; and (v) the
sale of $75,000,000 of Old Notes on September 10, 1997 and the application of
the net proceeds therefrom.
 
     The following unaudited pro forma consolidated balance sheet as of
September 30, 1997 gives effect to the Gordonsville/Auburndale Transaction as if
such transaction had occurred on September 30, 1997.
 
     For further discussion regarding the Transactions, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Description of Facilities."
 
     The pro forma consolidated financial data and accompanying notes should be
read in conjunction with the consolidated financial statements and related notes
thereto appearing elsewhere in this Prospectus. The pro forma adjustments are
based upon available information and certain assumptions that management
believes are reasonable and are described in the notes accompanying the pro
forma consolidated financial data. The pro forma consolidated financial data are
presented for informational purposes only and do not purport to represent what
the Company's results of operations or financial position would actually have
been had such transactions in fact occurred at such dates, or to project the
Company's results of operations or financial position at any future date or for
any future period. In the opinion of management, all adjustments necessary to
present fairly such pro forma consolidated financial data have been made.
 
                                       34
<PAGE>   36
 
                 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31, 1996
                                             ------------------------------------------------------------------------------------
                                                                                                                      PRO FORMA
                                                                                                                       FOR THE
                                                                                                                    TRANSACTIONS,
                                                                          ADJUSTMENTS   ADJUSTMENTS                  THE SALE OF
                                                                            FOR THE       FOR THE     ADJUSTMENTS    THE 10 1/2%
                                                                             SALE         SALE OF       FOR THE     SENIOR NOTES,
                                                                            OF THE         $200         SALE OF        AND THE
                                                        ADJUSTMENTS FOR     10 1/2%       MILLION     $75 MILLION      SALE OF
                                                              THE           SENIOR        OF OLD        OF OLD      $275 MILLION
                                              ACTUAL    TRANSACTIONS(1)      NOTES         NOTES         NOTES      OF OLD NOTES
                                             --------   ---------------   -----------   -----------   -----------   -------------
                                                           (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S>                                          <C>        <C>               <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
  Electricity and steam sales............... $199,464       $23,838         $    --       $    --       $    --       $ 223,302
  Service contract revenue..................    6,455         9,259              --            --            --          15,714
  Income from unconsolidated investments in
    power projects..........................    6,537         2,487              --            --            --           9,024
  Interest income on loans to power
    projects................................    2,098         6,424              --            --            --           8,522
                                             --------       -------         -------       -------       -------        --------
    Total revenue...........................  214,554        42,008              --            --            --         256,562
                                             --------       -------         -------       -------       -------        --------
Cost of revenue:
  Plant operating expenses..................   61,894         5,830              --            --            --          67,724
  Depreciation and amortization.............   39,818         7,474              --            --            --          47,292
  Operating lease expense...................    9,295         3,372              --            --            --          12,667
  Service contract expenses.................    7,400         7,759              --            --            --          15,159
  Production royalties......................   10,793            --              --            --            --          10,793
                                             --------       -------         -------       -------       -------        --------
    Total cost of revenue...................  129,200        24,435              --            --            --         153,635
                                             --------       -------         -------       -------       -------        --------
Gross profit................................   85,354        17,573              --            --            --         102,927
Project development expenses................    3,867            --              --            --            --           3,867
General and administrative expenses.........   14,696           186              --            --            --          14,882
                                             --------       -------         -------       -------       -------        --------
    Income from operations..................   66,791        17,387              --            --            --          84,178
Interest expense............................   45,294        12,677           3,259(2)      8,177(3)      6,612(4)       76,019
Other income, net...........................   (6,259)       (2,531)             --            --            --          (8,790)
                                             --------       -------         -------       -------       -------        --------
  Income before provision for income
    taxes...................................   27,756         7,241          (3,259)       (8,177)       (6,612)         16,949
Provision for income taxes..................    9,064         3,464          (1,338)       (3,357)       (2,714)          5,119
                                             --------       -------         -------       -------       -------        --------
    Net income.............................. $ 18,692       $ 3,777         $(1,921)      $(4,820)      $(3,898)      $  11,830
                                             ========       =======         =======       =======       =======        ========
    Net income per share.................... $   1.27                                                                 $    0.81
                                             ========                                                                  ========
OTHER OPERATING DATA AND FINANCIAL RATIOS:
  Depreciation and amortization............. $ 40,551                                                                 $  48,025
  EBITDA.................................... $117,379                                                                 $ 151,571
  EBITDA to Consolidated Interest Expense...    2.41x                                                                     1.88x
  Total debt to EBITDA(5)...................    5.12x                                                                     5.80x
  Ratio of earnings to fixed charges........    1.45x                                                                     1.23x
</TABLE>
 
          See Notes to Pro Forma Consolidated Statement of Operations
 
                                       35
<PAGE>   37
 
                 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                              NINE MONTHS ENDED SEPTEMBER 30, 1997
                                    -----------------------------------------------------------------------------------------
                                                                                                           PRO FORMA FOR THE
                                                                                                             MONTIS NIGER,
                                                ADJUSTMENTS FOR                                            TEXAS CITY/CLEAR
                                                   THE MONTIS                                                  LAKE AND
                                                     NIGER,                                                  GORDONSVILLE/
                                                TEXAS CITY/CLEAR                                              AUBURNDALE
                                                    LAKE AND          ADJUSTMENTS        ADJUSTMENTS         TRANSACTIONS
                                                 GORDONSVILLE/      FOR THE SALE OF    FOR THE SALE OF      AND THE SALE OF
                                                   AUBURNDALE        $200 MILLION        $75 MILLION         $275 MILLION
                                     ACTUAL     TRANSACTIONS(6)      OF OLD NOTES       OF OLD NOTES         OF OLD NOTES
                                    --------    ----------------    ---------------    ---------------    -------------------
                                                     (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S>                                 <C>         <C>                 <C>                <C>                <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
  Electricity and steam sales...... $175,767        $     --            $    --            $    --             $ 175,767
  Service contract revenue.........    6,871           4,629                 --                 --                11,500
  Income (loss) from unconsolidated
    investments in power
    projects.......................    7,477             712                 --                 --                 8,189
  Interest income on loans to power
    projects.......................    9,765           6,424                 --                 --                16,189
                                    --------         -------            -------            -------              --------
    Total revenue..................  199,880          11,765                 --                 --               211,645
                                    --------         -------            -------            -------              --------
Cost of revenue:
  Plant operating expenses.........   50,531              36                 --                 --                50,567
  Depreciation and amortization....   35,338             112                 --                 --                35,450
  Operating lease expense..........   10,703              --                 --                 --                10,703
  Service contract expenses........    6,223           3,879                 --                 --                10,102
  Production royalties.............    8,139              --                 --                 --                 8,139
                                    --------         -------            -------            -------              --------
    Total cost of revenue..........  110,934           4,027                 --                 --               114,961
                                    --------         -------            -------            -------              --------
Gross profit.......................   88,946           7,738                 --                 --                96,684
Project development expenses.......    5,711              --                 --                 --                 5,711
General and administrative
  expenses.........................   13,202               9                 --                 --                13,211
                                    --------         -------            -------            -------              --------
    Income from operations.........   70,033           7,729                 --                 --                77,762
Interest expense...................   43,364           5,173              4,829(7)           4,573(8)             57,939
Other income, net..................  (11,789)              1                 --                 --               (11,788)
                                    --------         -------            -------            -------              --------
  Income before provision for
    income taxes...................   38,458           2,555             (4,829)            (4,573)               31,611
Provision for income taxes.........   13,951           1,266             (1,967)            (1,864)               11,386
                                    --------         -------            -------            -------              --------
    Net income..................... $ 24,507        $  1,289            $(2,862)           $(2,709)            $  20,225
                                    ========         =======            =======            =======              ========
    Net income per share........... $   1.19                                                                   $     .98
                                    ========                                                                    ========
OTHER OPERATING DATA AND FINANCIAL RATIOS:
  Depreciation and amortization.... $ 36,919                                                                   $  37,032
  EBITDA........................... $127,398                                                                   $ 139,116
  EBITDA to Consolidated Interest
    Expense........................     2.70x                                                                       2.25x
  Ratio of earnings to fixed
    charges........................     1.77x                                                                       1.56x
</TABLE>
 
          See Notes to Pro Forma Consolidated Statement of Operations
 
                                       36
<PAGE>   38
 
            NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
 
(1) Represents the pro forma results of operations for the facilities involved
    in the Transactions for the periods during which such facilities were not
    owned by the Company during 1996, as if the Transactions had been completed
    on January 1, 1996, including (i) the King City Power Plant for the period
    through May 1, 1996; (ii) the Gilroy Power Plant for the period through
    August 28, 1996; (iii) the Montis Niger Gas Fields through December 31,
    1996; (iv) the Texas City and Clear Lake Power Plants and the related
    purchase of $155.6 million of non-recourse project debt through December 31,
    1996; and (v) the Gordonsville and Auburndale Power Plants through December
    31, 1996. The following table sets forth the total adjustments to results of
    operations for such periods:
 
<TABLE>
<CAPTION>
                                                                                      GORDONSVILLE/
                                  KING CITY   GILROY                   TEXAS CITY/    AUBURNDALE
                                    POWER      POWER    MONTIS NIGER    CLEAR LAKE       POWER         TOTAL
                                    PLANT      PLANT     GAS FIELDS    POWER PLANTS     PLANTS      ADJUSTMENTS
                                  ---------   -------   ------------   ------------   -----------   -----------
                                                      (DOLLARS IN THOUSANDS)
    <S>                           <C>         <C>       <C>            <C>            <C>           <C>
    Statement of operations
      data:
    Revenue:
      Electricity and steam
        sales...................   $ 1,583    $22,255     $     --       $     --       $    --       $23,838
      Service contract
        revenue.................        --         --           --          9,259            --         9,259
      Income from unconsolidated
        investments in power
        projects................        --         --           --          4,075        (1,588)        2,487
      Interest income on loans
        to power projects.......        --         --           --          6,424            --         6,424
                                   -------    -------      -------        -------       -------       -------
             Total revenue......     1,583     22,255           --         19,758        (1,588)       42,008
                                   -------    -------      -------        -------       -------       -------
    Cost of revenue:
      Plant operating
        expenses................     1,669      7,213       (3,052)            --            --         5,830
      Depreciation..............     2,800      3,660        1,014             --            --         7,474
      Operating lease expense...     3,372         --           --             --            --         3,372
      Service contract
        expenses................        --         --           --          7,759            --         7,759
      Production royalties......        --         --           --             --            --            --
                                   -------    -------      -------        -------       -------       -------
             Total cost of
               revenue..........     7,841     10,873       (2,038)         7,759            --        24,435
                                   -------    -------      -------        -------       -------       -------
    Gross profit................    (6,258)    11,382        2,038         11,999        (1,588)       17,573
    Project development
      expenses..................        --         --           --             --            --            --
    General and administrative
      expenses..................        --         --          186             --            --           186
                                   -------    -------      -------        -------       -------       -------
      Income from operations....    (6,258)    11,382        1,852         11,999        (1,588)       17,387
    Interest expense............     1,391      6,113           --          5,173            --        12,677
    Other income, net...........    (2,526)        --           (5)            --            --        (2,531)
                                   -------    -------      -------        -------       -------       -------
      Income before provision
        for income taxes........    (5,123)     5,269        1,857          6,826        (1,588)        7,241
    Provision for income
      taxes.....................    (2,103)     2,163          762          3,260          (618)        3,464
                                   -------    -------      -------        -------       -------       -------
             Net income.........   $(3,020)   $ 3,106     $  1,095       $  3,566       $  (970)      $ 3,777
                                   =======    =======      =======        =======       =======       =======
</TABLE>
 
     The Montis Niger Gas Fields pro forma adjustments reflect as a credit to
     plant operating expenses the fuel cost formerly charged to the Greenleaf 1
     and 2 Power Plants.
 
     The adjustments reflected in the table set forth above for the King City
     Power Plant and the Gilroy Power Plant are not necessarily indicative of a
     full year's results. See "Risk Factors -- Quarterly Fluctuations;
     Seasonality" in this Prospectus. Other income, net for the King City Power
     Plant reflects interest income from amounts contractually invested pursuant
     to collateral fund requirements. See "Business -- Description of
     Facilities -- Power Plants -- King City Power Plant."
 
(2) Reflects $7.0 million of interest expense related to the 10 1/2% Senior
    Notes and $201,000 of amortization expense for the costs associated with the
    sale of the 10 1/2% Senior Notes, reduced by $1.9 million of interest
    expense as a result of the repayment of a $57.0 million loan from The Bank
    of Nova Scotia, $1.1 million of interest expense as a result of the
    repayment of a $45.0 million loan from The Bank of Nova Scotia (assuming an
    interest rate of 7.5%) and $973,000 of interest expense as a result of the
 
                                       37
<PAGE>   39
 
    repayment of all amounts outstanding under the Company's previous credit
    facility. The $973,000 represents $707,000 of actual interest expense and
    $266,000 of assumed interest expense to fund a portion of the King City
    Transaction (assuming an interest rate of 6.0%).
 
(3) Reflects $17.5 million of interest expense related to the sale of
    $200,000,000 of Old Notes, $848,000 of amortization expense for the
    transaction costs, original issue discount and settlement costs related to
    interest rate contracts associated with the sale of $200,000,000 of Old
    Notes, $321,000 of interest expense as a result of the repayment of the $6.5
    million Natomas Promissory Note, $64,000 of interest expense as a result of
    the repayment of the $750,000 Santa Fe Note, reduced by $10.6 million of
    interest expense as a result of the repayment of the $108.6 million Deutsche
    Bank Loan.
 
(4) Reflects $6.6 million of interest expense related to the sale of $75,000,000
    of Old Notes and $49,000 of amortization expense for the costs associated
    with the sale of $75,000,000 of Old Notes.
 
(5) Total debt includes $114.0 million of current non-recourse debt incurred by
    Calpine Finance Company ("CFC")(the "CFC Non-Recourse Debt"), which was used
    to finance a portion of CFC's purchase of the existing $155.6 million
    non-recourse project debt relating to the Texas City and Clear Lake Power
    Plants. The Company intends to repay the CFC Non-Recourse Debt prior to
    maturity with a portion of the proceeds of approximately $155.6 million of
    non-recourse project debt that will be incurred by the unconsolidated
    50%-owned entity that owns the Texas City and Clear Lake Power Plants. The
    total debt to EBITDA ratio adjusted for such refinancing would have been
    5.04x.
 
(6) Represents the pro forma results of operations for the Montis Niger Gas
    Fields for the period of January 1, 1997 through January 30, 1997, the Texas
    City and Clear Lake Power Plants for the period of January 1, 1997 through
    June 23, 1997 and for the Gordonsville and Auburndale Power Plants for the
    period of January 1, 1997 through September 30, 1997.
 
(7) Reflects $9.1 million of interest expense related to the sale of
    $200,000,000 of Old Notes, $440,000 of amortization expense for the
    transaction costs, original issue discount and settlement costs related to
    interest rate contracts associated with the sale of $200,000,000 of Old
    Notes, $10,000 of interest expense for the repayment of the Santa Fe Note,
    reduced by $4.7 million of interest expense for the repayment of the
    Deutsche Bank Loan and $12,000 of interest expense for the repayment of the
    $6.5 million Natomas Promissory Note.
 
(8) Reflects $4.6 million of interest expense related to the sale of $75,000,000
    of Old Notes and $34,000 of amortization expense for the costs associated
    with the sale of $75,000,000 of Old Notes.
 
                                       38
<PAGE>   40
 
                      PRO FORMA CONSOLIDATED BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                                            AS OF SEPTEMBER 30, 1997
                                                              -----------------------------------------------------
                                                                              ADJUSTMENTS            PRO FORMA
                                                                                FOR THE               FOR THE
                                                                             GORDONSVILLE/         GORDONSVILLE/
                                                                              AUBURNDALE             AUBURNDALE
                                                                ACTUAL        TRANSACTION           TRANSACTION
                                                              ----------   -----------------     ------------------
                                                                                 (IN THOUSANDS)
<S>                                                           <C>          <C>                   <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $  198,550       $ (42,626)(1)         $  155,924
  Accounts receivable from related parties..................       1,931              --                  1,931
  Accounts receivable from others...........................      50,236              --                 50,236
  Collateral securities, current portion....................       6,046              --                  6,046
  Notes receivable from related parties, current portion....      15,564              --                 15,564
  Prepaid operating lease...................................      13,652              --                 13,652
  Other current assets......................................       7,684              --                  7,684
                                                              ----------        --------             ----------
    Total current assets....................................     293,663         (42,626)               251,037
Property, plant & equipment, net............................     710,599              --                710,599
Investments in power projects...............................      74,224          42,626(2)             116,850
Collateral securities, net of current portion...............      86,283              --                 86,283
Notes receivable from related parties.......................     134,189              --                134,189
Notes receivable from Coperlasa.............................      16,353              --                 16,353
Restricted cash.............................................      18,195              --                 18,195
Other assets................................................      34,461              --                 34,461
                                                              ----------        --------             ----------
    Total assets............................................  $1,367,967       $      --             $1,367,967
                                                              ==========        ========             ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of non-recourse project financing.........  $  123,095       $      --             $  123,095
  Notes payable and short-term borrowings...................          --              --                     --
  Accounts payable..........................................      19,104              --                 19,104
  Accrued payroll and related expenses......................       4,178              --                  4,178
  Accrued interest payable..................................      16,254              --                 16,254
  Other accrued expenses....................................       8,295              --                  8,295
                                                              ----------        --------             ----------
    Total current liabilities...............................     170,926              --                170,926
Non-recourse project financing, net of current portion......     186,403              --                186,403
Senior Notes................................................     560,043              --                560,043
Deferred income taxes, net..................................     139,651              --                139,651
Deferred lease incentive....................................      75,844              --                 75,844
Other liabilities...........................................       5,549              --                  5,549
                                                              ----------        --------             ----------
    Total liabilities.......................................   1,138,416              --              1,138,416
                                                              ----------        --------             ----------
Stockholders' equity:
  Common stock..............................................          20              --                     20
  Additional paid-in capital................................     167,329              --                167,329
  Retained earnings.........................................      62,202              --                 62,202
                                                              ----------        --------             ----------
    Total stockholders' equity..............................     229,551              --                229,551
                                                              ----------        --------             ----------
    Total liabilities and stockholders' equity..............  $1,367,967       $      --             $1,367,967
                                                              ==========        ========             ==========
</TABLE>
 
                                       39
<PAGE>   41
 
                 NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
 
(1) Represents the cash required to fund the purchase of 50% interests in the
    Gordonsville and Auburndale Power Plants.
 
(2) Reflects the purchase price allocated to the investment in the Gordonsville
    and Auburndale Power Plants.
 
                                       40
<PAGE>   42
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the consolidated financial statements
of the Company, including the notes thereto, appearing elsewhere in this
Prospectus.
 
GENERAL
 
     Calpine is engaged in the acquisition, development, ownership and operation
of power generation facilities and the sale of electricity and steam in the
United States and selected international markets. The Company currently has
interests in 19 power generation facilities and steam fields having an aggregate
capacity of 2,264 megawatts. In addition Calpine has a 240 megawatt gas-fired
power generation facility under construction in Pasadena, Texas and an
investment in a 169 megawatt gas-fired power generation facility currently under
construction in Dighton, Massachusetts. The Company also currently has a pending
acquisition, subject to the fulfillment of all required conditions, for the net
ownership of 120 megawatts of capacity in four gas-fired power generation
facilities located in New York, with an aggregate capacity of 388 megawatts.
Since its inception in 1984, Calpine has developed substantial expertise in all
aspects of electric power generation. The Company's vertical integration has
resulted in significant growth over the last five years as Calpine has applied
its extensive engineering, construction management, operations, fuel management
and financing capabilities to successfully implement its acquisition and
development program.
 
     Calpine's net interest in power generation facilities has increased from
281 megawatts in 1991 to 1,919 megawatts, including the facilities under
construction. Total assets have increased from $41.2 million as of December 31,
1991 to $1.4 billion on a pro forma basis as of September 30, 1997. Calpine's
revenue on a pro forma basis has increased to $256.6 million for 1996,
representing a five-year compound annual growth rate of 46% since 1991. The
Company's EBITDA (as defined) on a pro forma basis for 1996 increased to $151.6
million from $4.9 million in 1991, representing a five-year compound annual
growth rate of 99%. See "Pro Forma Consolidated Financial Data."
 
     On September 9, 1994, the Company acquired Thermal Power Company, which
owns a 25% undivided interest in certain steam fields at The Geysers steam
fields in northern California ("The Geysers") with a total capacity of 604
megawatts for a purchase price of $66.5 million. In January 1995, the Company
purchased the working interest in certain of the geothermal properties at the
PG&E Unit 13 and Unit 16 Steam Fields from a third-party for a purchase price of
$6.75 million. On April 21, 1995, the Company acquired the stock of certain
companies that own 100% of the Greenleaf 1 and 2 Power Plants, consisting of two
49.5 megawatt gas-fired cogeneration facilities, for an adjusted purchase price
of $81.5 million. On June 29, 1995, the Company acquired the operating lease for
the Watsonville Power Plant, a 28.5 megawatt gas-fired cogeneration facility,
for a purchase price of $900,000. On November 17, 1995, the Company entered into
a series of agreements to invest up to $20.0 million in the Cerro Prieto Steam
Fields. In April 1996, the Company entered into a lease transaction for the King
City Power Plant, a 120 megawatt gas-fired cogeneration facility, which required
an investment of $108.3 million, primarily related to the collateral fund
requirements. On August 29, 1996, the Company acquired the Gilroy Power Plant, a
120 megawatt gas-fired cogeneration facility, for a purchase price of $125.0
million plus certain contingent consideration, which the Company currently
estimates will amount to approximately $24.1 million. See
"Business -- Description of Facilities."
 
     On January 31, 1997, the Company acquired the Montis Niger Gas Fields for a
total purchase price of approximately $7.1 million plus $824,000 for certain
working capital items, subject to final adjustments. The Montis Niger Gas Fields
have 9.7 billion cubic feet of estimated proven gas reserves and an 80-mile
pipeline system which provide gas to the Company's Greenleaf 1 and 2 Power
Plants. See "Business -- Description of Facilities -- Gas Fields -- Montis Niger
Gas Fields."
 
     On June 23, 1997, the Company completed the acquisition of a 50% equity
interest in two gas-fired cogeneration facilities, the 450 megawatt Texas City
Power Plant and the 377 megawatt Clear Lake Power Plant, for an aggregate
purchase price of $35.4 million. As a part of that acquisition, the Company
entered into a $125.0 million non-recourse financing with The Bank of Nova
Scotia, the proceeds of which were utilized for
 
                                       41
<PAGE>   43
 
the acquisition of the 50% equity interest and the purchase of $155.6 million of
outstanding non-recourse project debt associated with the Texas City and Clear
Lake Power Plants. The $125.0 million non-recourse financing has a maturity of
June 22, 1998 and is expected to be repaid prior to maturity with the proceeds
of a planned refinancing of the $155.6 million non-recourse project debt. The
Company accounts for this investment under the equity method and such earnings
are included in "income from unconsolidated investments in Power Projects". See
"Business -- Description of Facilities -- Power Plants -- Texas City and Clear
Lake Power Plants."
 
     On October 9, 1997, the Company completed the acquisition of 50% interests
in the Gordonsville Power Plant, a 240 megawatt gas-fired combined cycle
cogeneration facility, and the Auburndale Power Plant, a 150 megawatt gas-fired
combined cycle cogeneration facility, for an aggregate purchase price of $42.6
million. See "Business -- Description of Facilities -- Power
Plants -- Gordonsville and Auburndale Power Plants."
 
     On October 10, 1997 the Company invested $16.0 million in a 169 megawatt
gas-fired combined cycle facility located in Dighton, Massachusetts. See
"Business -- Project Development and Acquisitions -- Project
Development -- Dighton Gas-Fired Project."
 
     In February 1997, the Company commenced construction of a 240 megawatt
gas-fired cogeneration project at the Phillips Houston Chemical Complex ("HCC")
located in Pasadena, Texas (the "Pasadena Cogeneration Project"). The Company
has entered into an agreement to supply HCC with approximately 90 megawatts of
electricity, with the remainder of available electricity output to be sold into
the competitive market. The Pasadena Cogeneration Project is the first merchant
power plant to be financed with non-recourse project debt and is scheduled to be
operational in 1998. In February 1997, the Company announced the development of
a 500 megawatt gas-fired project in Sutter County, in northern California (the
"Sutter Gas-Fired Project"). The Sutter Gas-Fired Project would be northern
California's first merchant power plant. The Sutter Gas-Fired Project is
expected to provide electricity to the deregulated California power market
commencing in the year 2000. The Company is currently pursuing regulatory agency
permits for this project. See "Business -- Project Development and
Acquisitions -- Project Development."
 
     On August 25, 1997, Calpine entered into an agreement with The Brooklyn
Union Gas Company ("BUGC") to acquire 100% of the capital stock of Gas Energy
Inc. ("GEI") and Gas Energy Cogeneration Inc. ("GECI") for an aggregate purchase
price of approximately $102.5 million, subject to certain adjustments. GEI and
GECI are both wholly owned subsidiaries of BUGC and have (i) a 50% general
partnership interest in the Kennedy International Airport Power Plant, a 107
megawatt gas-fired cogeneration facility (the "Kennedy International Airport
Power Plant"), (ii) a 50% general partnership interest in the Stony Brook Power
Plant a 40 megawatt gas-fired cogeneration facility (the "Stony Brook Power
Plant"), (iii) a 45% general partnership interest in the Grumman Power Plant
(the "Grumman Power Plant"), a 57 megawatt gas-fired cogeneration facility (iv)
an 11.36% limited partnership interest in the Lockport Power Plant a 184
megawatt gas-fired cogeneration facility (the "Lockport Power Plant") and (v) a
100% interest in three fuel management contracts (collectively referred to as
the "GEI Transaction"). The Company currently expects to complete these
acquisitions during the fourth quarter of 1997, upon the fulfillment of all
required conditions. See "Business -- Project Development and
Acquisitions -- Acquisitions -- Gas Energy Inc. Power Plants."
 
     Included in the results of operations for the nine months ended September
30, 1997 are the King City and Gilroy Power Plants which each have a generating
capacity of 120 megawatts. The King City Power Plant has been included in the
Company's consolidated results of operations since the May 2, 1996 effective
date of the operating lease, and the Gilroy Power Plant since its acquisition on
August 29, 1996. As scheduled by PG&E and in accordance with their respective
power sales agreements, the King City and Gilroy Power Plants did not generate
electricity during the four months ended April 30, 1997. As scheduled, both
power plants resumed operation on May 1, 1997.
 
     Each of the Company's power plants produces electricity for sale to a
utility or, in certain instances, other third-party purchasers. Thermal energy
produced by the gas-fired cogeneration facilities is sold to governmental and
industrial users, and steam produced by the geothermal steam fields is sold to
utility-owned power plants. The electricity, thermal energy and steam generated
by these facilities are typically sold pursuant to
 
                                       42
<PAGE>   44
 
long-term, take-and-pay power or steam sales agreements generally having
original terms of 20 or 30 years. The Company has a net interest of 421
megawatts of the aggregate capacity generated by nine power plants that deliver
electricity to PG&E under separate long-term power sales agreements. Each of
these agreements provides for both capacity payments and energy payments for the
term of the agreement. During the initial ten-year period of certain agreements,
PG&E pays a fixed price for each unit of electrical energy according to
schedules set forth in such agreements (which represent 17%, or 73 megawatts, of
such net interest). The fixed price periods under these power sales agreements
expire at various times in 1998 through 2000. After the fixed price periods
expire, while the basis for the capacity and capacity bonus payments under these
power sales agreements remains the same, the energy payments adjust to PG&E's
then avoided cost of energy, which is determined and published each month by the
utility. The term "avoided cost" refers to the incremental costs that an
electric utility would incur to produce or purchase an amount of power
equivalent to that purchased from QFs. On December 9, 1996, the CPUC approved a
new methodology for the calculation of short-run avoided cost ("SRAC"), which
was effective retroactive to October 1, 1996 and will continue until the
independent power exchange has commenced operations and is functioning properly.
The independent power exchange is scheduled to commence operations on January 1,
1998. Thereafter, the SRAC will become the energy clearing price of the
independent power exchange. The currently prevailing SRAC is substantially lower
than the fixed energy prices under these power sales agreements and is expected
to remain so. While SRAC does not affect capacity payments under the power sales
agreements, the Company's energy revenues under these power sales agreements are
expected to be materially reduced at the expiration of the fixed price period.
Such reduction may have a material adverse effect on the Company's results of
operations. The majority of the capacity revenues are paid during the months of
May through October. Prices paid for the steam delivered by the Company's steam
fields are based on a formula that partially reflects the price levels of
nuclear and fossil fuels, and, therefore, a reduction in the price levels of
such fuels may reduce revenue under the steam sales agreements for the steam
fields.
 
     Certain of the Company's power and steam sales agreements contain
curtailment provisions under which the purchasers of energy or steam are
entitled to reduce the number of hours of energy or amount of steam purchased
thereunder. For the year ended December 31, 1996, certain of the Company's power
generation facilities experienced maximum curtailment primarily as a result of
low gas prices and a high degree of precipitation during the period, which
resulted in high levels of energy generation by hydroelectric power facilities
that supply electricity. For the nine months ended September 30, 1997, such
facilities experienced a reduced amount of curtailment compared to the same
period in 1996. Due to an amendment to certain of the power sales agreements
executed in May 1997, the Company currently does not expect curtailment during
the remainder of the terms of the power sales agreements for these power plants.
 
     Many states are implementing or considering regulatory initiatives designed
to increase competition in the domestic power generation industry. In December
1995, the CPUC issued an electric industry restructuring decision which provides
for the commencement of deregulation and implementation of customer choice of
electricity supplier by January 1, 1998. Legislation implementing this decision
was adopted in September 1996. As part of its policy decision, the CPUC
indicated that power sales agreements of existing qualifying facilities would be
honored. The Company cannot predict the final form or timing of the proposed
restructuring and the impact, if any, that such restructuring would have on the
Company's existing business or results of operations. The Company believes that
any such restructuring would not have a material effect on its power sales
agreements and, accordingly, believes that its existing business and results of
operations would not be materially adversely affected, although there can be no
assurance in this regard.
 
SELECTED OPERATING INFORMATION
 
     Set forth below is certain selected operating information for the power
generation facilities and steam fields, for which results are consolidated in
the Company's statements of operations. The information set forth under power
plants consists of the results for the West Ford Flat Power Plant, the Bear
Canyon Power Plant, the Greenleaf 1 and 2 Power Plants since their acquisition
on April 21, 1993 the Watsonville Power Plant since its acquisition on June 29,
1995, the Gilroy Power Plant since its acquisition on August 29,1996, and the
King City Power Plant since the effective date of the lease on May 2, 1996. The
information set forth under
 
                                       43
<PAGE>   45
 
steam fields consists of the results for the PG&E Unit 13 and Unit 16 Steam
Fields, the SMUDGEO #1 Steam Fields and, for 1994 through 1996, the Thermal
Power Company Steam Fields since the acquisition of Thermal Power Company on
September 9, 1994. The information provided for the other interest included
under steam revenue prior to 1995 represents revenue attributable to a working
interest that was held by a third-party in the PG&E Unit 13 and Unit 16 Steam
Fields. In January 1995, the Company purchased this working interest. Prior to
the Company's acquisition of the remaining interest in the West Ford Flat Power
Plant, Bear Canyon Power Plant, the PG&E Unit 13 and Unit 16 Steam Fields and
the SMUDGEO #1 Steam Fields in April 1993, the Company's revenue from these
facilities was accounted for under the equity method and, therefore, does not
represent the actual revenue of the Company from these facilities for the
periods set forth below.
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                    ---------------------------------------------------------------------
                                                                                            1996              NINE MONTHS ENDED
                                                                                    ---------------------       SEPTEMBER 30,
                                                                                                   PRO      ---------------------
                                      1992        1993        1994        1995       ACTUAL     FORMA(1)      1996        1997
                                    ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------
                                                                       (DOLLARS IN THOUSANDS)
<S>                                 <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
POWER PLANTS:
  Electricity revenue:
    Energy........................  $  38,325   $  37,088   $  45,912   $  54,886   $  93,851   $  98,715   $  60,561   $  77,451
    Capacity(2)...................  $   7,707   $   7,834   $   7,967   $  30,485   $  65,064   $  84,038   $  50,095   $  67,048
  Megawatt hours produced.........    403,274     378,035     447,177   1,033,566   1,985,404   2,225,867   1,332,594   1,551,078
    Average energy price per
      kilowatt hour(2)............      9.503c      9.811c     10.267c      5.310c      4.727c      4.435c      4.545c      4.993%
Steam Fields:
  Steam revenue:
    Calpine.......................  $  33,385   $  31,066   $  32,631   $  39,669   $  40,549   $  40,549   $  29,655   $  31,268
    Other interest................  $   2,501   $   2,143   $   2,051          --          --          --          --          --
  Megawatt hours produced.........  2,105,345   2,014,758   2,156,492   2,415,059   2,528,874   2,528,874   1,811,449   1,972,439
    Average price per kilowatt
      hour........................      1.705c      1.648c      1.608c      1.643c      1.603c      1.603c      1.637c      1.585c
</TABLE>
 
- ---------------
 
(1) Pro forma results for the year ended December 31, 1996 give effect to the
    King City Transaction and the Gilroy Transaction as if such transactions had
    occurred on January 1, 1996. See "Pro Forma Consolidated Financial Data."
 
(2) Represents variable energy revenue divided by the kilowatt hours produced.
    The significant increase in capacity revenue and the accompanying decline in
    average energy price per kilowatt hour since 1994 reflects the increase in
    the Company's megawatt hour production as a result of acquisitions of
    interests in gas-fired cogeneration facilities by the Company.
 
RESULTS OF OPERATIONS
 
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1996
 
     Revenue. Total revenue was $92.9 million and $199.9 million for the three
and nine months ended September 30, 1997 compared to $70.9 million and $152.9
million for the comparable periods in 1996. Electricity and steam sales revenue
increased 16% and 25% to $79.4 million and $175.8 million for the three and nine
months ended September 30, 1997 compared to $68.3 million and $140.3 million for
the comparable periods in 1996. The increase for the three months ended
September 30, 1997 was primarily due to $10.0 million of higher revenue from the
Gilroy Power Plant acquired in August 1996. The increase for the nine months
ended September 30, 1997 was primarily due to $23.4 million of higher revenue
from the Gilroy Power Plant, $3.0 million of higher revenue from the King City
Power Plant, $6.3 million of higher revenue from the Company's geothermal power
plants, and $2.8 million due to increased prices of production at other Company
gas-fired power plants. As scheduled, the King City and Gilroy Power Plants did
not generate electrical energy and did not earn energy revenue during the four
months ended April 30, 1997. Included in geothermal revenue are revenue from the
West Ford Flat and Bear Canyon Power Plants which increased by $1.0 million and
$4.7 million for the three and nine months ended September 30, 1997 compared to
the same periods in 1996, primarily due to increased kilowatt hour generation
and increased energy prices. Thermal
 
                                       44
<PAGE>   46
 
Power Company also contributed $263,000 and $2.0 million more revenue for the
three and nine months ended September 30, 1997 than the same periods in 1996.
The increase in the three months ended September 30, 1997 was attributed to
higher energy prices, and the increase for the nine months ended September 30,
1997 was primarily due to increased steam sales under the alternative pricing
agreement entered into with PG&E in March 1996. Service contract revenue was
$3.3 million and $6.9 million for the three and nine months ended September 30,
1997 compared to $172,000 and $5.6 million for the comparable periods in 1996.
Included within service contract revenue are revenue from Calpine Power Services
Company which recorded trading losses of $1.9 million and $1.7 million for the
three and nine months ended September 30, 1996. Income from unconsolidated
investments in power projects increased to $3.3 million and $7.5 million for the
three and nine months ended September 30, 1997 compared to $1.2 million and $2.9
million for the same periods in 1996. The increase for three and nine month
period ended September 30, 1997 is primarily attributable to an increase in
equity income of $685,000 and $2.7 million, respectively, from the Company's
investment in Sumas Cogeneration Company, L.P. ("Sumas"), and to equity income
of $1.7 million and $1.8 million, respectively, from the Company's June 1997
investment in Texas Cogeneration Company (see Note 5 to the Condensed
Consolidated Financial Statements). In accordance with a power sales agreement
with Puget Sound Power and Light Company, Sumas operated the plant at a minimum
capacity from February to September 1997 and received a higher price for energy
sold and certain other payments. Interest income on loans to power projects
increased to $6.8 million and $9.8 million for the three and nine months ended
September 30, 1997 compared to $1.3 million and $4.1 million for the comparable
periods in 1996. The increase is primarily related to interest income on the
loans to the sole shareholder of Sumas Energy, Inc., the Company's partner in
the Sumas project, and interest income on loans made by Calpine Finance Company
to the Texas City and Clear Lake Power Plants (see Note 5 to the Condensed
Consolidated Financial Statements).
 
     Cost of revenue. Cost of revenue increased 20% and 27% to $43.1 million and
$110.9 million for the three and nine months ended September 30, 1997 compared
to $35.9 million and $87.2 million for the comparable periods in 1996. The
increase was primarily due to plant operating, depreciation and operating lease
expenses attributable to the operations of the King City and Gilroy Power Plants
which have been included in the Company's operations since May 2, 1996 and
August 29, 1996, respectively.
 
     Project development expenses increased to $1.8 million and $5.7 million for
the three and nine months ended September 30, 1997 compared to $1.0 million and
$2.5 million for the same periods in 1996. The increase was due primarily to
expanded business acquisition and development activities.
 
     General and administrative expenses. General and administrative expenses
decreased 6% to $4.6 million for the three months ended September 30, 1997
compared to $4.9 million for the same period in 1996. The decrease was primarily
due to a $1.4 million employee bonus expenses related to the common stock
offering in September 1996, partially offset by an increase in personnel and
related expenses in 1997. General and administrative expenses increased 22% to
$13.2 million for the nine months ended September 30, 1997 compared to $10.8
million for the same period in 1996. The increase in 1997 was due to additional
personnel and related expenses necessary to support the Company's expanded
operations.
 
     Interest expense. Interest expense increased to $17.2 million and $43.4
million for the three and nine months ended September 30, 1997 compared to $12.4
million and $31.1 million for the comparable periods in 1996. The 39% increase
for the three months ended September 30, 1997 compared to the same period in
1996 was attributable to $1.6 million of increased interest on debt related to
the Gilroy Power Plant acquired in August 1996, $4.6 million of increased
interest on the 8 3/4% Senior Notes Due 2007 issued in July 1997, and $2.6
million of interest expense at Calpine Finance Company, offset by $1.3 million
of interest capitalized for the construction of the Pasadena Cogeneration
Project and a $2.0 million decrease in interest expense for Calpine Geysers due
to repayment of the junior and senior term loans. The 40% increase for the nine
months ended September 30, 1997 compared to the same period in 1996 was
attributable to $4.6 million of increased interest expense related to the 8 3/4%
Senior Notes Due 2007 issued in July 1997, $7.3 million of increased interest
expense related to the 10 1/2% Senior Notes Due 2006 issued in May 1996, $6.3
million of interest on debt related to the Gilroy Power Plant acquired in August
1996 and $2.8 million of interest expense at Calpine Finance Company, offset by
$2.6 million of interest capitalized for the construction of the Pasadena Power
 
                                       45
<PAGE>   47
 
Plant, a $2.9 million decrease in interest expense at Calpine Geysers, and a
$1.8 million decrease in interest expense at Thermal Power Company.
 
     Other income, net. Other income, net increased to $3.9 million and $11.8
million for the three and nine months ended September 30, 1997 compared to a
loss of $1.1 million and income of $1.6 million for the same periods in 1996 due
to interest earned on higher cash and cash equivalent balances and interest
income earned on the collateral securities for the King City Power Plant.
 
     Provision for income taxes. The effective income tax rate was approximately
36% for the three and nine months ended September 30, 1997. Depletion in excess
of tax basis benefits at the Company's geothermal facilities and a revision of
prior year's tax estimates of $1.3 million and $1.7 million, respectively,
reduced the Company's effective tax rate for 1997. The effective rates for the
three and nine months ended September 30, 1996 were 31% and 34%, respectively.
In 1996, the Company decreased its deferred income tax liability by $769,000 to
reflect the change in California's state income tax rate from 9.3% to 8.84%
effective January 1, 1997. In addition, depletion in excess of tax basis
benefits at the Company's geothermal facilities reduced the Company's effective
tax rate for 1996.
 
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
 
     Revenue. Revenue increased 62% to $214.6 million in 1996 compared to $132.1
million in 1995, primarily due to a 56% increase in electricity and steam sales
of $199.5 million in 1996 compared to $127.8 million in 1995. The King City
Power Plant and the Gilroy Power Plant contributed revenues of $41.5 million and
$14.7 million, respectively, to electric and steam sales revenue during 1996.
Revenue for 1996 also reflected a full year of operation at the Greenleaf 1 and
2 Power Plants and the Watsonville Power Plant which contributed increases in
electric and steam revenue in 1996 compared to 1995 of $9.1 million and $4.7
million, respectively. During 1996 and 1995, the Company experienced the maximum
curtailment allowed under the power sales agreements with PG&E for the West Ford
Flat and Bear Canyon Power Plants. Without such curtailment, the West Ford Flat
and Bear Canyon Power Plants would have generated an additional $5.7 million and
$5.2 million of revenue in 1996 and 1995, respectively. Service contract revenue
decreased to $6.5 million in 1996 compared to $7.2 million in 1995, reflecting a
$2.8 million loss related to the Company's electricity trading operations,
offset by increased revenue during 1996 related to overhauls at the Aidlin and
Agnews Power Plants, and to technical services performed for the Cerro Prieto
Steam Fields. Income from unconsolidated investments in power projects increased
to $6.5 million in 1996 compared to losses of $2.9 million during 1995. The
increase is primarily attributable to $6.4 million of equity income generated by
the Company's investment in Sumas Cogeneration Company, L.P. ("Sumas") during
1996 compared to a $3.0 million loss in 1995. The increase in Sumas'
profitability during 1996 is primarily attributable to a contractual increase in
the energy price in accordance with the power sales agreement with Puget Sound
Power & Light Company. Interest income on loans to power projects was $2.1
million in 1996 as a result of the recognition of interest income on loans to
the sole shareholder of the general partner in Sumas.
 
     Cost of revenue. Cost of revenue increased 67% to $129.2 million in 1996 as
compared to $77.4 million in 1995. The increase was primarily due to plant
operating, depreciation, and operating lease expenses attributable to (i) a full
year of operation during 1996 at the Greenleaf 1 and 2 Power Plants which were
purchased on April 21, 1995, (ii) a full year of operation during 1996 at the
Watsonville Power Plant which was acquired on June 29, 1995, (iii) operations at
the King City Power Plant subsequent to May 2, 1996, and (iv) operations at the
Gilroy Power Plant subsequent to acquisition on August 29, 1996. Cost of revenue
also increased due to service contract expenses related to the Cerro Prieto
Steam Fields, partially offset by lower operating expenses at the Company's
other existing power generation facilities and steam fields.
 
     Project development expenses. Project development expenses increased to
$3.9 million in 1996, compared to $3.1 million in 1995, due to project
development activities.
 
     General and administrative expenses. General and administrative expenses
were $14.7 million in 1996 compared to $8.9 million in 1995. The increases were
primarily due to additional personnel and related expenses necessary to support
the Company's expanding operations, including the Company's power
 
                                       46
<PAGE>   48
 
marketing operations. The Company also incurred an employee bonus expense of
$1.3 million in September 1996 related to the Company's initial public offering.
 
     Interest expense. Interest expense increased 41% to $45.3 million in 1996
from $32.2 million in 1995. Approximately $11.8 million of the increase was
attributable to interest on the Company's 10 1/2% Senior Notes issued in May
1996, $2.7 million of interest expense related to the Gilroy Power Plant
acquired on August 29, 1996, and $1.6 million of higher interest expense related
to the Greenleaf 1 and 2 Power Plants acquired on April 21, 1995, offset in part
by a $3.0 million decrease in interest expense as a result of repayments of
principal on certain non-recourse project financings.
 
     Other income, net. Other income, net increased 232% to $6.3 million for
1996 compared with $1.9 million for 1995. The increase was primarily due to $4.5
million of interest income on collateral securities purchased in connection with
the King City Transaction, $1.4 million of net proceeds for the settlement of
the Coso project, and higher interest income for the period due to the
investment of the net proceeds of the preferred stock, the 10 1/2% Senior Notes,
and from the Company's initial public offering of common shares. Offsetting
these income items was a $3.7 million loss for uncollectible amounts related to
an acquisition project. See Note 13 of the Notes to Consolidated Financial
Statements.
 
     Provision for income taxes. The effective rate for the income tax provision
was approximately 33% in 1996 and 41% in 1995. In 1996, the Company decreased
its deferred income tax liability by $769,000 to reflect the change in
California's state income tax rate from 9.3% to 8.84% effective January 1, 1997.
In addition, depletion in excess of tax basis benefits at the Company's
geothermal facilities and a revision of prior years' tax estimates reduced the
Company's effective tax rate for 1996.
 
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
 
     Revenue. Revenue increased 39.0% to $132.1 million in 1995 compared to
$94.8 million in 1994, primarily due to a 41.5% increase in electricity and
steam sales to $127.8 million in 1995 compared to $90.3 million in 1994. Such an
increase was primarily attributable to the $28.3 million of revenue from the
Greenleaf 1 and 2 Power Plants, $5.9 million of revenue from the Watsonville
Power Plant, the $5.2 million of additional revenue from the Thermal Power
Company Steam Fields as a result of a full year of operation in 1995, and an
increase of $3.0 million of revenue from the SMUDGEO #1 Steam Fields
attributable to increased production as a result of an extended outage during
1994. Such an increase also reflects a substantial increase in capacity payments
for electricity sales from $8.0 million in 1994 to $30.5 million in 1995 as a
result of the transactions stated above. This revenue increase was partially
offset by a $2.7 million decrease in revenue from the West Ford Flat and Bear
Canyon Power Plants, as a result of curtailments by PG&E due to low gas prices
and high levels of precipitation during 1995 as compared to 1994, offset in part
by contractual price increases for 1995. Without such curtailment, the West Ford
Flat and Bear Canyon Power Plants would have generated an additional $5.2
million of revenue in 1995. Revenue for 1995 also reflects curtailment of steam
production at the Thermal Power Company Steam Fields as a result of higher
precipitation and lower gas prices in 1995, and at the PG&E Unit 13 and Unit 16
Steam Fields as a result of hydro-spill conditions. Without curtailment, the
Thermal Power Company Steam Fields and the PG&E Unit 13 and Unit 16 Steam Fields
would have generated an additional $5.7 million and $800,000 of revenue during
1995, respectively.
 
     Revenue for 1995 and 1994 reflects reversals of $2.7 million and $3.2
million, respectively, of previously deferred revenue. Company revenue from
sales of steam were previously calculated considering a future period when steam
would be delivered without receiving corresponding revenue. See Note 2 of the
Notes to Consolidated Financial Statements. In May 1994, the Company ceased
deferring revenue and recognized $4.0 million of its previously deferred
revenue. Based on estimates and analyses performed by the Company, the Company
no longer expects that it will be required to make these deliveries to SMUD.
Concurrently, $800,000 of the revenue increase was reserved for future
construction of gathering systems required for future production of the steam
fields, with the offset recorded in property, plant and equipment. In October
1995, PG&E agreed to the termination of the free steam provision with respect to
the PG&E Unit 13 Steam Fields. During 1995, the Company took additional measures
regarding future capital commitments and other actions
 
                                       47
<PAGE>   49
 
which will increase steam production and, based on additional analyses and
estimates performed, the Company recognized the remaining $2.7 million of
previously deferred revenue.
 
     Cost of revenue. Cost of revenue increased 46.6% to $77.4 million in 1995
compared to $52.8 million in 1994. The increase was due to plant operating,
production royalty and depreciation and amortization expenses attributable to
(i) a full year of operations at Thermal Power Company, which was purchased on
September 9, 1994, (ii) operations at the Greenleaf 1 and 2 Power Plants
subsequent to April 21, 1995, and (iii) operations at the Watsonville Power
Plant subsequent to June 29, 1995. The increases were partially offset by lower
depreciation and production royalty expenses at the West Ford Flat and Bear
Canyon Power Plants and the PG&E Unit 13 and Unit 16 Steam Fields due to
curtailment by PG&E during 1995.
 
     Project development expenses. Project development expenses increased to
$3.1 million in 1995, compared to $1.8 million in 1994, due to new project
development activities.
 
     General and administrative expenses. General and administrative expenses
were $8.9 million in 1995 compared to $7.3 million in 1994. The increase in 1995
was primarily due to additional personnel and related expenses necessary to
support the Company's expanded operations.
 
     Interest expense. Interest expense increased to $32.2 million in 1995 from
$23.9 million in 1994. Approximately $3.6 million of the increase was
attributable to a full year of interest expense incurred on the debt related to
the Thermal Power Company acquisition in September 1994 and $4.1 million of
interest expense incurred on the debt related to the acquisition of the
Greenleaf 1 and 2 Power Plants in April 1995. In addition, 1995 included a full
year of interest expense on the 9 1/4% Senior Notes issued on February 17, 1994.
 
     Provision for income taxes. The effective rate for the income tax provision
was approximately 41% for 1995 and 39% for 1994. The effective rates were based
on statutory tax rates, with minor reductions for depletion in excess of tax
basis benefits. Due to curtailment of production during 1995, the allowance for
statutory depletion decreased in 1995 from 1994.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     To date, the Company has obtained cash from its operations, borrowings
under its credit facilities and other working capital lines, sale of debt and
equity, and proceeds from non-recourse project financings. The Company utilized
this cash to fund its operations, service debt obligations, fund the
acquisition, development and construction of power generation facilities,
finance capital expenditures and meet its other cash and liquidity needs.
 
     The following table summarizes the Company's cash flow activities for the
periods indicated:
 
<TABLE>
<CAPTION>
                                                                              NINE MONTHS ENDED
                                         YEAR ENDED DECEMBER 31,                SEPTEMBER 30,
                                   -----------------------------------     -----------------------
                                     1994         1995         1996          1996          1997
                                   --------     --------     ---------     ---------     ---------
                                                           (IN THOUSANDS)
<S>                                <C>          <C>          <C>           <C>           <C>
Cash flows from:
  Operating activities...........  $ 34,196     $ 26,653     $  59,881     $  25,694     $  66,429
  Investing activities...........   (84,444)     (38,497)     (326,834)     (269,320)     (228,844)
  Financing activities...........    66,609       11,127       345,153       321,293       260,955
                                   --------     --------     ---------      --------      --------
          Total..................  $ 16,361     $   (717)    $  78,200     $  77,667     $  98,540
                                   ========     ========     =========      ========      ========
</TABLE>
 
     Operating activities for 1996 consisted of approximately $18.7 million of
net income from operations, $36.6 million of depreciation and amortization, $2.0
million in deferred income taxes, and $7.8 million net increase in operating
assets and liabilities, offset by $5.3 million of undistributed income from
unconsolidated investments in power projects. Operating activities for the nine
months ended September 30, 1997 provided $66.4 million, consisting of
approximately $24.5 million of net income from operations, $11.5 million in
deferred income taxes, $34.6 million of depreciation and amortization, $9.6
million of partnership distributions and income from unconsolidated investments
in power projects and a $1.6 million distribution from Coperlasa, offset by a
$15.4 million net increase in operating assets and liabilities.
 
                                       48
<PAGE>   50
 
     Investing activities used $326.8 million during 1996, primarily due to
$29.9 million of capital expenditures and capitalized project costs, $98.4
million for the purchase of collateral securities, a $12.9 million loan to
Coperlasa in connection with the Cerro Prieto Steam Fields, $138.1 million for
the acquisition of the Gilroy Power Plant, and a $41.6 million increase in
restricted cash requirements related to the construction of the Pasadena
Cogeneration Project. Investing activities used $228.8 million during the nine
months ended September 30, 1997, primarily due to $192.3 million for the
acquisition of Texas Cogeneration Company and the related notes receivable,
$66.4 million of capital expenditures related to the construction of the
Pasadena Cogeneration Project, $22.9 million of other capital expenditures, $7.6
million for the acquisition of the Montis Niger Gas Fields, offset by a $21.1
million of loan payments, $5.4 million of collateral security maturities in
connection with the King City Power Plant and a $37.0 million decrease in
restricted cash, primarily related to the Pasadena Cogeneration Project and
Calpine Geysers Company, L.P.
 
     Financing activities provided $345.2 million of cash during 1996. The
Company issued $50.0 million of preferred stock, borrowed $161.8 million of bank
debt and an additional $46.9 million under the credit facilities, received net
proceeds of $174.9 million from the 10 1/2% Senior Notes, and received $109.2
million upon the issuance of common stock. The Company subsequently repaid $46.2
million of bank debt, all borrowings outstanding under the credit facilities of
$66.7 million, and $84.7 million of non-recourse project financing. Financing
activities provided $261.0 million of cash during the nine months ended
September 30, 1997 consisting of $139.3 million of borrowings for the
acquisition of Texas Cogeneration Company and the related notes receivable, $5.0
million of borrowings for contingent consideration in connection with the
acquisition of the Gilroy Power Plant and $275.0 million of proceeds from the
issuance of the Old Notes, offset by $118.2 million in repayment of non-recourse
project debt, $25.3 million in repayment of borrowings related to the
acquisition of the Texas City and Clear Lake Power Plants, $7.1 million in
repayment of notes payable and $9.5 million of costs associated with financing
activities.
 
     As of December 31, 1996, cash and cash equivalents were $100.0 million and
working capital was $96.2 million. For the twelve months ended December 31,
1996, working capital increased by $145.2 million and cash and cash equivalents
increased by $78.2 million as compared to the comparable period in 1995. The
increase in working capital was primarily due to remaining net proceeds from the
issuance of common stock in September 1996, and reflects the inclusion of $57.0
million of non-recourse project financing in current liabilities as of December
31, 1995. On May 16, 1996, the Company issued the 10 1/2% Senior Notes. A
portion of the funds from the issuance of the 10 1/2% Senior Notes was used to
refinance current bank debt and borrowings under the Company's previous
revolving credit facility, and to repay the $57.0 million non-recourse
indebtedness to The Bank of Nova Scotia.
 
     As of September 30, 1997, cash and cash equivalents were $198.6 million and
working capital was $122.7 million. For the nine months ended September 30,
1997, cash and cash equivalents increased by $98.5 million and working capital
increased by $26.5 million as compared to December 31, 1996. The increase in
working capital is primarily due to the issuance of $275.0 million of Old Notes
and proceeds from a non-recourse project financing due in 1998, offset by the
use of available cash for the acquisition of the Texas City and Clear Lake Power
Plants and in the purchase of the non-recourse project financing of the Texas
City and Clear Lake Power Plants.
 
     As a developer, owner and operator of power generation projects, the
Company may be required to make long-term commitments and investments of
substantial capital for its projects. The Company historically has financed
these capital requirements with borrowings under its credit facilities, other
lines of credit, non-recourse project financing or long-term debt.
 
     At September 30, 1997, the Company had outstanding $105.0 million of 9 1/4%
Senior Notes Due 2004 which mature on February 1, 2004 and bear interest payable
semi-annually on February 1 and August 1 of each year. In addition, the Company
had $180.0 million of 10 1/2% Senior Notes Due 2006 which mature on May 15, 2006
and bear interest payable semi-annually on May 15 and November 15 of each year.
On July 8, 1997, the Company issued $200.0 million of Old Notes which mature on
July 15, 2007 and bear interest payable semi-annually of January 15 and July 15
of each year, beginning January 1, 1998. Of the $195.0 million of net proceeds
from the sale of the Old Notes, the Company repaid approximately
 
                                       49
<PAGE>   51
 
$124.1 million of existing indebtedness (see Note 12 to the Condensed
Consolidated Financial Statements for use of proceeds and further information).
On September 10, 1997, the Company issued an additional $75.0 million of 8 3/4%
Senior Notes Due 2007. Under the provisions of the applicable indentures, the
Company may, under certain circumstances, be limited in its ability to make
restricted payments, as defined, which include dividends and certain purchases
and investments, incur additional indebtedness and engage in certain
transactions.
 
     At September 30, 1997, the Company had $195.5 million of non-recourse
project financing associated with the Greenleaf 1 and 2 Power Plants and the
Gilroy Power Plant. The annual maturities for all non-recourse project financing
were $4.7 million for the remainder of 1997, $9.7 million for 1998, $8.7 million
for 1999, $10.4 million for 2000, $10.6 million for 2001 and $151.5 million
thereafter.
 
     At September 30, 1997, the Company had $114.0 million of non-recourse
borrowings from The Bank of Nova Scotia in connection with the acquisition of
the notes receivable from the Texas City and Clear Lake Power Plants. Such debt
matures on June 22, 1998.
 
     The Company currently has a $50.0 million revolving credit agreement with a
consortium of commercial lending institutions led by The Bank of Nova Scotia,
with borrowings bearing interest at either LIBOR or at The Bank of Nova Scotia
base rate plus a mutually agreed margin. At September 30, 1997, the Company had
no borrowings outstanding and $7.6 million of letters of credit outstanding
under the revolving credit facility. The Bank of Nova Scotia credit facility
contains certain restrictions that significantly limit or prohibit, among other
things, the ability of the Company or its subsidiaries to incur indebtedness,
make payments of certain indebtedness, pay dividends, make investments, engage
in transactions with affiliates, create liens, sell assets and engage in mergers
and consolidations.
 
     The Company has a $1.2 million working capital line with a commercial
lender that may be used to fund short-term working capital commitments and
letters of credit. At September 30, 1997, the Company had no borrowings under
this working capital line and $74,000 of letters of credit outstanding.
Borrowings bear interest at prime plus 1%.
 
     Where appropriate, the Company intends to continue to seek the use of
non-recourse project financing for new projects. The debt agreements of the
Company's subsidiaries and other affiliates governing the non-recourse project
financing generally restrict their ability to pay dividends, make distributions
or otherwise transfer funds to the Company. The dividend restrictions in such
agreements generally require that, prior to the payment of dividends,
distributions or other transfers, the subsidiary or other affiliate must provide
for the payment of other obligations, including operating expenses, debt service
and reserves. However, the Company does not believe that such restrictions will
adversely affect its ability to meet its debt obligations.
 
     At September 30, 1997, the Company had commitments for capital expenditures
in 1997 totaling $36.8 million related to various projects at its power
generation facilities. The Company intends to fund capital expenditures for the
ongoing operation and development of the Company's power generation facilities
primarily through the operating cash flow of such facilities and non-recourse
financing. Capital expenditures for the nine months ended September 30, 1997 of
$91.2 million included $66.4 million for the construction of the Pasadena
Cogeneration Project, $9.3 million related to the geothermal facilities, $1.4
million related to merchant power plants and the remaining $14.1 million at the
gas-fired power plants.
 
     The Company expects to use approximately $102.5 million of its cash
resources to complete the GEI Transaction. See "Business -- Project Development
and Acquisitions -- Acquisitions -- Gas Energy Inc. Power Plants."
 
     The Company continues to pursue the acquisition and development of new
power generation projects. The Company expects to commit significant capital in
future years for the acquisition and development of these projects. The
Company's actual capital expenditures may vary significantly during any year.
 
     The Company believes that it will have sufficient liquidity from cash flow
from operations and borrowings available under the lines of credit and working
capital to satisfy all obligations under outstanding indebtedness,
 
                                       50
<PAGE>   52
 
to finance anticipated capital expenditures and to fund working capital
requirements through December 31, 1998.
 
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
 
     In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in non-condensed
general purpose financial statements. SFAS No. 130 requires classification of
other comprehensive income by their nature in a financial statement, and the
display of the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Company believes this pronouncement will
not have a material effect on its financial statements.
 
     In June 1997, the FASB also issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, which established standards for the
way public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services geographic areas and major customers. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997, although
earlier application is encouraged. The Company believes this pronouncement will
not have a material effect on its financial statements.
 
                                       51
<PAGE>   53
 
                                    BUSINESS
 
OVERVIEW
 
     Calpine is engaged in the acquisition, development, ownership and operation
of power generation facilities and the sale of electricity and steam in the
United States and selected international markets. The Company currently has
interests in 19 power generation facilities and steam fields having an aggregate
capacity of 2,264 megawatts. In addition, Calpine has a 240 megawatt gas-fired
power generation facility currently under construction in Pasadena, Texas and an
investment in a 169 megawatt gas-fired power generation facility currently under
construction in Dighton, Massachusetts. The Company also currently has a pending
acquisition, subject to the fulfillment of all required conditions, for the net
ownership interests of 120 megawatts of capacity in four gas-fired power
generation facilities located in and New York, with an aggregate capacity of 388
megawatts. Since its inception in 1984, Calpine has developed substantial
expertise in all aspects of electric power generation. The Company's vertical
integration has resulted in significant growth over the last five years as
Calpine has applied its extensive engineering, construction management,
operations, fuel management and financing capabilities to successfully implement
its acquisition and development program. Calpine's strategy is to capitalize on
opportunities in the power market through an ongoing program to acquire,
develop, own and operate electric power generation facilities, as well as
marketing power and energy services to utilities and other end users.
 
     Calpine's net interest in power generation facilities has increased from
281 megawatts in 1991 to 1,919 megawatts, including the facilities currently
under construction. Total assets have increased from $41.2 million as of
December 31, 1991 to $1.4 billion on a pro forma basis as of September 30, 1997.
Calpine's revenue on a pro forma basis has increased to $256.6 million for 1996,
representing a five-year compound annual growth rate of 46% since 1991. The
Company's EBITDA (as defined) on a pro forma basis for 1996 increased to $151.6
million from $4.9 million in 1991, representing a five-year compound annual
growth rate of 99%. See "Pro Forma Consolidated Financial Data."
 
THE MARKET
 
     The power generation industry represents the third largest industry in the
United States,with an estimated end user market of approximately $211.9 billion
of electricity sales and 3,100 gigawatt hours of production in 1996. In response
to increasing customer demand for access to low-cost electricity and enhanced
services, new regulatory initiatives are currently being adopted or considered
at both state and federal levels to increase competition in the domestic power
generation industry. To date, such initiatives are under consideration at the
federal level and in approximately forty-five states. In April 1996, FERC
adopted Order No. 888, opening wholesale power sales to competition and
providing for open and fair electric transmission services by public utilities.
In addition, the CPUC has issued an electric industry restructuring decision
which provides for commencement of deregulation and implementation of customer
choice of electricity supplier by January 1, 1998. Legislation implementing this
decision was adopted in September 1996. Calpine believes that industry trends
and such regulatory initiatives will lead to the transformation of the existing
market, which is largely characterized by electric utility monopolies having
old, inefficient high cost generating facilities, selling to a captive customer
base, to a more competitive market where end users may purchase electricity from
a variety of suppliers, including non-utility generators, power marketers,
public utilities and others. The Company believes that these market trends will
create substantial opportunities for companies such as Calpine that are low cost
power producers and have an integrated power services capability which enables
them to produce and sell energy to customers at competitive rates.
 
     The Company also believes that these market trends will result in the
disposition of power generation facilities by utilities, independent power
producers and industrial companies. Utilities such as PG&E and Southern
California Edison Company have announced their intentions to sell power
generation facilities totaling approximately 7,300 megawatts and 9,500
megawatts, respectively. New England Electric System is currently in the process
of selling its entire non-nuclear generation portfolio of approximately 4,000
megawatts. The independent power industry, which represents approximately 8% of
the installed capacity in the United States, or approximately 65,000 megawatts,
and has accounted for approximately 50% of all
 
                                       52
<PAGE>   54
 
additional capacity in the United States since 1991, is currently undergoing
significant consolidation. Many independent producers operating a limited number
of power plants are seeking to dispose of such plants in response to competitive
pressures, and industrial companies are selling their power plants to redeploy
capital in their core businesses. Over 200 independent power plant and portfolio
sale transactions have occurred in the past three years. The Company believes
that this consolidation will continue in the highly fragmented independent power
industry.
 
     The power generation industry outside the United States is approximately
three times larger than the domestic market, and the demand for electricity is
growing rapidly. It has been estimated in 1997 that in excess of 440 gigawatts
of new capacity will be required outside the United States over the ensuing
ten-year period. In order to satisfy this anticipated increase in demand, many
countries have adopted active government programs designed to encourage private
investment in power generation facilities. The Company believes that these
market trends will create significant opportunities to acquire and develop
generation facilities in such countries.
 
STRATEGY
 
     Calpine's objective is to become a leading power company by capitalizing on
emerging market opportunities in the domestic and international power markets.
The key elements of the Company's strategy are as follows:
 
     Expand and diversify its domestic portfolio of power projects. In pursuing
its growth strategy, the Company intends to focus on opportunities where it is
able to capitalize on its extensive management and technical expertise to
implement a fully integrated approach to the acquisition, development and
operation of power generation facilities. This approach includes design,
engineering, procurement, finance, construction, management, fuel and resource
acquisition, operations and power marketing, which Calpine believes provides it
with a competitive advantage. By pursuing this strategy, the Company has
significantly expanded and diversified its project portfolio. Since 1993, the
Company has completed transactions involving nine gas-fired cogeneration
facilities and two steam fields. As a result of these transactions, the Company
has more than quadrupled its aggregate power generation capacity and
substantially diversified its fuel mix since 1993.
 
     The Company is also pursuing the development of highly efficient, low-cost
power plants that seek to take advantage of inefficiencies in the electricity
market. The Company intends to sell all or a portion of the power generated by
such merchant plants into the competitive market, rather than exclusively
through long-term power sales agreements. As part of Calpine's initial effort to
develop merchant plants, the Company has commenced construction of a 240
megawatt gas-fired cogeneration project located in Pasadena, Texas (the
"Pasadena Cogeneration Project"). Approximately 90 megawatts of electricity
generated by the Pasadena Cogeneration Project will be sold to the Phillips
Houston Chemical Complex, with the remainder to be sold into the competitive
wholesale market through Calpine's power marketing activities. The Company
expects that this project will represent a prototype for future merchant plant
developments. The Company currently plans to develop additional low-cost,
gas-fired facilities in California, Texas, New England and other high priced
power markets. See "-- Project Development and Acquisitions -- Project
Development".
 
     Enhance the performance and efficiency of existing power projects. The
Company continually seeks to maximize the power generation potential of its
operating assets and minimize its operating and maintenance expenses and fuel
costs. To date, the Company's power generation facilities have operated at an
average availability of approximately 97%. The Company believes that achieving
and maintaining a low-cost of production will be increasingly important to
compete effectively in the power generation market.
 
     Continue to develop an integrated power marketing capability. The Company
is developing an integrated power marketing capability, conducted through its
wholly owned subsidiary, Calpine Power Services Company ("CPSC"). In 1995, CPSC
received approval from the Federal Energy Regulatory Commission ("FERC") to
conduct power marketing activities. The Company believes that a power marketing
capability complements its business strategy of providing low cost power
generation services. CPSC's power marketing activities will focus on the
development of long-term customer service relationships, supported primarily by
generating assets that are owned, operated or controlled by Calpine. CPSC will
aggregate the Company's own resources,
 
                                       53
<PAGE>   55
 
the resources of its customers, power pool resources, and market power supply to
provide the customized services demanded by its customers at a competitive
price.
 
     Continue to develop a diversified portfolio of fuel resources. The
Company's wholly owned subsidiary, Calpine Fuels, was formed in 1995 to manage
the fuel requirements of the Company's facilities. Calpine Fuels is aggregating
a diversified portfolio of third party gas supplies, pipeline capacity and gas
produced from Company-owned reserves to meet the Company's needs. The Company
anticipates that the direct management and optimization of its fuel resources
will enable the Company to minimize its fuel costs.
 
     Selectively expand into international markets. Internationally, the Company
intends to utilize its geothermal and gas-fired expertise in selected markets of
Southeast Asia and Latin America, where demand for power is rapidly growing and
private investment is encouraged. In November 1995, the Company made an
investment in the Cerro Prieto Steam Fields, located in Baja California, Mexico.
In March 1996, the Company entered into a joint venture agreement to pursue the
development of a geothermal resource in Indonesia with an estimated potential
capacity in excess of 500 megawatts. Calpine believes that its investments in
these projects will effectively position it for future expansion in Southeast
Asia and Latin America.
 
DESCRIPTION OF FACILITIES
 
     The Company currently has interests in 19 power generation facilities and
steam fields with a current aggregate capacity of approximately 2,264 megawatts,
consisting of eleven natural gas-fired cogeneration power plants with a total
capacity of 1,739 megawatts, three geothermal power generation facilities (which
include a steam field and a power plant) with a total capacity of 67 megawatts
and five geothermal steam fields that supply utility power plants with a total
current capacity of approximately 458 megawatts. In addition, Calpine has a 240
megawatt gas-fired power generation facility under construction in Pasadena,
Texas, and an investment in a 169 megawatt gas-fired power generation facility
currently under construction in Dighton, Massachusetts. In addition, the Company
currently has a pending acquisition for the net ownership interests of 120
megawatts of capacity in four gas-fired facilities with an aggregate capacity of
388 megawatts. Each of the power generation facilities currently in operation
produces electricity for sale to a utility or other third party end user.
Thermal energy produced by the gas-fired cogeneration facilities is sold to
governmental and industrial users, and steam produced by the geothermal steam
fields is sold to utility-owned power plants.
 
     The natural gas-fired and geothermal power generation projects in which the
Company has an interest produce electricity, thermal energy and steam that are
typically sold pursuant to long-term, take-and-pay power or steam sales
agreements generally having original terms of 20 or 30 years. Revenue from a
power sales agreement usually consists of two components: energy payments and
capacity payments. Energy payments are based on a power plant's net electrical
output where payment rates may be determined by a schedule of prices covering a
fixed number of years under the power sales agreement, after which payment rates
are usually indexed to the fuel costs of the contracting utility or to general
inflation indices. Capacity payments are based on a power plant's net electrical
output and/or its available capacity. Energy payments are made for each kilowatt
hour of energy delivered, while capacity payments, under certain circumstances,
are made whether or not any electricity is delivered. The Company is paid for
steam supplied by its steam fields on the basis of the amount of electrical
energy produced by, or steam delivered to, the contracting utility's power
plants.
 
     The Company currently provides operating and maintenance services for all
power generation facilities in which the Company has an interest, except for the
Thermal Power Company Steam Fields, the Cerro Prieto Steam Fields and the
Gordonsville and Auburndale Power Plants. Such services include the operation of
power plants, geothermal steam fields, wells and well pumps, gathering systems
and gas pipelines. The Company also supervises maintenance, materials purchasing
and inventory control, manages cash flow, trains staff and prepares operating
and maintenance manuals for each power generation facility. As a facility
develops an operating history, the Company analyzes its operation and may modify
or upgrade equipment or adjust operating procedures or maintenance measures to
enhance the facility's reliability or profitability. These services are
performed under the terms of an operating and maintenance agreement pursuant to
which the Company is generally reimbursed for certain costs, is paid an annual
operating fee and may also be paid an
 
                                       54
<PAGE>   56
 
incentive fee based on the performance of the facility. The fees payable to the
Company are generally subordinated to any lease payments or debt service
obligations of non-recourse debt for the project.
 
     In order to provide fuel for the gas-fired power generation projects in
which the Company has an interest, natural gas reserves are acquired or natural
gas is purchased from third parties under supply agreements. The Company
structures a gas-fired power facility's fuel supply agreement so that gas costs
have a direct relationship to the fuel component of revenue energy payments.
 
     Certain power generation facilities in which the Company has an interest
have been financed primarily with nonrecourse project financing that is
structured to be serviced out of the cash flows derived from the sale of
electricity, thermal energy and/or steam produced by such facilities and
provides that the obligations to pay interest and principal on the loans are
secured almost solely by the capital stock or partnership interests, physical
assets, contracts and/or cash flow attributable to the entities that own the
projects. The lenders under non-recourse project financing generally have no
recourse for repayment against the Company or any assets of the Company or any
other entity other than foreclosure on pledges of stock or partnership interests
and the assets attributable to the entities that own the facilities.
 
     Substantially all of the power generation facilities in which the Company
has an interest are located on sites which are leased on a long-term basis. The
Company currently holds interests in geothermal leaseholds in The Geysers that
produce steam for sale under steam sales agreements and for use in producing
electricity from its wholly owned geothermal power generation facilities. See
"-- Properties."
 
     The continued operation of power generation facilities and steam fields
involves many risks, including the breakdown or failure of power generation
equipment, transmission lines, pipelines or other equipment or processes and
performance below expected levels of output or efficiency. To date, the
Company's power generation facilities have operated at an average availability
of approximately 97%, and although from time to time the Company's power
generation facilities and steam fields have experienced certain equipment
breakdowns or failures, such breakdowns or failures have not had a material
adverse effect on the operation of such facilities or on the Company's results
of operations. Although the Company's facilities contain certain redundancies
and back-up mechanisms, there can be no assurance that any such breakdown or
failure would not prevent the affected facility or steam field from performing
under applicable power and/or steam sales agreements. In addition, although
insurance is maintained to protect against certain of these operating risks, the
proceeds of such insurance may not be adequate to cover lost revenue or
increased expenses, and, as a result, the entity owning such power generation
facility or steam field may be unable to service principal and interest payments
under its financing obligations and may operate at a loss. A default under such
a financing obligation could result in the Company losing its interest in such
power generation facility or steam field.
 
     Insurance coverage for each power generation facility includes commercial
general liability, workers' compensation, employer's liability and property
damage coverage which generally contains business interruption insurance
covering debt service and continuing expenses for a period ranging from 12 to 18
months.
 
     The Company believes that each of the currently operating power generation
facilities in which the Company has an interest is exempt from financial and
rate regulation as a public utility under federal and state laws. See
"-- Government Regulation."
 
                                       55
<PAGE>   57
 
                           [MAP OF THE UNITED STATES]
 
                                       56
<PAGE>   58
 
     Set forth below is certain information regarding the Company's power
generation facilities and steam fields.
 
                                  POWER PLANTS
 
<TABLE>
<CAPTION>
                                                                               COMMENCEMENT                   TERM OF
                     POWER        NAMEPLATE       CALPINE      CALPINE NET          OF                         POWER
                  GENERATION       CAPACITY       INTEREST       INTEREST       COMMERCIAL        POWER        SALES
  POWER PLANT     TECHNOLOGY    (MEGAWATTS)(1)   PERCENTAGE    (MEGAWATTS)      OPERATION      PURCHASERS    AGREEMENT
- ---------------  -------------  --------------   ----------   --------------   ------------   -------------  ---------
<S>              <C>            <C>              <C>          <C>              <C>            <C>            <C>
OPERATING
POWER PLANTS
Texas City.....    Gas-Fired          450             50%            225           1987           TUEC          1999
                                                                                                 UCC(2)         1999
Clear Lake.....    Gas-Fired          377             50%          188.5           1984            TNP          2004
                                                                                                  HL&P          2005
                                                                                                 HCCG(3)        2004
Gordonsville...    Gas-Fired          240             50%            120           1994         Virginia        2024
                                                                                                Electric
                                                                                                and Power
                                                                                                 Company
Auburndale.....    Gas-Fired          150             50%             75           1994       Florida Power     2013
                                                                                                 Company
Sumas(4).......    Gas-Fired          125             85%          106.3           1993        Puget Sound      2013
                                                                                                 Power &
                                                                                                  Light
King City......    Gas-Fired          120            100%            120           1989       Pacific Gas &     2019
                                                                                                Electric
Gilroy.........    Gas-Fired          120            100%            120           1988       Pacific Gas &     2018
                                                                                                Electric
Greenleaf 1....    Gas-Fired         49.5            100%           49.5           1989       Pacific Gas &     2019
                                                                                                Electric
Greenleaf 2....    Gas-Fired         49.5            100%           49.5           1989       Pacific Gas &     2019
                                                                                                Electric
Agnews.........    Gas-Fired           29             20%            5.8           1990       Pacific Gas &     2021
                                                                                                Electric
Watsonville....    Gas-Fired         28.5            100%           28.5           1990       Pacific Gas &     2009
                                                                                                Electric
West Ford         Geothermal           27            100%             27           1988       Pacific Gas &     2008
  Flat.........                                                                                 Electric
Bear Canyon....   Geothermal           20            100%             20           1988       Pacific Gas &     2008
                                                                                                Electric
Aidlin.........   Geothermal           20              5%              1           1989       Pacific Gas &     2009
                                                                                                Electric
PENDING
ACQUISITIONS
Lockport(5)....    Gas-Fired          184          11.36%           20.9           1992            GM           2007
                                                                                                NYSEG(6)
Kennedy
  International
  Airport(5)...    Gas-Fired          107             50%           53.5           1995          Kennedy        2015
                                                                                              International
                                                                                                 Airport
Grumman(5).....    Gas-Fired           57             45%           25.7           1989         NG Corp.        2004
                                                                                                LILCO(7)
Stony              Gas-Fired           40             50%             20           1995           SUNY          2015
  Brook(5).....                                                                                 LILCO(8)
PROJECTS UNDER
CONSTRUCTION
Pasadena(9)....    Gas-Fired          240            100%            240           1998         Phillips        2018
                                                                                                Petroleum
                                                                                               Company(9)
Dighton(10)....    Gas-Fired          169             50%           84.5           1999         Merchant         n/a
</TABLE>
 
                                       57
<PAGE>   59
 
                                  STEAM FIELDS
 
<TABLE>
<CAPTION>
                                                                               COMMENCEMENT
                                APPROXIMATE      CALPINE       CALPINE NET          OF
                                 CAPACITY        INTEREST        INTEREST       COMMERCIAL        UTILITY      ESTIMATED
        STEAM FIELD           (MEGAWATTS)(11)   PERCENTAGE     (MEGAWATTS)      OPERATION        PURCHASER     LIFE(12)
- ----------------------------  ---------------   ----------    --------------   ------------   ---------------  ---------
<S>                           <C>               <C>           <C>              <C>            <C>              <C>
Thermal Power Company.......        151            100%             151            1960        Pacific Gas &      2018
                                                                                                 Electric
PG&E Unit 13................         86            100%              86            1980        Pacific Gas &      2018
                                                                                                 Electric
PG&E Unit 16................         82            100%              82            1985        Pacific Gas &      2018
                                                                                                 Electric
SMUDGEO #1..................         59            100%              59            1983         Sacramento        2018
                                                                                                 Municipal
                                                                                                  Utility
                                                                                                 District
Cerro Prieto................         80            100%(13)          80            1973          Comision         2000(14)
                                                                                                Federal de
                                                                                               Electricidad
                                                                                                 Electric
</TABLE>
 
- ---------------
 
 (1) Nameplate capacity may not represent the actual output for a facility at
     any particular time.
 
 (2) The power purchasers for the Texas City Power Plant are the Texas Utilities
     Electric Company ("TUEC") and the Union Carbide Corporation ("UCC").
 
 (3) The power purchasers for the Clear Lake Power Plant are the Texas-New
     Mexico Power Company ("TNP"), the Houston Lighting and Power Company
     ("HL&P") and the Hoechst Celanese Chemical Group, Inc. ("HCCG").
 
 (4) See "-- Power Plants -- Sumas Power Plant" for a description of the
     Company's interest in the Sumas partnership and current sales of power by
     the Sumas Power Plant.
 
 (5) On August 25, 1997, the Company entered into an agreement to purchase the
     stock of companies which own interests in the Lockport Power Plant, the
     Kennedy International Airport Power Plant, the Grumman Power Plant and the
     Stony Brook Power Plant. The Company currently expects to complete these
     acquisitions during the fourth quarter of 1997, upon the fulfillment of all
     required conditions. See "-- Project Development and
     Acquisitions -- Acquisitions -- Gas Energy Inc. Power Plants."
 
 (6) Electricity generated by the Lockport Power Plant is sold to a General
     Motors ("GM") plant under a fifteen year agreement terminating in 2007, and
     excess energy is sold to New York State Electric and Gas ("NYSEG").
 
 (7) Electricity generated by the Grumman Power Plant is sold to the Northrup
     Grumman Corporation ("NG Corp.") under a fifteen year agreement terminating
     in 2004, and excess energy is sold to Long Island Lighting Corporation
     ("LILCO").
 
 (8) Electricity generated by the Stony Brook Power Plant is sold to the State
     University of New York at Stony Brook ("SUNY") under a twenty year contract
     terminating in 2015, and excess energy is sold to LILCO.
 
 (9) The Pasadena Cogeneration Project is currently under construction and is
     expected to commence commercial operation in July 1998. Approximately 90
     megawatts will be sold to Phillips Petroleum Company, with the remaining
     available electricity generated to be sold into the open market. See
     "--Project Development and Acquisitions -- Project Development -- Pasadena
     Cogeneration Project."
 
(10) The Dighton Gas-Fired Project is currently under construction and is
     expected to commence commercial operation in early 1999. The Company
     invested $16.0 million in the facility, which entitles the Company to
     receive a preferred payment stream at a rate of 12.07% per annum on its
     investment. Based on the Company's current estimates, this preferred
     payment stream will represent approximately 50% of project cash flow
     beginning at the commencement of commercial operation. A merchant plant is
     a power generation facility that sells all or a portion of its electricity
     into the competitive market rather than pursuant to long-term power sales
     agreements. See "-- Project Development and Acquisitions -- Project
     Development -- Dighton Gas-Fired Project."
 
                                       58
<PAGE>   60
 
(11) Capacity is expected to gradually diminish as the production of the related
     steam fields declines. See "-- Steam Fields."
 
(12) Other than the Cerro Prieto Steam Field, the steam sales agreements remain
     in effect so long as steam is produced in commercial quantities. There can
     be no assurance that the estimated life shown accurately predicts actual
     productive capacity of the steam fields. See "-- Steam Fields."
 
(13) See "-- Steam Fields -- Cerro Prieto Steam Fields" for a description of the
     Company's interest in and current sales of steam by the Cerro Prieto Steam
     Field.
 
(14) Represents the actual termination of the steam sales agreement. See
     "-- Steam Fields -- Cerro Prieto Steam Fields."
 
POWER PLANTS
 
     Texas City and Clear Lake Power Plants
 
     On June 23, 1997, Calpine completed the acquisition of a 50% equity
interest in the Texas City cogeneration facility (the "Texas City Power Plant")
and the Clear Lake cogeneration facility (the "Clear Lake Power Plant") for a
total purchase price of $35.4 million. The Company acquired its 50% interest in
these plants through the acquisition of 50% of the capital stock of Enron
Dominion Cogen Corp., subsequently renamed Texas Cogeneration Company ("TCC")
from Enron Power Corp., which is a wholly-owned subsidiary of Enron Corp.
("Enron"). The other 50% shareholder in TCC is Dominion Cogen, Inc., a wholly
owned subsidiary of Dominion Energy, Inc. which in turn is a wholly owned
subsidiary of Dominion Resources, Inc., which is the parent company of Virginia
Electric and Power Company. In addition to the purchase of 50% of the stock of
TCC, Calpine, through its wholly owned subsidiary, Calpine Finance Company
("CFC"), purchased from the existing lenders the $155.6 million of outstanding
non-recourse project debt incurred by TCC in connection with the Texas City
Power Plant (approximately $53.0 million) and the Clear Lake Power Plant
(approximately $102.6 million). The acquisition of the capital stock of TCC and
the purchase of the outstanding debt from the existing lenders were financed
with approximately $125.0 million of non-recourse debt provided by The Bank of
Nova Scotia and $70.0 million of equity provided by the Company. The $125.0
million non-recourse debt matures on June 22, 1998 and bears interest at LIBOR
plus an agreed margin, currently 7.0% per annum. The Company expects to repay
the $125.0 million non-recourse debt prior to maturity with the proceeds of a
planned refinancing of the $155.6 million non-recourse project debt.
 
     Texas City Power Plant. The Texas City Power Plant is a 450 megawatt
natural gas-fired combined cycle cogeneration facility located in Texas City,
Texas. The Texas City Power Plant includes three Westinghouse W-501D5 combustion
turbines, three Econotherm heat recovery steam generators and one Hitachi steam
turbine. The Texas City Power Plant commenced commercial operation in June 1987.
 
     Electricity generated by the Texas City Power Plant is sold under two
separate long-term agreements to (i) TUEC under an original 12-year power sales
agreement terminating on June 30, 1999 and (ii) UCC under an original 12-year
power sales agreement terminating on June 30, 1999. Each power sales agreement
contains payment provisions for capacity and energy. The TUEC power sales
agreement provides for a firm capacity payment for 410 megawatts. The UCC power
sales agreement provides for a firm capacity payment for 20 megawatts.
 
     Natural gas requirements for the Texas City Power Plant are allocated
between UCC, DEI Texas, Inc. ("DEI"), an affiliate of Dominion Cogen Inc., and
Enron Capital & Trade Resources Corporation ("ECT") pursuant to a contractual
arrangement. UCC and DEI currently provide approximately 25% and 56%,
respectively, of the fuel requirements of the Texas City Power Plant. The three
fuel contracts are effective through June 30, 1999. Under the fuel contracts,
approximately 19% of the total fuel requirements of the Texas City Power Plant
is supplied at spot market prices. The remainder is purchased at fixed rates set
forth in the contracts.
 
                                       59
<PAGE>   61
 
     The Texas City Power Plant is operated and maintained by the Company under
a one-year operating and maintenance agreement with automatic renewal
provisions, pursuant to which the Company is reimbursed for certain costs and is
entitled to a fixed annual fee and an incentive payment based on project
performance.
 
     The Texas City Power Plant is located on approximately 9 acres of land
located in Texas City, Texas.
 
     During 1996, the Texas City Power Plant generated approximately
2,924,719,000 kilowatt hours of electric energy for sale to TUEC and UCC and
approximately $203.8 million of revenue.
 
     Clear Lake Power Plant. The Clear Lake Power Plant is a 377 megawatt
natural gas/hydrogen-fired combined cycle cogeneration facility located in
Pasadena, Texas. The Clear Lake Power Plant includes three Westinghouse W-501D5
combustion turbines, three Vogt heat recovery steam generators and two
Westinghouse steam turbines. The Clear Lake Power Plant commenced commercial
operation in December 1984.
 
     Electricity generated by the Clear Lake Power Plant is sold under three
separate long-term agreements to (i) TNP under an original 20-year power sales
agreement terminating in 2004, (ii) HL&P under an original 10-year power sales
agreement terminating in 2005, and (iii) HCCG under an original 10-year power
sales agreement terminating in 2004. Each power sales agreement contains payment
provisions for capacity and energy payments.
 
     The natural gas for the Clear Lake Power Plant is purchased primarily from
TCC, which receives its fuel from ECT. In addition, the facility burns hydrogen
provided by HCCG, amounting to about 5% of the Clear Lake Power Plant's total
fuel requirements.
 
     The Clear Lake Power Plant is operated by the Company under a one-year
operating and maintenance agreement with automatic renewal provisions, pursuant
to which the Company is reimbursed for certain costs and is entitled to a fixed
annual fee and an incentive payment based on project performance.
 
     The Clear Lake Power Plant is located on approximately 21 acres of land
located in Pasadena, Texas.
 
     During 1996, the Clear Lake Power Plant generated approximately
2,999,973,000 kilowatt hours of electric energy for sale to TNP, HL&P and HCCG
and approximately $96.2 million of revenue.
 
     Gordonsville and Auburndale Power Plants
 
     On October 9, 1997 Calpine completed the acquisition of 50% interests in
the Gordonsville cogeneration facility (the "Gordonsville Power Plant") and the
Auburndale cogeneration facility (the "Auburndale Power Plant"). The Company
acquired its interest in the Gordonsville Power Plant through the acquisition of
a 50% general and limited partnership interest in Gordonsville Energy, L.P. from
United Utilities plc for approximately $14.9 million. The other 50% general and
limited partnership interest in Gordonsville Energy, L.P. is owned by affiliates
of Edison Mission Energy, a subsidiary of Edison International Company.
Construction of the Gordonsville Power Plant was financed with non-recourse
project financing totalling $223.0 million maturing on June 1, 2009. The Company
acquired its interest in the Auburndale Power Plant through the acquisition of a
50% general and limited partnership in Auburndale Power Partners, L.P. from
United Utilities plc for approximately $27.7 million. The other 50% general and
limited partnership interest in Auburndale Power Partners, L.P. is owned by
affiliates of Edison Mission Energy, a subsidiary of Edison International
Company. The construction of the Auburndale Power Plant was financed with a term
loan in the amount of $126.0 million and a final maturity date of December 31,
2012.
 
     Gordonsville Power Plant. The Gordonsville Power Plant is a 240 megawatt
natural gas-fired combined cycle cogeneration facility located near
Gordonsville, Virginia. The Gordonsville Power Plant consists of two General
Electric Stag 107EA combined cycle combustion turbines, one steam turbine, one
heat recovery steam generator and an air-cooled condenser. The Gordonsville
Power Plant commenced commercial operation in 1994.
 
     Electricity generated by the Gordonsville Power Plant is sold to Virginia
Electric Power Company ("Virginia Power") under two 30-year power sales
agreements terminating on June 1, 2024, each of which include payment provisions
for capacity and energy. The power sales agreements provide for firm capacity
 
                                       60
<PAGE>   62
 
payments at a price of $128.00 per kilowatt year through 2008 and at a price of
$102.41 for years 2009 through 2024. For the term of the power sales agreements,
Gordonsville is paid for firm capacity up to 217.4 megawatts in the summer and
up to 287.8 megawatts in the winter. The power sales agreements contain dispatch
provisions which allow Virginia Power to control the output of the units.
 
     Gordonsville has two separate natural gas supply and transportation
agreements. During the summer period, gas is supplied by Union Pacific Fuels
Inc. under a 15-year agreement expiring June 2009. During the winter period, gas
is supplied by Tejas Power under a 15-year agreement expiring June 2009.
 
     The Gordonsville Power Plant is operated by Edison Mission Operations &
Maintenance Inc. ("EMOM") under an agreement which expires on December 31, 2013.
EMOM is paid on a cost-plus basis for all direct labor plus reimbursement of
certain costs, an annual operating fee and an incentive fee based on
performance.
 
     The Gordonsville Power Plant is located on approximately 16.7 acres near
the town of Gordonsville, Virginia. The site is owned by and is leased from the
town of Gordonsville under a lease agreement which expires in January 2023.
 
     During 1996, the Gordonsville Power Plant generated approximately
333,900,000 kilowatt hours of electrical energy and approximately $39.6 million
of revenue.
 
     Auburndale Power Plant. The Auburndale Power Plant is a 150 megawatt
natural gas-fired combined cycle cogeneration facility located near the city of
Auburndale, Florida. The Auburndale Power Plant consists of a single
Westinghouse W501DS combustion turbine generator, a Mitsubishi steam turbine and
a Nooter Erickson heat recovery steam generator. The project uses an on-site
zero discharge wastewater system. The Auburndale Power Plant commenced
commercial operation in July 1994.
 
     Electricity generated by the Auburndale Power Plant is sold under various
power sales agreements to Florida Power Corporation ("FPC"), Enron Power
Marketing and Sonat Power Marketing. Auburndale sells 131.18 megawatts of
capacity and energy to FPC under three power sales agreements, each terminating
at the end of 2013. The power sales agreements provide for capacity payments at
a price of $176.69 per kilowatt year (1997 dollars) on 114 megawatts escalating
at 5.1% per year. On 17 megawatts, capacity payments are based on $217.62 per
kilowatt year (1997 dollars) escalating at 6.33% per year.
 
     The Auburndale Power Plant sells steam under two steam purchase and sale
agreements. One agreement is with Citrale Citrus Juices, USA, an affiliate of
Sucocitro Cutrale LTDA, for a term of 20 years expiring on July 1, 2014. The
second agreement is with Todhunter International, Inc., doing business as
Florida Distillers Company, for a term of 15 years expiring on July 1, 2009.
 
     The Auburndale Power Plant has an 18-year fuel supply contract with Citrus
Trading Corporation, a joint venture between Enron Corporation and Sonat Inc.,
for 25,100 mmbtu/day of natural gas. The fuel supply contract expires in June
2014.
 
     The Auburndale Power Plant is operated by EMOM. EMOM is paid on a cost-plus
basis for all direct labor plus reimbursement of certain costs, an annual
operating fee and an incentive-fee based on performance.
 
     The Auburndale Power Plant is located on a ten acre site near the city of
Auburndale, Florida. The site is owned by Auburndale Power Partners, L.P.
 
     During 1996, the Auburndale Power Plant generated approximately
1,035,500,000 kilowatt hours of electrical energy and approximately $46.6
million in revenue.
 
     Sumas Power Plant
 
     The Sumas cogeneration facility (the "Sumas Power Plant") is a 125 megawatt
natural gas-fired, combined cycle cogeneration facility located in Sumas,
Washington, near the Canadian border. In 1991, the Company and Sumas Energy,
Inc. ("SEI") formed Sumas Cogeneration Company, L.P. ("Sumas") for the purpose
of developing, constructing, owning and operating the Sumas Power Plant. The
Company is the sole limited partner in Sumas and SEI is the general partner. On
September 30, 1997, the partnership agreement
 
                                       61
<PAGE>   63
 
governing Sumas Cogeneration Company, L.P. was amended changing the distribution
percentages to the partners. As provided by the terms of the amendment, the
Company increased its percentage share of the project's cash flow from 50% to
70% through June 30, 2001. Thereafter, the Company will receive 50% of the
project's cash flow until a 24.5% pre-tax rate of return on its original
investment is achieved, at which time the Company's equity interest in the
partnership will be reduced to 0.1%. Further, the Company receives an additional
15% of the cash flow of the Sumas Power Plant to repay principal and interest on
a $10.0 million loan at an interest rate of 15.0% per annum to the sole
shareholder of SEI. The Sumas Power Plant commenced commercial operation in
April 1993.
 
     The Company managed the engineering, procurement and construction of the
power plant and related facilities of the Sumas Power Plant, including the gas
pipeline. The Sumas Power Plant was constructed by a Washington joint venture
formed by Industrial Power Corporation and Haskell Corporation. The Sumas Power
Plant is comprised of an MS 7001EA combined cycle gas turbine manufactured by
General Electric Company ("General Electric"), a Vogt heat recovery steam
generator, a General Electric steam turbine and a 3.5 mile gas pipeline. Since
start-up in April 1993, the Sumas Power Plant has operated at an average
availability of approximately 97.4%.
 
     The Sumas Power Plant's $135.0 million construction and gas reserves
acquisition cost was financed through $120.0 million of construction and term
loan financing provided to Sumas and ENCO Gas, Ltd. ("ENCO"), a wholly owned
Canadian subsidiary of Sumas, by The Prudential Insurance Company of America
("Prudential") and Credit Suisse First Boston. The credit facilities originally
included term loans of $70.0 million at a combined fixed interest rate of 10.28%
per annum and variable rate loans of $50.0 million currently based on LIBOR,
which are amortized over a 15-year period ending in 2008.
 
     Electrical energy generated by the Sumas Power Plant is sold to Puget Sound
Power & Light Company ("Puget") under the terms of a 20-year power sales
agreement terminating in 2013. Under the power sales agreement, Puget has agreed
to purchase an annual average of 123 megawatts of electrical energy.
 
     The power sales agreement provides for the sale of electrical energy at a
total price equal to the sum of (i) a fixed price component and (ii) a variable
price component multiplied by an escalation factor for the year in which the
energy is delivered. The schedule of annual fixed average energy prices
(expressed in cents per kilowatt hour) in effect through 2013 under the Sumas
power sales agreement is as follows:
 
<TABLE>
<CAPTION>
                  FIXED                        FIXED                        FIXED
                  ENERGY                       ENERGY                       ENERGY
      YEAR        PRICE            YEAR        PRICE            YEAR        PRICE
- ----------------  ------     ----------------  ------     ----------------  ------
<S>               <C>        <C>               <C>        <C>               <C>
1997............  3.38c      2003............  6.22c      2009............  5.40c
1998............  3.64c      2004............  6.33c      2010............  5.49c
1999............  3.98c      2005............  6.45c      2011............  5.58c
2000............  4.23c      2006............  6.57c      2012............  5.58c
2001............  6.23c      2007............  5.23c      2013............  5.58c
2002............  6.11c      2008............  5.31c
</TABLE>
 
     The variable price component is set according to a scheduled rate set forth
in the agreement, which in 1996 was 0.99c per kilowatt hour, and escalates
annually by a factor equal to the U.S. Gross National Product Implicit Price
Deflator. For 1996, the average price paid by Puget under the power sales
agreement was 4.166c per kilowatt hour. Pursuant to the power sales agreement,
Puget may displace the production of the Sumas Power Plant when the cost of
Puget's replacement power is less than the Sumas Power Plant's incremental power
generation costs. Thirty-five percent of the savings to Puget under this
displacement provision are shared with the Sumas Power Plant. In 1996, the Sumas
Power Plant's net profit increased by $501,000 as a result of the displacement
provision.
 
     In addition to the sale of electricity to Puget, pursuant to a long-term
steam supply and dry kiln lease agreement, the Sumas Power Plant produces and
sells approximately 23,000 pounds per hour of low pressure steam to an adjacent
lumber-drying facility owned by Sumas, which has been leased to and is operated
by
 
                                       62
<PAGE>   64
 
Socco, Inc. ("Socco"), an SEI affiliate. It is necessary to continue to operate
the dry kiln facility in order to maintain the Sumas Power Plant's QF status.
See "Government Regulation."
 
     In connection with the development of the Sumas Power Plant, Canadian
natural gas reserves located primarily in northeastern British Columbia, Canada
were acquired by Sumas through its wholly owned subsidiary, ENCO. The gas
reserves owned by ENCO totaled 130 billion cubic feet as of January 1, 1997.
Firm transportation is contracted for on the Westcoast Energy Inc. pipeline. Gas
is delivered to Huntington, British Columbia, where it is transferred into
Sumas' own pipeline for transportation to the plant. ENCO is currently supplying
approximately 12,900 million British thermal units per day ("mmbtu/day") to the
Sumas Power Plant. The remaining 12,100 mmbtu/day requirement is being supplied
under a one year contract with West Coast Gas Services, Inc.
 
     The Company operates and maintains the Sumas Power Plant under an operating
and maintenance agreement pursuant to which the Company is reimbursed for
certain costs and is entitled to a fixed annual fee and an incentive payment
based on project performance. This agreement has an initial term of ten years
expiring in April 2003 and provides for extensions.
 
     The Sumas Power Plant is located on 13.5 acres located in Sumas,
Washington, which are leased from the Port of Bellingham under the terms of a
23.5-year lease expiring in 2014, subject to renewal. The lease provides for
rental payments according to a fixed schedule.
 
     During 1996, the Sumas Power Plant generated approximately 1,032,000,000
kilowatt hours of electrical energy and approximately $44.0 million of total
revenue. In 1996, the Company recognized income of approximately $6.4 million in
accordance with the terms of the Sumas partnership agreement, and recorded
revenue of $2.0 million for services performed under the operating and
maintenance agreement.
 
     King City Power Plant
 
     The King City cogeneration power plant (the "King City Power Plant") is a
120 megawatt natural gas-fired, combined cycle facility located in King City,
California. In April 1996, the Company entered into a long-term operating lease
for this facility with BAF Energy ("BAF"). Under the terms of the operating
lease, the Company makes semi-annual lease payments to BAF, a portion of which
is supported by a collateral fund owned by the Company. The collateral consists
of a portfolio of investment grade and U.S. Treasury Securities that mature
serially in amounts equal to a portion of the lease payments.
 
     The power plant consists of a General Electric Frame 7 Model EA combustion
turbine generator, a Nooter/Eriksen heat recovery steam generator, an ASEA Brown
Boveri ("ABB") steam turbine generator and two Nebraska Boiler auxiliary
boilers. The King City Power Plant commenced commercial operation in 1989 and
has operated at an average availability of approximately 92.3%.
 
     Electricity generated by the King City Power Plant is sold to Pacific Gas
and Electric Company ("PG&E") under a 30-year power sales agreement terminating
in 2019. The power sales agreement contains payment provisions for capacity and
energy. The power sales agreement provides for a firm capacity payment of $184
per kilowatt year for 111 megawatts for the term of the agreement so long as the
King City Power Plant delivers 80% of the firm capacity during designated
periods of the year. Additional capacity payments are received for as-delivered
capacity in excess of 111 megawatts delivered during peak and partial peak
hours. As-delivered capacity prices are $188 per kilowatt year for 1997 and
1998. Thereafter, the payment for as-delivered capacity will be the greater of
$188 per kilowatt year or PG&E's then current as-delivered capacity rate.
Through 1998, payments for electrical energy produced are based on 100% of
PG&E's avoided cost of energy for the period of January 1 through April 30, and
80% at avoided cost and 20% at fixed prices for the period of May 1 through
December 31. The fixed average energy price in effect for 1997 and 1998 under
the King City power sales agreement is 13.14c per kilowatt hour. Thereafter,
PG&E is required to pay for electrical energy actually delivered at prices equal
to PG&E's then avoided cost of energy (as determined by the CPUC). PG&E's
avoided cost of energy varies from month to month and has ranged from an annual
average of 1.84c to 2.96c per kilowatt hour since 1992. During 1996, PG&E's
avoided cost of energy averaged approximately 2.26c per kilowatt hour.
 
                                       63
<PAGE>   65
 
     Through April 28, 1999, the power sales agreement allows for dispatchable
operation which gives PG&E the right to curtail the number of hours per year
that the King City Power Plant operates. PG&E has an option to extend its
curtailment rights for two additional one-year terms. If PG&E exercises the
curtailment extension option, it will be required to pay an additional $0.7c per
kilowatt hour for all energy delivered from the King City Power Plant.
 
     In addition to the sale of electricity to PG&E, the King City Power Plant
produces and sells thermal energy to a thermal host, Basic Vegetable Products,
Inc. ("BVP"), an affiliate of BAF, under a long-term contract coterminous with
the power sales agreement. It is necessary to continue to operate the host
facility in order to maintain the King City Power Plant's QF status. See
"Government Regulation." The BVP facility was built in 1957 and processes
between 30% and 40% of the dehydrated onion and garlic production in the United
States.
 
     Natural gas for the King City Power Plant is supplied pursuant to an Agency
Agreement with Calpine Fuels Corporation ("Calpine Fuels") expiring on the
earlier of the implementation of the gas transportation restructuring in
California (the "Gas Accord") or April 1, 1998. Natural gas is transported under
a firm transportation agreement, expiring on the earlier of the Gas Accord or
June 30, 1999, via a 38 mile pipeline owned and operated by PG&E.
 
     Fee title to the premises is owned by Basic American, Inc., which has
leased the premises to an affiliate of BAF for a term equivalent to the term of
the power sales agreement for the King City Power Plant. The Company is
subleasing the premises, together with certain easements, from such affiliate of
BAF pursuant to a ground sublease for approximately 15 acres.
 
     During 1996, the King City Power Plant generated approximately 411,977,000
kilowatt hours of electrical energy and approximately $41.5 million of total
revenue.
 
     Gilroy Power Plant
 
     On August 29, 1996, the Company acquired the Gilroy cogeneration facility
(the "Gilroy Power Plant"), a 120 megawatt gas-fired facility located in Gilroy,
California. The Company purchased the Gilroy Power Plant for $125.0 million plus
certain contingent consideration, which the Company currently estimates will be
approximately $24.1 million.
 
     The acquisition of the Gilroy Power Plant was originally financed utilizing
a non-recourse project loan in the aggregate amount of $116.0 million. Such loan
consisted of a 15-year tranche in the amount of $81.0 million and an 18-year
tranche in the amount of $35.0 million and bears interest at fixed and floating
rates. See Note 18 of the Notes to Consolidated Financial Statements.
 
     The power plant consists of a General Electric Frame 7 Model EA combustion
turbine generator, an AEG-KANIS (ABB) steam turbine, a Henry Vogt heat recovery
steam generator, two auxiliary boilers and an inlet chiller using a Henry Vogt
ice machine. The Gilroy Power Plant commenced commercial operation in March
1988. Since its acquisition by the Company in August 1996, the power plant has
operated at an average availability of 98.3%.
 
     Electricity generated by the Gilroy Power Plant is sold to PG&E under an
original 30-year power sales agreement terminating in 2018. The power sales
agreement contains payment provisions for capacity and energy. The power sales
agreement provides for a firm capacity payment of $172 per kilowatt year for 120
megawatts for the term of the agreement so long as the Gilroy Power Plant
delivers 80% of the firm capacity during designated periods of the year.
Additional capacity payments are received for as-delivered capacity in excess of
120 megawatts delivered at $188 per kilowatt year for 1997. Thereafter, the
payment for as-delivered capacity will be the greater of $188 per kilowatt year
or PG&E's then current as-delivered capacity rate. In addition, through 1998 the
power sales agreement provides for payments for electrical energy actually
delivered during the period of dispatchable operation at a price based on the
interim short-run avoided cost of energy ("Interim SRAC") less $.00132 per
kilowatt hour. Thereafter, during the period of baseload operation, PG&E is
required to pay for electrical energy actually delivered at prices equal to
Interim SRAC. PG&E's avoided cost of energy has varied from month to month and
has ranged from an annual average of
 
                                       64
<PAGE>   66
 
1.84c to 2.96c per kilowatt hour since 1992. During 1996, PG&E's avoided cost of
energy averaged approximately 2.26c per kilowatt hour.
 
     Through December 31, 1998, the power sales agreement allows for
dispatchable operation which gives PG&E the right to curtail the number of hours
per year that the Gilroy Power Plant operates.
 
     In addition to the sale of electricity to PG&E, the Gilroy Power Plant
produces and sells thermal energy to a thermal host, Gilroy Foods, Inc. ("Gilroy
Foods"), under a long-term contract that is coterminous with the power sales
agreement. Gilroy Foods is a recognized leader in the production of dehydrated
onions and garlic. Simultaneously with the acquisition by the Company of the
Gilroy Power Plant, Gilroy Foods was acquired by ConAgra, Inc., an international
food company with 1995 revenues of approximately $24.1 billion. It is necessary
to continue to operate the host facility in order to maintain the Gilroy Power
Plant's QF status. See "Government Regulation."
 
     Natural gas for the Gilroy Power Plant is supplied pursuant to a
month-to-month contract with Amoco Energy Trading Corporation ("Amoco").
Effective December 1, 1997, natural gas will be supplied pursuant to an Agency
Agreement with Calpine Fuels Corporation, expiring on the earlier of the
implementation of the Gas Accord or April 1, 1998. Natural gas is transported
under a firm transportation agreement with PG&E, expiring on the earlier of the
Gas Accord or June 30, 1999.
 
     The Gilroy Power Plant is located on approximately five acres of land which
are leased to the Company by Gilroy Foods. The lease term runs concurrent with
the term of the power sales agreement.
 
     From August 29, 1996 through December 31, 1996, the Gilroy Power Plant
generated approximately 231,365,000 kilowatt hours of electrical energy for sale
to PG&E and approximately $14.7 million in revenue.
 
     Greenleaf 1 and 2 Power Plants
 
     On April 21, 1995, Calpine completed the acquisition of the Greenleaf 1 and
2 cogeneration facilities (the "Greenleaf 1 and 2 Power Plants") for an adjusted
purchase price of $81.5 million.
 
     On June 30, 1995, Calpine refinanced the existing debt on the Greenleaf 1
and 2 Power Plants by borrowing $76.0 million from Sumitomo Bank. The
non-recourse project financing with Sumitomo Bank is divided into two tranches,
a $60.0 million fixed rate loan facility which bears interest on the unpaid
principal at a fixed rate of 7.415% per annum, with amortization of principal
based on a fixed schedule through June 30, 2005, and a $16.0 million floating
rate loan facility which bears interest based on LIBOR plus an applicable
margin, with the amortization of principal based on a fixed schedule through
December 31, 2010.
 
     The Company is currently negotiating to enter into a sale leaseback of the
Greenleaf 1 and 2 Power Plants. Pursuant to the sale leaseback, the Company
anticipates that the Greenleaf 1 and 2 Power Plants would be sold to a equipment
leasing finance company and the Company would enter into a 15-year operating
lease for the plants. The Company anticipates completing the sale leaseback in
the fourth quarter of 1997.
 
     The Greenleaf 1 and 2 Power Plants have a combined natural gas requirement
of approximately 22,000 mmbtu/day. Natural gas for the Greenleaf 1 and 2 Power
Plants is supplied pursuant to a Gas Sales Agreement dated April 12, 1995,
expiring on the termination of the power sales agreements for the Greenleaf 1
and 2 Power Plants. Supplemental gas is supplied pursuant to an Agency Agreement
with Calpine Fuels Corporation expiring on the earlier of the implementation of
the Gas Accord or April 1, 1998. Natural gas is transported under an
interruptible transportation agreement with PG&E, expiring on the earlier of the
Gas Accord or June 30, 1999.
 
     Greenleaf 1 Power Plant. The Greenleaf 1 cogeneration facility (the
"Greenleaf 1 Power Plant") is a 49.5 megawatt natural gas-fired cogeneration
facility located near Yuba City, California. The Greenleaf 1 Power Plant
includes an LM5000 gas turbine manufactured by General Electric, a Vogt heat
recovery steam generator and a condensing General Electric steam turbine. The
Greenleaf 1 Power Plant commenced commercial operation in March 1989. Since its
acquisition by the Company in April 1995, the power plant has operated at an
average availability of approximately 93.9%.
 
                                       65
<PAGE>   67
 
     Electricity generated by the Greenleaf 1 Power Plant is sold to PG&E under
a 30-year power sales agreement terminating in 2019 which contains payment
provisions for capacity and energy. The power sales agreement provides for a
firm capacity payment of $184 per kilowatt year for 49.2 megawatts for the term
of the agreement, so long as the Greenleaf 1 Power Plant delivers 80% of its
firm capacity during certain designated periods of the year, and an as-delivered
capacity payment for an additional 0.3 megawatts of capacity at $188 per
kilowatt year for 1997. Thereafter, the payment for as-delivered capacity will
be the greater of $188 per kilowatt year or PG&E's then current as-delivered
capacity rate. In addition, the power sales agreement provides for payments for
up to 49.5 megawatts of electrical energy actually delivered at a price equal to
PG&E's avoided cost of energy (as determined by the CPUC). PG&E's avoided cost
of energy varies from month to month and has ranged from an annual average of
1.84c to 2.96c per kilowatt hour since 1992. During 1996, PG&E's avoided cost of
energy averaged approximately 2.26c per kilowatt hour.
 
     In accordance with the power sales agreement, PG&E is entitled to curtail
the Greenleaf 1 Power Plant during hydro-spill periods, or during periods of
negative avoided costs. During 1996, the Greenleaf 1 Power Plant did not
experience curtailment. PG&E may also interrupt or reduce deliveries if
necessary to repair its system or because of system emergencies, forced outages,
force majeure and compliance with prudent electrical practices.
 
     In addition to the sale of electricity to PG&E, the Greenleaf 1 Power Plant
sells thermal energy, in the form of hot exhaust to dry wood waste, to a thermal
host which is owned and operated by the Company. It is necessary to continue to
operate the host facility in order to maintain the Greenleaf 1 Power Plant's QF
status. See "Government Regulation."
 
     The Greenleaf 1 Power Plant is located on 77 acres owned by the Company
near Yuba City, California.
 
     For 1996, the Greenleaf 1 Power Plant generated approximately 354,182,000
kilowatt hours of electrical energy for sale to PG&E and approximately $18.1
million in revenue.
 
     Greenleaf 2 Power Plant. The Greenleaf 2 cogeneration facility (the
"Greenleaf 2 Power Plant") is a 49.5 megawatt natural gas-fired cogeneration
facility located near Yuba City, California. The Greenleaf 2 Power Plant
includes a STIG LM5000 gas turbine manufactured by General Electric and a Deltak
heat recovery steam generator. The Greenleaf 2 Power Plant commenced commercial
operation in December 1989. Since its acquisition by the Company in April 1995,
the power plant has operated at an average availability of approximately 95.9%.
 
     Electricity generated by the Greenleaf 2 Power Plant is sold to PG&E under
a 30-year power sales agreement terminating in 2019 which includes payment
provisions for capacity and energy. The power sales agreement provides for a
firm capacity payment of $184 per kilowatt year for 49.2 megawatts for the term
of the agreement, so long as the Greenleaf 2 Power Plant delivers 80% of its
firm capacity during certain designated periods of the year, and an as-delivered
capacity payment for an additional 0.3 megawatts of capacity at $188 per
kilowatt year through 1997. Thereafter, the payment for as-delivered capacity
will be the greater of $188 per kilowatt year or PG&E's then current
as-delivered capacity rate. In addition, the power sales agreement provides for
payments for up to 49.5 megawatts of electrical energy actually delivered at a
price equal to PG&E's avoided cost of energy (as determined by the CPUC). PG&E's
avoided cost of energy varies from month to month and has ranged from an annual
average of 1.84c to 2.96c per kilowatt hour since 1992. During 1996, PG&E's
avoided cost of energy averaged approximately 2.26c per kilowatt hour.
 
     In accordance with the power sales agreement, PG&E is entitled to curtail
the Greenleaf 2 Power Plant during hydro-spill periods or during any period of
negative avoided costs. During 1996, the Greenleaf 2 Power Plant did not
experience curtailment. PG&E may also interrupt or reduce deliveries if
necessary to repair its system or because of system emergencies, forced outages,
force majeure and compliance with prudent electrical practices.
 
     In addition to the sale of electricity to PG&E, the Greenleaf 2 Power Plant
sells thermal energy to Sunsweet Growers, Inc. ("Sunsweet") pursuant to a
30-year contract. Sunsweet is the largest producer of dried fruit in the United
States. It is necessary to continue to operate the host facility in order to
maintain the status of the Greenleaf 2 Power Plant as a QF. See "Government
Regulation."
 
                                       66
<PAGE>   68
 
     The Greenleaf 2 Power Plant is located on 2.5 acres of land under a lease
from Sunsweet, which runs concurrent with the power sales agreement.
 
     For 1996, the Greenleaf 2 Power Plant generated approximately 399,707,000
kilowatt hours of electrical energy for sale to PG&E and approximately $19.3
million in revenue.
 
     Agnews Power Plant
 
     The Agnews cogeneration facility (the "Agnews Power Plant") is a 29
megawatt natural gas-fired, combined-cycle cogeneration facility located on the
East Campus of the state-owned Agnews Developmental Center in San Jose,
California. Calpine holds a 20% ownership interest in GATX Calpine-Agnews, Inc.,
which is the sole stockholder of O.L.S. Energy-Agnews, Inc. ("O.L.S.
Energy-Agnews"). O.L.S. Energy-Agnews leases the Agnews Power Plant under a sale
leaseback arrangement. The other stockholder of GATX Calpine-Agnews, Inc. is
GATX Capital Corporation ("GATX"), which has an 80% ownership interest. In
connection with the sale leaseback arrangement, Calpine has agreed to reimburse
GATX for its proportionate share of certain payments that may be made by GATX
with respect to the Agnews Power Plant. The Company and GATX managed the
development and financing of the Agnews Power Plant, which commenced commercial
operations in December 1990.
 
     The Company managed the engineering, construction and start-up of the
Agnews Power Plant. The construction work was performed by Power Systems
Engineering, Inc. under a turnkey contract. The power plant consists of an
LM2500 aeroderivative gas turbine manufactured by General Electric, a Deltak
unfired heat recovery steam generator and a Shin Nippon steam turbine-generator.
Since start-up, the Agnews Power Plant has operated at an average availability
of approximately 97.1%.
 
     The total cost of the Agnews Power Plant was approximately $39.0 million.
The construction financing was provided by Credit Suisse in the amount of $28.0
million. After the commencement of commercial operation, the power plant was
sold to Nynex Credit Corporation under a sale leaseback arrangement with O.L.S.
Energy-Agnews. Under the sale leaseback, O.L.S. Energy-Agnews has entered into a
22-year lease, commencing March 1991, providing for the payment of a fixed base
rental, renewal options and a purchase option at fair market value at the
termination of the lease.
 
     Electricity generated by the Agnews Power Plant is sold to PG&E under a
30-year power sales agreement terminating in 2021 which contains payment
provisions for capacity and energy. The power sales agreement provides for a
payment of $196 per kilowatt year for 24 megawatts of firm capacity for the term
of the agreement, so long as the Agnews Power Plant delivers at least 80% of its
firm capacity of 24 megawatts during certain designated periods of the year, and
an as-delivered capacity payment for an additional 4 megawatts of capacity at
$188 per kilowatt year for 1997 and 1998. Thereafter, the payment for
as-delivered capacity will be the greater of $188 per kilowatt year or PG&E's
then current as-delivered capacity rate. In addition, the power sales agreement
provides for payments for up to 32 megawatts of electrical energy actually
delivered at a price equal to (i) through 1998, the product of PG&E's fixed
incremental energy rate and PG&E's utility electric generation gas cost, and
(ii) thereafter, PG&E's avoided cost of energy (as determined by the CPUC).
PG&E's avoided cost of energy varies from month to month and has ranged from an
annual average of 1.84c to 2.96c per kilowatt hour since 1992. During 1996,
PG&E's avoided cost of energy averaged approximately 2.26c per kilowatt hour.
 
     Under certain circumstances, PG&E may curtail energy deliveries for up to
1,000 off-peak hours per year. During 1996, PG&E curtailed the energy purchased
under the power sales agreement by 995 hours.
 
     In addition to the sale of electricity to PG&E, the Agnews Power Plant
produces and sells electricity and approximately 7,000 pounds per hour of steam
to the Agnews Developmental Center pursuant to a 30-year energy service
agreement. The energy service agreement provides that the State of California
will purchase from the Agnews Power Plant all of its requirements for steam (up
to a specified maximum) and for electricity (which has historically been less
than one megawatt per year) for the East Campus of the Agnews Developmental
Center for the term of the agreement. Steam sales are priced at the cost of
production for the Agnews Developmental Center. Electricity sales are priced at
the rates that would otherwise be paid to PG&E
 
                                       67
<PAGE>   69
 
by the Agnews Developmental Center. The State of California is required to
utilize the minimum amount of steam required to maintain the Agnews Power
Plant's QF status. See "Government Regulation."
 
     The supply of natural gas for the Agnews Power Plant is currently provided
under a month-to-month full requirements fuel supply agreement between O.L.S.
Energy-Agnews and Amoco Energy Trading Corporation ("Amoco"). Intrastate
transportation is provided under a firm gas transportation agreement with PG&E,
expiring on the earlier of the Gas Accord or June 30, 1999.
 
     The Agnews Power Plant is operated by the Company under an operating and
maintenance agreement pursuant to which the Company is reimbursed for certain
costs and is entitled to a fixed annual fee and an incentive payment based on
performance. This agreement had an initial term of six years, expiring on
December 31, 1996, and was renewed for an additional six-year term effective
January 1, 1997.
 
     The Agnews Power Plant is located on 1.4 acres of land leased from the
Agnews Development Center under the terms of a 30-year lease that expires in
2021. This lease provides for rental payments to the State of California on a
fixed payment basis until January 1, 1999, and thereafter based on the gross
revenues derived from sales of electricity by the Agnews Power Plant, as well as
a purchase option at fair market value.
 
     During 1996, the Agnews Power Plant generated approximately 205,838,000
kilowatt hours of electrical energy and total revenue of $11.0 million. In 1996,
the Company recognized a loss of approximately $190,000 as a result of the
Company's 20% ownership interest and recorded revenue of $2.0 million for
services performed under the operating and maintenance agreement.
 
     Watsonville Power Plant
 
     The Watsonville cogeneration facility (the "Watsonville Power Plant") is a
28.5 megawatt natural gas-fired, combined cycle cogeneration facility located in
Watsonville, California. On June 29, 1995, the Company acquired the operating
lease for this facility for $900,000 from Ford Motor Credit Company. Under the
terms of the lease, rent is payable each month from July through December. The
lease terminates on December 29, 2009. The Watsonville Power Plant commenced
commercial operation in May 1990. The power plant consists of a General Electric
LM2500 gas turbine, a Deltak heat recovery steam generator and a Shin Nippon
steam turbine. Since its acquisition by the Company in June 1995, the power
plant has operated at an average availability of approximately 96.8%.
 
     Electricity generated by the Watsonville Power Plant is sold to PG&E under
a 20-year power sales agreement terminating in 2009 which contains payment
provisions for capacity and energy. The power sales agreement provides for a
payment of $178 per kilowatt year for 20.9 megawatts of firm capacity for the
term of the agreement, so long as the Watsonville Power Plant delivers at least
80% of its firm capacity of 20.9 megawatts during certain designated periods of
the year, and an as-delivered capacity payment for all megawatts of capacity
delivered above the 20.9 megawatts of firm capacity. The power sales agreement
provides for payments of all electrical energy actually delivered. Through April
2000, 1% of energy will be sold under the fixed energy price schedule set forth
below, and 99% of the energy will be sold at PG&E's avoided cost of energy. The
following schedule sets forth the fixed average energy prices (expressed in
cents per kilowatt hour) and the as-delivered capacity prices per kilowatt year
through 2000 for energy deliveries under the Watsonville Power Plant power sales
agreement:
 
<TABLE>
<CAPTION>
                                                                       AS-DELIVERED
                               YEAR                  ENERGY PRICE     CAPACITY PRICE
                -----------------------------------  ------------     --------------
                <S>                                  <C>              <C>
                1997...............................     13.14c             $188
                1998...............................     13.90c             $188
                1999...............................     13.90c             $188
                2000...............................     13.90c             $188
</TABLE>
 
     Thereafter, PG&E will pay for energy delivered at prices equal to PG&E's
avoided cost of energy (as determined by the CPUC), and will pay for
as-delivered capacity at the greater of $188 per kilowatt year or PG&E's then
current as-delivered capacity rate. PG&E's avoided cost of energy varies from
month to month
 
                                       68
<PAGE>   70
 
and has ranged from an annual average of 1.84c to 2.96c per kilowatt hour since
1992. During 1996, PG&E's avoided cost of energy averaged approximately 2.26c
per kilowatt hour.
 
     Under certain circumstances, PG&E may curtail energy deliveries for up to
400 hours between January 1 and April 15 and an additional 900 off-peak hours
from October 1 though April 30. From January 1, 1996 through December 31, 1996,
PG&E curtailed energy purchases of 1,290 hours under the power sales agreement.
 
     In addition to the sale of electricity to PG&E, during 1996 the Watsonville
Power Plant produced and sold steam to two thermal hosts, Norcal Frozen Foods,
Inc. ("Norcal") and Farmers Processing, both food processors. In August 1995,
Norcal sold its facility to a subsidiary of Dean Foods ("Dean Foods"), which
closed the facility on February 9, 1996. The lessor of the Watsonville Power
Plant has constructed a water distillation facility on the site of the
Watsonville Power Plant to replace the Dean Foods food processing facility. This
facility's water distillation commenced operations in August 1996 and is
operated by the Company. It is necessary to continue to operate the host
facilities in order to maintain the Watsonville Power Plant's QF status. See
"Government Regulation."
 
     Natural gas for the Watsonville Power Plant is supplied pursuant to an
Agency Agreement with Calpine Fuels Corporation expiring the earlier of the
implementation of the Gas Accord and April 1, 1998. Natural gas is transported
under a firm transportation agreement with PG&E, expiring on the earlier of the
Gas Accord or June 30, 1999.
 
     The Watsonville Power Plant is located on 1.8 acres of land leased from
Dean Foods under the terms of a 30-year lease expiring in 2010.
 
     For 1996, the Watsonville Power Plant generated approximately 205,942,000
kilowatt hours of electrical energy for sale to PG&E and approximately $10.6
million in revenue.
 
     West Ford Flat Power Plant
 
     The West Ford Flat geothermal facility (the "West Ford Flat Power Plant")
consists of a 27 megawatt geothermal power plant and associated steam fields
located in the eastern portion of The Geysers area of northern California. The
West Ford Flat Power Plant includes a power plant consisting of two turbines
manufactured by Mitsubishi Heavy Industries, Inc. with rotors remanufactured by
ABB Industries, Inc., two generators manufactured by Electric Machinery, Inc.,
eight production wells and various steam leases. The West Ford Flat Power Plant
commenced commercial operation in December 1988. Since start-up, the West Ford
Flat Power Plant has operated at an average availability of approximately 98.4%.
 
     Electricity generated by the West Ford Flat Power Plant is sold to PG&E
under a 20-year power sales agreement terminating in 2008 which contains payment
provisions for capacity and energy. The power sales agreement provides for a
firm capacity payment of $167 per kilowatt year for 27 megawatts of firm
capacity for the term of the agreement, so long as the West Ford Flat Power
Plant delivers 80% of its firm capacity during certain designated periods of the
year. In addition, the power sales agreement provides for energy payments for
electricity actually delivered based on a fixed price derived from a scheduled
forecast of energy prices over the initial ten-year term of the agreement ending
December 1998. The fixed average energy price for 1997 and 1998 is 13.83c per
kilowatt hour under the West Ford Flat power sales agreement. Thereafter, PG&E
is required to pay for electrical energy actually delivered at prices equal to
PG&E's avoided cost of energy (as determined by the CPUC). PG&E's avoided cost
of energy varies from month to month and has ranged from an annual average of
1.84 to 2.96c per kilowatt hour since 1992. During 1996, PG&E's avoided cost of
energy averaged approximately 2.26c per kilowatt hour. The Company cannot
accurately predict the avoided cost of energy prices that will be in effect at
the expiration of the fixed price period under this agreement.
 
     The power sales agreement provides that, under certain circumstances, PG&E
may curtail energy deliveries. During 1996, PG&E curtailed the energy purchased
under this agreement by 1,000 hours. Due to an amendment to the power sales
agreement in April 1997, the Company currently does not expect curtailment
during the remainder of the agreement.
 
                                       69
<PAGE>   71
 
     The Company believes that the geothermal reserves that supply energy for
use by the West Ford Flat Power Plant will be sufficient to operate so as to
earn the full capacity payments for the entire term of the power sales agreement
due principally to high reservoir pressures, low projected decline rates,
limited development in adjacent areas and the substantial productive acreage
dedicated to the West Ford Flat Power Plant.
 
     The West Ford Flat Power Plant is located on 267 acres of leased land
located in The Geysers. For a description of the leases covering the properties
located in The Geysers, see "Properties."
 
     During 1996, the West Ford Flat Power Plant generated approximately
219,849,000 kilowatt hours of electrical energy for sale to PG&E and
approximately $31.9 million of revenue.
 
     Bear Canyon Power Plant
 
     The Bear Canyon facility (the "Bear Canyon Power Plant") consists of a 20
megawatt geothermal power plant and associated steam fields located in the
eastern portion of The Geysers area of northern California, two miles south of
the West Ford Flat Power Plant. The Bear Canyon Power Plant includes a power
plant consisting of two turbine generators manufactured by Mitsubishi Heavy
Industries, Inc. with rotors remanufactured by ABB Industries, Inc., as well as
nine production wells, an injection well and steam reserves. The Bear Canyon
Power Plant commenced commercial operation in October 1988. Since start-up, the
Bear Canyon Power Plant has operated at an average availability of approximately
98.2%.
 
     Electricity generated by the Bear Canyon Power Plant is sold to PG&E under
two 10 megawatt, 20-year power sales agreements terminating in 2008 which
contain payment provisions for capacity and energy. One of the power sales
agreements provides for a firm capacity payment of $156 per kilowatt year on
four megawatts for the term of the agreement, so long as the Bear Canyon Power
Plant delivers 80% of its firm capacity during certain designated periods of the
year, and an as-delivered capacity payment for the additional six megawatts of
capacity. The other agreement provides for an as-delivered capacity payment for
the entire 10 megawatts. Both agreements provide for energy payments for
electricity actually delivered based on a fixed price basis through the initial
ten-year term of the agreement ending September 1998. The energy and
as-delivered capacity prices through 1998 are 13.83c per kilowatt hour and $188
per kilowatt year, respectively. Thereafter, PG&E will pay for energy delivered
at prices equal to PG&E's avoided cost of energy (as determined by the CPUC),
and will pay for as-delivered capacity at the greater of $188 per kilowatt year
or PG&E's then current as-delivered capacity rate. PG&E's avoided cost of energy
varies from month to month and has ranged from an annual average of 1.84c to
2.96c per kilowatt hour since 1992. During 1996, PG&E's avoided cost of energy
averaged approximately 2.26c per kilowatt hour. The Company cannot accurately
predict the avoided cost of energy prices that will be in effect at the
expiration of the fixed price period under this agreement.
 
     The power sales agreement provides that, under certain circumstances, PG&E
may curtail energy deliveries. During 1996, PG&E curtailed the energy purchased
under this agreement by 1,000 hours. Due to an amendment to the power sales
agreement in April 1997, the Company currently does not expect curtailment
during the remainder of the agreement.
 
     The Company believes that the geothermal reserves for the Bear Canyon Power
Plant will be sufficient to operate so as to earn substantially all of the full
capacity payments for the remaining term of the power sales agreements due
principally to high reservoir pressures, low projected decline rates, limited
development in adjacent areas and the substantial productive acreage dedicated
to the Bear Canyon Power Plant.
 
     The Bear Canyon Power Plant is located on 284 acres of land located in The
Geysers covered by two leases: one with the State of California and the other
with a private landowner. For a description of the leases covering the
properties located at The Geysers, see "Properties."
 
     During 1996, the Bear Canyon Power Plant generated approximately
161,785,000 kilowatt hours of electrical energy and approximately $22.8 million
of revenue.
 
                                       70
<PAGE>   72
 
     Aidlin Power Plant
 
     The Aidlin geothermal facility (the "Aidlin Power Plant") consists of a 20
megawatt geothermal power plant and associated steam fields located in the
western portion of The Geysers area of northern California. The Company holds an
indirect 5% ownership interest in the Aidlin Power Plant. The Company's
ownership interest is held in the form of a 10% general partnership interest in
a limited partnership (the "Aidlin Partnership"), which in turn owns a 50%
ownership interest, as both a limited and general partner, in Geothermal Energy
Partners Ltd. ("GEP"), a limited partnership which is the owner of the Aidlin
Power Plant. MetLife Capital Corporation owns the remaining 90% interest in the
Aidlin Partnership as a limited partner. The remaining 50% of GEP is owned by
subsidiaries of Mission Energy Company and Sumitomo Corporation. The Aidlin
Power Plant commenced commercial operation in May 1989.
 
     The Aidlin Power Plant includes a power plant consisting of two turbine and
generator sets manufactured by Fuji Electric and ABB Industries, Inc., as well
as seven production wells and two injection wells. Since start-up, the Aidlin
Power Plant has operated at an average availability of approximately 98.9%.
 
     The construction of the Aidlin Power Plant was financed with a $59.4
million term loan provided by Prudential, which bears interest at a fixed rate
of 10.48% per annum and matures on June 30, 2008 according to a specified
amortization schedule.
 
     Electricity generated by the Aidlin Power Plant is sold to PG&E under two
10 megawatt, 20-year power sales agreements terminating in 2009 which contain
payment provisions for capacity and energy. The power sales agreements provide
for an aggregate firm capacity payment for 17 megawatts of $167 per kilowatt
year for the term of the agreements, so long as the Aidlin Power Plant delivers
80% of its capacity during certain designated periods of the year. In addition,
the Aidlin power sales agreements provide for energy payments for 20 megawatts
based on a schedule of fixed energy prices in effect through 1999 of 13.83c per
kilowatt hour. Thereafter, PG&E is required to pay for electrical energy
actually delivered at prices equal to PG&E's avoided cost of energy (as
determined by the CPUC). PG&E's avoided cost of energy varies from month to
month and has ranged from an annual average of 1.84c to 2.96c per kilowatt hour
since 1992. During 1996, PG&E's avoided cost of energy averaged approximately
2.26c per kilowatt hour. The Company cannot accurately predict the avoided cost
of energy that will be in effect at the expiration of the fixed price period
under this agreement.
 
     Under certain circumstances, PG&E may curtail energy deliveries for up to
1,000 off-peak hours per year. During 1996, PG&E curtailed the energy purchased
under this agreement by 1,000 hours.
 
     The Aidlin Power Plant is operated and maintained by the Company under an
operating and maintenance agreement pursuant to which the Company is reimbursed
for certain costs and is entitled to an incentive payment based on project
performance. This agreement expires on December 31, 1999.
 
     The Aidlin Power Plant is located on 713.8 acres of land located in The
Geysers, which is leased by GEP from a private landowner. The lease will remain
in force so long as geothermal steam is produced in commercial quantities.
 
     During 1996, the Aidlin Power Plant generated approximately 167,804,000
kilowatt hours of electrical energy and revenue of $22.3 million. In 1996, the
Company recognized revenue of approximately $331,000 as a result of the
Company's 5% ownership interest and $4.0 million for services performed under
the operating and maintenance agreement.
 
STEAM FIELDS
 
     Thermal Power Company Steam Fields
 
     The Company acquired Thermal Power Company on September 9, 1994 for a
purchase price of $66.5 million. Thermal Power Company owns a 25% undivided
interest in certain geothermal steam fields located at The Geysers in northern
California (the "Thermal Power Company Steam Fields"). Union Oil Company of
California ("Union Oil") owns the remaining 75% interest in the steam fields and
operates and maintains the steam fields. The Thermal Power Company Steam Fields
include the leasehold rights to 13,908
 
                                       71
<PAGE>   73
 
acres of steam fields which supply steam to 12 PG&E power plants located in The
Geysers and include 238 production wells, 18 injection wells and 55 miles of
steam-transporting pipeline. See "-- Properties." The 12 plants have a nameplate
capacity of 978 megawatts and currently have the capability to operate at over
600 megawatts. The steam fields commenced commercial operation in 1960.
 
     The Thermal Power Company Steam Fields produce steam for sale to PG&E under
a long-term steam sales agreement. Under this steam sales agreement, the Company
is paid on the basis of the amount of electricity produced by the power plants
to which steam is supplied. PG&E is obligated to use its best efforts to operate
its power plants to maintain monthly and annual steam field capacity. The price
paid for steam under the steam sales agreement is determined according to a
formula that consists of the average of three indices multiplied by a fixed
price of 1.65c per kilowatt hour. The indices used are the Producer Price Index
for Crude Petroleum, the Producer Price Index for Natural Gas and the Consumer
Price Index ("CPI"). The price of steam under the steam sales agreement in 1996
was 1.622c per kilowatt hour. The price for 1997 is 1.919c per kilowatt hour. In
addition, the Company receives a monthly fee for effluent disposal and
maintenance. During 1996, such monthly fee was $147,000 per month.
 
     In March 1996, the Company and Union Oil entered into an alternative
pricing agreement with PG&E for any steam produced in excess of 40% of average
field capacity as defined in the steam sales contract. The alternative pricing
agreement is effective through December 31, 2000. Under the alternative pricing
agreement, PG&E has the option to purchase a portion of the steam that PG&E
would likely curtail under the existing steam sales agreement. The price for
this portion of steam will be set by the Company and Union Oil with the intent
that it be at competitive market prices. The Company and Union Oil will solely
determine the price and duration of these alternative prices.
 
     The steam sales agreement with PG&E also provides for offset payments,
which constitute a remedy for insufficient steam. Under the steam sales
agreement, the Company is required to pay PG&E for the unamortized costs,
including site clean-up, removal and abandonment costs, of power plants that are
installed but are unused as a result of steam supply deficiency. The offset
payments are calculated based upon a fixed amortization schedule for all power
plants, which may be adjusted for future capital expenditures, and upon the
steam fields' capacity in megawatts. In accordance with the steam sales
agreement, the Company makes offset payments at a reduced rate until total
offsets calculated since July 1, 1991 equal $15.0 million. Accordingly, the
Company's share of offsets in 1996 was $672,000. In approximately 2001, when
total offsets may exceed $15.0 million, in accordance with the agreement the
Company's share of offset payments to PG&E would be approximately 3 1/2 times
their current rate (as calculated at the current steam field capacity).
 
     In accordance with the steam sales agreement, PG&E may curtail the power
plants which receive steam in order to produce energy from lower cost sources.
PG&E is contractually obligated to operate all of the power plants at a minimum
of 40% of the field capacity during any given year, and at 25% of the field
capacity in any given month. During 1996, the Thermal Power Company Steam Fields
experienced curtailment of steam production due to low gas prices and abundant
hydro power. The Company receives a monthly fee for PG&E's right to curtail its
power plants. Such fee was $13,200 per month during 1996.
 
     The steam sales agreement with PG&E terminates two years after the closing
of the last operating power plant. In addition, PG&E may terminate the contract
earlier with a one-year written notice. If PG&E terminates in accordance with
the steam sales agreement, the Company will provide capacity maintenance
services for five years after the termination date, and will retain a right of
first refusal to purchase the PG&E facilities at PG&E's unamortized cost.
Alternatively, the Company may terminate the agreement with a two-year written
notice to PG&E. If the Company terminates, PG&E has the right to take assignment
of the Thermal Power Company Steam Fields' facilities on the date of
termination. In that case, the Company would continue to pay offset payments for
three years following the date of termination. Under the steam sales agreement,
PG&E may retire older power plants upon a minimum of six-months' notice. The
Company is unable to predict PG&E's schedule for the retirement of such power
plants, which may change from time to time. If steam is abandoned (i.e., cannot
be transported to the remaining plants), the abandoned steam may be delivered
for use to other PG&E power plants, subject to existing contract conditions, or
to other customers upon closure of a PG&E power plant.
 
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<PAGE>   74
 
     The Thermal Power Company Steam Fields currently supply steam sufficient to
operate the PG&E power plants at approximately 60% of their combined nameplate
capacity. This percentage reflects a decline in productivity since the
commencement of operations. While it is not possible to accurately predict
long-term steam field productivity, the Company has estimated that the current
annual rate of decline in steam field productivity of the Thermal Power Company
Steam Fields was approximately 9% until 1995, during which year extensive
curtailment interrupted the decline trend. The Company expects steam field
productivity to continue to decline in the future. The Company plans to work
with Union Oil to partially offset the expected rate of decline by the
development of water injection projects and power plant improvements.
 
     During 1996, the PG&E power plants produced 3,208,984,000 kilowatt hours of
electrical energy of which the Company's 25% share is 802,246,000 kilowatt hours
for approximately $13.1 million of revenue.
 
     PG&E Unit 13 and Unit 16 Steam Fields
 
     The Company holds the leasehold rights to 1,631 acres of steam fields (the
"PG&E Unit 13 and Unit 16 Steam Fields") that supply steam to PG&E's Unit 13
power plant (the "Unit 13") and PG&E's Unit 16 power plant (the "Unit 16"), all
of which are located in The Geysers. See "-- Properties." Unit 13 and Unit 16
have nameplate capacities of 98 and 113 megawatts, respectively, and currently
operate at outputs of approximately 81 and 77 megawatts, respectively. The PG&E
Unit 13 Steam Field includes 956 acres, 28 production wells, five injection
wells and five miles of pipeline, and commenced commercial operations in May
1980. The PG&E Unit 16 Steam Field includes 675 acres, 19 producing wells, two
injection wells, and three miles of pipeline, and commenced commercial operation
in October 1985.
 
     The PG&E Unit 13 and Unit 16 Steam Fields produce steam for sale to PG&E
under long-term steam sales agreements. Under the steam sales agreements with
PG&E, the Company is paid for steam on the basis of the amount of electricity
produced by Unit 13 and Unit 16. The price paid for steam under the PG&E Unit 13
and Unit 16 Steam Fields agreements is determined according to a formula that is
essentially a weighted average of PG&E's fossil (oil and gas) fuel price and
PG&E's nuclear fuel price. The price of steam for 1996 was 0.955c per kilowatt
hour. The price for 1997 is 0.953c per kilowatt hour. The Company receives an
additional 0.05c per kilowatt hour from PG&E for the disposal of liquid
effluents produced at Unit 13 and Unit 16.
 
     During conditions of hydro-spill, PG&E may curtail energy deliveries from
Unit 13 and Unit 16 which would reduce deliveries of steam under this agreement.
Curtailments are primarily the result of a higher degree of precipitation during
the period, which results in higher levels of energy generation by hydroelectric
power facilities that supply electricity for sale by PG&E. In the event of any
such curtailment, the Company's results of operations may be materially
adversely affected. PG&E curtailed approximately 63,000,000 kilowatt hours under
the steam sales agreement during 1996, and 37,371,000 kilowatt hours through
October 31, 1997.
 
     The steam sales agreement with PG&E continues in effect for as long as
either Unit 13 or Unit 16 remains in commercial operation, which depends on
maintaining the productive capacity of the respective steam fields. However,
PG&E may terminate the agreement if the quantity, quality or purity of the steam
is such that the operation of Unit 13 or Unit 16 becomes economically
impractical. The Company currently estimates that the productive capacity of the
PG&E Unit 13 and Unit 16 Steam Fields is approximately 22 years. However, no
assurance can be given that the operation of either Unit 13 or Unit 16 will not
become economically impractical at any time during these periods.
 
     The Company is required to supply a sufficient quantity of steam of
specified quality to Unit 16. If an insufficient quantity of steam is delivered,
the Company may be subject to penalty provisions, including suspension of PG&E's
obligation to pay for steam delivered. Specifically, if the Company fails to
deliver to Unit 16 in any calendar month a sufficient quantity of steam adequate
to operate the power plant at or above a capacity factor of 50%, no payment
shall be made for steam delivered to such Unit during such month until the cost
of that Unit has been completely amortized by PG&E.
 
     In order to increase the efficiency of Unit 13 by approximately 20%, the
Company agreed to purchase new rotors for $10.8 million. In exchange, PG&E
agreed to amend the steam sales agreement to remove the
 
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<PAGE>   75
 
penalty provision for a failure to deliver a sufficient quantity of steam to
Unit 13 and to require PG&E to operate at variable pressure operations which
will optimize production at the PG&E Unit 13 and Unit 16 Steam Fields.
 
     The PG&E Unit 13 and Unit 16 Steam Fields currently supply steam sufficient
to operate Unit 13 and Unit 16 at approximately 77% of their combined nameplate
capacities. This percentage reflects a decline in the productivity of the PG&E
Unit 13 and Unit 16 Steam Fields since the commencement of operations of Unit 13
and Unit 16. While it is not possible to accurately predict long-term steam
field productivity, the Company has estimated that the annual rate of decline in
steam field productivity of the PG&E Unit 13 and Unit 16 Steam Fields was
approximately 8.7% in 1996. The Company expects steam field productivity to
continue to decline in the future, but at reduced annual rates of decline. The
Company considered these declines in steam field productivity in developing its
original projections for the PG&E Unit 13 and Unit 16 Steam Fields at the time
the Company acquired its initial interest in 1990. The Company plans to
partially offset the expected rate of decline by implementing enhanced water
injection and power plant improvements.
 
     During 1996, the PG&E Unit 13 and Unit 16 Steam Fields produced sufficient
steam to permit Unit 13 and Unit 16 to produce approximately 1,269,400,000
kilowatt hours of electrical energy and approximately $12.8 million of revenue.
 
     SMUDGEO #1 Steam Fields
 
     The Company holds the leasehold rights to 394 acres of steam fields that
supply steam to the power plant for the Sacramento Municipal Utility District
("SMUD") SMUDGEO #1 steam fields (the "SMUDGEO #1 Steam Fields"). See
"-- Properties." The SMUD power plant has a nameplate capacity of 72 megawatts
and currently operates at an output of 54 megawatts. The SMUDGEO #1 Steam Fields
include 19 producing wells, one injection well and two and one half miles of
pipeline. Commercial operation of the SMUD power plant commenced in October
1983.
 
     The steam sales agreement with SMUD provides that SMUD will pay for steam
based upon the quantity of steam delivered to the SMUD power plant. The current
price paid for steam delivered under the steam sales agreement is $1.818 per
thousand pounds of steam, which is adjusted semi-annually based on changes in
the Gross National Product Implicit Price Deflator Index and Producers Price
Index for Fuels, Related Products and Power. SMUD may suspend payments for steam
in any month if the Company is unable to deliver 50% of the steam requirement
until the cost of the plant and related facilities have been completely
amortized by the value of such steam delivered to the plant. The Company
receives an additional 0.15c per kilowatt hour from SMUD for the disposal of
liquid effluents produced at the SMUDGEO #1 Steam Fields.
 
     The steam sales agreement with SMUD continues until the expiration or
termination of the geothermal lease covering the SMUDGEO #1 Steam Fields, which
continues for so long as steam is produced in commercial quantities. The Company
and SMUD each have the right to terminate the agreement if their respective
operations become economically impractical. In the event that SMUD exercises its
right to terminate, the Company will have no further obligation to deliver steam
to the power plants.
 
     The SMUDGEO #1 Steam Fields currently supply steam sufficient to operate
the SMUD power plant at approximately 75% of its nameplate capacity. This
percentage reflects a decline in the productivity of the SMUDGEO #1 Steam Fields
since commencement of operations. Although the SMUDGEO #1 Steam Fields
productivity increased in 1995 and did not decline in 1996 (due to curtailment
of neighboring plants), the Company expects the SMUDGEO #1 Steam Fields'
productivity to decline in the future.
 
     During 1996, the SMUDGEO #1 Steam Fields produced approximately 6,835,390
thousand pounds of steam and approximately $14.6 million of revenue.
 
     Cerro Prieto Steam Fields
 
     In 1995, the Company entered into a series of agreements with Constructora
y Perforadora Latina, S.A. de C.V. ("Coperlasa") and certain of Coperlasa's
creditors pursuant to which the Company has invested $20 million in the Cerro
Prieto steam fields (the "Cerro Prieto Steam Fields") located in Baja
California,
 
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<PAGE>   76
 
Mexico. The Cerro Prieto Steam Fields provide geothermal steam to three
geothermal power plants owned and operated by Comision Federal de Electricidad
("CFE"), the Mexican national utility.
 
     The Company's investment consists of a loan of $18.5 million and a $1.5
million payment for an option to purchase up to 29% of the capital stock of
Coperlasa for $5.8 million.
 
     The $18.5 million loan was made in installments throughout 1995 and 1996,
which provided capital to Coperlasa to fund the drilling of new wells and the
repair of existing wells to meet its performance under the agreement with CFE.
The loan matures in November 1999 and bears interest at an effective rate of
18.9% per annum. The Company is deferring the recognition of income on this loan
until the Cerro Prieto project generates sufficient cash flows available for
distribution to support the collectibility of interest earned.
 
     Pursuant to a technical services agreement, the Company receives fees for
its technical services provided to Coperlasa. In addition, if the Company is
successful in assisting Coperlasa in producing steam at a lower cost, the
Company will receive 30% of the savings.
 
     The Cerro Prieto Steam Fields are located near the city of Mexicali, Baja
California, at the border of Baja California and the State of California. The
Cerro Prieto geothermal resource, which has been commercially produced by CFE
since 1973, provides approximately 70% of Baja California's electricity
requirements since this region is not connected to the Mexican national power
grid.
 
     The steam sales agreement between Coperlasa and CFE was entered into in May
1991. Under this agreement, CFE pays for steam delivered up to 1,600 tons per
hour plus 10%. Payments for the steam delivered are made in Mexican pesos and
are adjusted by a formula that accounts for the increases in inflation in Mexico
and the United States, as well as for the devaluation of the peso against the
U.S. dollar. This agreement has a termination date of October 2000.
 
     The Company is currently in discussions with the major shareholders and
lenders of Coperlasa which intend to restructure the existing debt and equity
structure of Coperlasa. The Company has received an extension of its option to
acquire up to 29% of the capital stock of Coperlasa pending the outcome of the
restructuring discussions.
 
GAS FIELDS
 
     Montis Niger Gas Fields
 
     On January 31, 1997, the Company purchased Montis Niger, Inc. a gas
production and pipeline company operating primarily in the Sacramento Basin in
California. On July 25, 1997, Montis Niger, Inc. was renamed Calpine Gas
Company. Calpine Gas Company has approximately 9.7 billion cubic feet of proven
natural gas reserves and approximately 25,600 gross acres and 23,800 net acres
under lease in the Sacramento Basin. In addition, Calpine Gas Company owns and
operates an 80 mile pipeline delivering gas to the Greenleaf 1 and 2 Power
Plants which had been either produced by Calpine Gas Company or purchased from
third parties. Calpine Gas Company currently supplies approximately 80% of the
fuel requirements for the Greenleaf 1 and 2 Power Plants.
 
PROJECT DEVELOPMENT AND ACQUISITIONS
 
     The Company is actively engaged in the development and acquisition of power
generation projects. The Company has historically focused principally on the
development and acquisition of interests in natural gas-fired and geothermal
power projects, although the Company also considers projects that utilize other
power generation technologies. The Company has significant expertise in a
variety of power generation technologies and has substantial capabilities in
each aspect of the development and acquisition process, including design,
engineering, procurement, construction management, fuel and resource acquisition
and management, financing and operations.
 
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<PAGE>   77
 
PROJECT DEVELOPMENT
 
     The development of power generation projects involves numerous elements,
including evaluating and selecting development opportunities, designing and
engineering the project, obtaining power and steam sales agreements, acquiring
necessary land rights, permits and fuel resources, obtaining financing, and
managing construction. The Company intends to focus primarily on development
opportunities where the Company is able to capitalize on its expertise in
implementing an innovative and fully integrated approach to project development
in which the Company controls the entire development process. Utilizing this
approach, the Company believes that it is able to enhance the value of its
projects throughout each stage of development in an effort to maximize its
return on investment.
 
     The Company is pursuing the development of highly efficient, low cost
merchant power plants that seek to take advantage of inefficiencies in the
electricity market. The Company intends to sell all or a portion of the power
generated by such merchant plants into the competitive market, rather than
exclusively through long-term power sales agreements. As part of Calpine's
initial effort to develop merchant plants, the Company has commenced
construction of a 240 megawatt gas-fired cogeneration project located in
Pasadena, Texas (the "Pasadena Cogeneration Project"), and a 500 megawatt
gas-fired project located in Sutter County, in northern California (the "Sutter
Gas-Fired Project"), as described below. The Company expects that these projects
will represent a prototype for future merchant plant developments by the
Company. The Company currently plans to develop additional low-cost, gas-fired
facilities in California, Texas, New England and other high priced power
markets. See "Business -- Strategy" and "Risk Factors -- Project Development and
Acquisition Risks."
 
     Pasadena Cogeneration Project
 
     Calpine has entered into a development agreement with Phillips Petroleum
Company ("Phillips") to construct and operate a 240 megawatt gas-fired
cogeneration project at the Phillips Houston Chemical Complex ("HCC") located in
Pasadena, Texas (the "Pasadena Cogeneration Project"). On December 19, 1996, the
Company entered into an Energy Sales Agreement with Phillips pursuant to which
Phillips will purchase all of the HCC's steam and electricity requirements of
approximately 90 megawatts. It is anticipated that the remainder of available
electricity output will be sold into the competitive wholesale market through
Calpine's power marketing activities. On December 20, 1996, the Company entered
into a credit agreement with ING U.S. Capital Corporation to provide $151.7
million of construction loans and $98.6 million of term loan non-recourse
project financing for the Pasadena Cogeneration Project. In accordance with the
terms of the agreement, Calpine Corporation, through its wholly owned
subsidiaries, Calpine Pasadena Cogeneration, Inc. and Calpine Texas
Cogeneration, Inc., contributed $53.1 million in equity to the project. The
Company commenced construction in February 1997, with commercial operation
scheduled to begin in July 1998. However, there can be no assurances that the
Company will be successful in completing any additional power sales agreements
or that the anticipated schedule for construction will be met.
 
     Dighton Gas-Fired Project
 
     On October 10, 1997, Calpine invested $16.0 million in a 169 megawatt
natural gas-fired combined-cycle merchant power plant to be located in Dighton,
Massachusetts (the "Dighton Gas-Fired Project"). This investment, which is
structured as subordinated debt, will provide the Company with a preferred
payment stream at a rate of 12.07% per annum for a period of twenty years from
the commercial operation date. The Dighton Gas-Fired Project is owned and
developed by Energy Management Inc. ("EMI"), a privately held power developer
located in New England. The project is estimated to cost approximately $120.0
million and is being financed, in part, with $104.0 million of non-recourse
construction financing. Upon commercial operation, EMI will contribute $2.0
million of equity and the construction financing will convert to a $102.0
million term loan non-recourse project financing. Construction commenced in the
fourth quarter of 1997 and commercial operation is scheduled to begin in early
1999. Upon completion, the Dighton facility will be operated by EMI and will
sell its output into the New England Power Pool and to wholesale and retail
customers in the northeastern United States.
 
                                       76
<PAGE>   78
 
     Sutter Gas-Fired Project
 
     In February 1997, the Company announced the development of a 500 megawatt
gas-fired cogeneration project in Sutter County, in northern California (the
"Sutter Gas-Fired Project"). The Sutter Gas-Fired Project would be northern
California's first merchant power plant. The Sutter Gas-Fired Project is
expected to provide electricity to the deregulated California power market
commencing in the year 2000. The Company is currently pursuing regulatory agency
permits for this project. There can be no assurances that the Company will be
successful in obtaining the required permits or the financing required for the
Sutter Gas-Fired Project, or that the anticipated schedule for construction will
be met.
 
     Indonesian Geothermal Project
 
     Calpine plans to develop geothermal facilities in the Lampung Province of
Indonesia, located in southern Sumatra. The geothermal resource at Ulubelu is
estimated to have potential capacity in excess of 500 megawatts. The Company
anticipates that the facility would sell electricity to Perusahaan Umum Listrik
Negara ("PLN"), the state-owned electric company. The first phase of the project
is expected to be 110 megawatts.
 
     The Company's joint venture partner will be PT. Dharmasatrya Arthasentosa
("DATRA"), a company with interests in coal mining and other ventures. The
Company expects that it will be the project's managing partner, with
responsibility for the design, construction and operation of the power plant.
The ownership structure, as planned, will be a joint venture with DATRA in which
the Company would be the managing partner and hold at least a 50% equity
interest, and as much as 85% of the project. DATRA would hold up to 50% of the
project.
 
     In March 1996, the Company and DATRA entered into a joint venture agreement
to develop Ulubelu. The Company and DATRA are negotiating with the National
Resource Agency Pertamina ("Pertamina") regarding resource development. Deep
test well drilling and flow tests by Pertamina are planned during 1998 at
Ulubelu. Commercial operation is anticipated in 2002 for the initial phase of
the project. There can be no assurances, however, that this transaction will be
consummated on these terms, if at all, that the proposed timetable will be met
or that commercial operation of these resources will be feasible.
 
ACQUISITIONS
 
     Calpine will consider the acquisition of an interest in operating projects
as well as projects under development where Calpine would assume responsibility
for completing the development of the project. In the acquisition of power
generation facilities, Calpine generally seeks to acquire an ownership interest
in facilities that offer the Company attractive opportunities for revenue and
earnings growth, that have existing, favorable long-term power sales agreements
with major electric utilities or major users of power (i.e., industrial
facilities), and that permit the Company to assume sole responsibility for the
operation and maintenance of the facility. In evaluating and selecting a project
for acquisition, the Company considers a variety of factors, including the type
of power generation technology utilized, the location of the project, the terms
of any existing power or thermal energy sales agreements, gas supply and
transportation agreements and wheeling agreements, the quantity and quality of
any geothermal or other natural resource involved, and the actual condition of
the physical plant. In addition, the Company assesses the past performance of an
operating project and prepares financial projections to determine the
profitability of the project. The Company generally seeks to obtain a
significant equity interest in a project and to obtain the operation and
maintenance contract for that project. See "Business -- Strategy" and "Risk
Factors -- Project Development and Acquisition Risks."
 
     Gas Energy Inc. Power Plants
 
     On August 25, 1997, Calpine entered into an agreement with The Brooklyn
Union Gas Company ("BUGC") to acquire 100% of the capital stock of Gas Energy
Inc. ("GEI") and Gas Energy Cogeneration Inc. ("GECI") for an aggregate purchase
price of approximately $102.5 million, subject to certain adjustments. GEI and
GECI are both wholly owned subsidiaries of BUGC and have (i) a 50% general
 
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<PAGE>   79
 
partnership interest in the Kennedy International Airport Power Plant (the
"Kennedy International Airport Power Plant"), (ii) a 50% general partnership
interest in the Stony Brook Power Plant (the "Stony Brook Power Plant"), (iii) a
45% general partnership interest in the Grumman Power Plant (the "Grumman Power
Plant"), (iv) an 11.36% limited partnership interest in the Lockport Power Plant
(the "Lockport Power Plant") and (v) a 100% interest in three fuel management
contracts (collectively referred to as the "GEI Transaction"). The Kennedy
International Airport Power Plant is a 107 megawatt gas-fired combined cycle
cogeneration facility located in Queens, New York. Electricity generated by the
Kennedy International Airport Power Plant is sold to the John F. Kennedy
International Airport under a twenty year agreement terminating in 2015. The
Stony Brook Power Plant is a 40 megawatt gas-fired cogeneration facility located
at the State University of New York at Stony Brook ("SUNY") on Long Island, New
York. Electricity generated by the Stony Brook Power Plant is sold to SUNY under
a twenty year agreement terminating in 2015, and excess energy is sold to Long
Island Lighting Corporation ("LILCO"). The Grumman Power Plant is a 57 megawatt
gas-fired combined cycle cogeneration facility located in Bethpage, New York.
Electricity generated by the Grumman Power Plant is sold to the Northrop Grumman
Corporation under a fifteen year agreement terminating in 2004, and excess
energy is sold to LILCO. The Lockport Power Plant is a 184 megawatt gas-fired
combined cycle cogeneration facility located in Lockport, New York. Electricity
generated by the Lockport Power Plant is sold to a General Motors plant under a
fifteen year agreement terminating in 2007, and excess energy is sold to New
York State Electric and Gas. The Company currently expects to complete these
acquisitions during the fourth quarter of 1997, upon the fulfillment of all
required conditions. However, there can be no assurance that this acquisition
will be completed in the anticipated time frame.
 
GOVERNMENT REGULATION
 
     The Company is subject to complex and stringent energy, environmental and
other governmental laws and regulations at the federal, state and local levels
in connection with the development, ownership and operation of its energy
generation facilities. Federal laws and regulations govern transactions by
electrical and gas utility companies, the types of fuel which may be utilized by
an electric generating plant, the type of energy which may be produced by such a
plant and the ownership of a plant. State utility regulatory commissions must
approve the rates and, in some instances, other terms and conditions under which
public utilities purchase electric power from independent producers and sell
retail electric power. Under certain circumstances where specific exemptions are
otherwise unavailable, state utility regulatory commissions may have broad
jurisdiction over non-utility electric power plants. Energy producing projects
also are subject to federal, state and local laws and administrative regulations
which govern the emissions and other substances produced, discharged or disposed
of by a plant and the geographical location, zoning, land use and operation of a
plant. Applicable federal environmental laws typically have both state and local
enforcement and implementation provisions. These environmental laws and
regulations generally require that a wide variety of permits and other approvals
be obtained before the commencement of construction or operation of an energy-
producing facility and that the facility then operate in compliance with such
permits and approvals.
 
FEDERAL ENERGY REGULATION
 
     PURPA
 
     The enactment of the Public Utility Regulatory Policies Act of 1978, as
amended ("PURPA") and the adoption of regulations thereunder by FERC provided
incentives for the development of cogeneration facilities and small power
production facilities (those utilizing renewable fuels and having a capacity of
less than 80 megawatts).
 
     A domestic electricity generating project must be a QF under FERC
regulations in order to take advantage of certain rate and regulatory incentives
provided by PURPA. PURPA exempts owners of QFs from the Public Utility Holding
Company Act of 1935, as amended ("PUHCA"), and exempts QFs from most provisions
of the Federal Power Act (the "FPA") and, except under certain limited
circumstances, state laws concerning rate or financial regulation. These
exemptions are important to the Company and its competitors. The Company
believes that each of the electricity generating projects in which the Company
 
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<PAGE>   80
 
owns an interest currently meets the requirements under PURPA necessary for QF
status. Most of the projects which the Company is currently planning or
developing are also expected to be QFs.
 
     PURPA provides two primary benefits to QFs. First, QFs generally are
relieved of compliance with extensive federal, state and local regulations that
control the financial structure of an electric generating plant and the prices
and terms on which electricity may be sold by the plant. Second, the FERC's
regulations promulgated under PURPA require that electric utilities purchase
electricity generated by QFs at a price based on the purchasing utility's
"avoided cost," and that the utility sell back-up power to the QF on a non-
discriminatory basis. The term "avoided cost" is defined as the incremental cost
to an electric utility of electric energy or capacity, or both, which, but for
the purchase from QFs, such utility would generate for itself or purchase from
another source. The FERC regulations also permit QFs and utilities to negotiate
agreements for utility purchases of power at rates lower than the utility's
avoided costs. Due to increasing competition for utility contracts, the current
practice is for most power sales agreements to be awarded at a rate below
avoided cost. While public utilities are not explicitly required by PURPA to
enter into long-term power sales agreements, PURPA helped to create a regulatory
environment in which it has been common for long-term agreements to be
negotiated.
 
     In order to be a QF, a cogeneration facility must produce not only
electricity, but also useful thermal energy for use in an industrial or
commercial process for heating or cooling applications in certain proportions to
the facility's total energy output and must meet certain energy efficiency
standards. Finally, a QF (including a geothermal or hydroelectric QF or other
qualifying small power producer) must not be controlled or more than 50% owned
by an electric utility or by most electric utility holding companies, or a
subsidiary of such a utility or holding company or any combination thereof.
 
     The Company endeavors to develop its projects, monitor compliance by the
projects with applicable regulations and choose its customers in a manner which
minimizes the risks of any project losing its QF status. Certain factors
necessary to maintain QF status are, however, subject to the risk of events
outside the Company's control. For example, loss of a thermal energy customer or
failure of a thermal energy customer to take required amounts of thermal energy
from a cogeneration facility that is a QF could cause the facility to fail
requirements regarding the level of useful thermal energy output. Upon the
occurrence of such an event, the Company would seek to replace the thermal
energy customer or find another use for the thermal energy which meets PURPA's
requirements, but no assurance can be given that this would be possible.
 
     If one of the projects in which the Company has an interest should lose its
status as a QF, the project would no longer be entitled to the exemptions from
PUHCA and the FPA. This could trigger certain rights of termination under the
power sales agreement, could subject the project to rate regulation as a public
utility under the FPA and state law and could result in the Company
inadvertently becoming a public utility holding company by owning more than 10%
of the voting securities of, or controlling, a facility that would no longer be
exempt from PUHCA. This could cause all of the Company's remaining projects to
lose their qualifying status, because QFs may not be controlled or more than 50%
owned by such public utility holding companies. Loss of QF status may also
trigger defaults under covenants to maintain QF status in the projects' power
sales agreements, steam sales agreements and financing agreements and result in
termination, penalties or acceleration of indebtedness under such agreements
such that loss of status may be on a retroactive or a prospective basis.
 
     If a project were to lose its QF status, the Company could attempt to avoid
holding company status (and thereby protect the QF status of its other projects)
on a prospective basis by restructuring the project, by changing its voting
interest in the entity owning the non-qualifying project to nonvoting or limited
partnership interests and selling the voting interest to an individual or
company which could tolerate the lack of exemption from PUHCA, or by otherwise
restructuring ownership of the project so as not to become a holding company.
These actions, however, would require approval of the Securities and Exchange
Commission ("SEC") or a no-action letter from the SEC, and would result in a
loss of control over the non-qualifying project, could result in a reduced
financial interest therein and might result in a modification of the Company's
operation and maintenance agreement relating to such project. A reduced
financial interest could result in a gain or loss on the sale of the interest in
such project, the removal of the affiliate through which the ownership interest
is held
 
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<PAGE>   81
 
from the consolidated income tax group or the consolidated financial statements
of the Company, or a change in the results of operations of the Company. Loss of
QF status on a retroactive basis could lead to, among other things, fines and
penalties being levied against the Company and its subsidiaries and claims by
utilities for refund of payments previously made.
 
     Under the Energy Policy Act of 1992, if a project can be qualified as an
exempt wholesale generator ("EWG"), it will be exempt from PUHCA even if it does
not qualify as a QF. Therefore, another response to the loss or potential loss
of QF status would be to apply to have the project qualified as an EWG. However,
assuming this changed status would be permissible under the terms of the
applicable power sales agreement, rate approval from FERC and approval of the
utility would be required. In addition, the project would be required to cease
selling electricity to any retail customers (such as the thermal energy
customer) and could become subject to state regulation of sales of thermal
energy. See "-- Public Utility Holding Company Regulation."
 
     Currently, Congress is considering proposed legislation that would amend
PURPA by eliminating the requirement that utilities purchase electricity from
QFs at avoided costs. The Company does not know whether such legislation will be
passed or what form it may take. The Company believes that if any such
legislation is passed, it would apply to new projects. As a result, although
such legislation may adversely affect the Company's ability to develop new
projects, the Company believes it would not affect the Company's existing QFs.
There can be no assurance, however, that any legislation passed would not
adversely impact the Company's existing projects.
 
     Public Utility Holding Company Regulation
 
     Under PUHCA, any corporation, partnership or other legal entity which owns
or controls 10% or more of the outstanding voting securities of a "public
utility company" or a company which is a "holding company" for a public utility
company is subject to registration with the SEC and regulation under PUHCA,
unless eligible for an exemption. A holding company of a public utility company
that is subject to registration is required by PUHCA to limit its utility
operations to a single integrated utility system and to divest any other
operations not functionally related to the operation of that utility system.
Approval by the SEC is required for nearly all important financial and business
dealings of the holding company. Under PURPA, most QFs are not public utility
companies under PUHCA.
 
     The Energy Policy Act of 1992, among other things, amends PUHCA to allow
EWGs, under certain circumstances, to own and operate non-QFs without subjecting
those producers to registration or regulation under PUHCA. The expected effect
of such amendments would be to enhance the development of non-QFs which do not
have to meet the fuel, production and ownership requirements of PURPA. The
Company believes that the amendments could benefit the Company by expanding its
ability to own and operate facilities that do not qualify for QF status, but may
also result in increased competition by allowing utilities to develop such
facilities which are not subject to the constraints of PUHCA.
 
     Federal Natural Gas Transportation Regulation
 
     The Company has an ownership interest in and operates seven natural
gas-fired cogeneration projects. The cost of natural gas is ordinarily the
largest expense (other than debt costs) of a project and is critical to the
project's economics. The risks associated with using natural gas can include the
need to arrange transportation of the gas from great distances, including
obtaining removal, export and import authority if the gas is transported from
Canada; the possibility of interruption of the gas supply or transportation
(depending on the quality of the gas reserves purchased or dedicated to the
project, the financial and operating strength of the gas supplier, and whether
firm or non-firm transportation is purchased); and obligations to take a minimum
quantity of gas and pay for it (i.e., take-and-pay obligations).
 
     Pursuant to the Natural Gas Act, FERC has jurisdiction over the
transportation and storage of natural gas in interstate commerce. With respect
to most transactions that do not involve the construction of pipeline
facilities, regulatory authorization can be obtained on a self-implementing
basis. However, pipeline rates for such services are subject to continuing FERC
oversight. Order No. 636, issued by FERC in April 1992,
 
                                       80
<PAGE>   82
 
mandates the restructuring of interstate natural gas pipeline sales and
transportation services and will result in changes in the terms and conditions
under which interstate pipelines will provide transportation services, as well
as the rates pipelines may charge for such services. The restructuring required
by the rule includes (i) the separation (unbundling) of a pipeline's sales and
transportation services, (ii) the implementation of a straight fixed-variable
rate design methodology under which all of a pipeline's fixed costs are
recovered through its reservation charge, (iii) the implementation of a capacity
releasing mechanism under which holders of firm transportation capacity on
pipelines can release that capacity for resale by the pipeline and (iv) the
opportunity for pipelines to recover 100% of their prudently incurred costs
(transition costs) associated with implementing the restructuring mandated by
the rule. Pipelines were required to file tariff sheets implementing Order No.
636 by December 31, 1992. FERC affirmed the major components of Order No. 636 in
Order Nos. 636A and B issued in August and November 1992. The restructuring
required by the rule became effective in late 1993.
 
STATE REGULATION
 
     State public utility commissions ("PUCs") have historically had broad
authority to regulate both the rates charged by, and the financial activities
of, electric utilities and to promulgate regulation for implementation of PURPA.
Since a power sales contract becomes a part of a utility's cost structure
(generally reflected in its retail rates), power sales contracts with
independent electricity producers are potentially under the regulatory purview
of PUCs and in particular the process by which the utility has entered into the
power sales contracts. If a PUC has approved the process by which a utility
secures its power supply, a PUC is generally inclined to "pass through" the
expense associated with an independent power contract to the utility's retail
customer. However, a regulatory commission under certain circumstances may
disallow the full reimbursement to a utility for the cost to purchase power from
a QF. In addition, retail sales of electricity or thermal energy by an
independent power producer may be subject to PUC regulation depending on state
law. Independent power producers which are not QFs under PURPA, or EWGs pursuant
to the Energy Policy Act of 1992, are considered to be public utilities in many
states and are subject to broad regulation by a PUC, ranging from requirement of
certificate of public convenience and necessity to regulation of organizational,
accounting, financial and other corporate matters. States may assert
jurisdiction over the siting and construction of electric generating facilities
including QFs and, with the exception of QFs, over the issuance of securities
and the sale or other transfer of assets by these facilities.
 
     The California Public Utilities Commission ("CPUC") and the California
Joint Legislative Committee on Lowering the Cost of Electric Services commenced
proceedings and hearings related to the restructure of the California electric
services industry in 1994. The proceedings and hearings were initiated as a
result of the CPUC study and Order Instituting Rulemaking and Order Instituting
Investigation on the Commission's Proposed Policies Governing Restructuring
California's Electric Services Industry and Reforming Regulation, issued by the
CPUC on April 20, 1994. The FERC, as authorized under the Energy Policy Act of
1992, has also initiated proceedings and continues to hold workshops and
hearings on policy issues related to a more competitive electric services
industry. Though the state of California appears to be at the forefront, many
other states are in various stages of review and interest in deregulation,
moving toward a more competitive electric services industry.
 
     On December 20, 1995, the CPUC issued its decision on California electric
industry restructure which envisioned commencement of deregulation and
implementation of customer choice beginning January 1, 1998, with all customers
participating by 2003. The decision provided for phased-in customer choice,
development of a non-discriminatory market structure, full recovery of utility
stranded costs, sanctity of existing contracts, and continuation of existing
public purpose programs including promotion of fuel diversity through a
renewable energy purchase requirement. On February 5, 1996, the CPUC issued a
procedural plan to facilitate the transition of the electric generation market
to competition. The electric restructuring roadmap focused on the multiple and
interrelated tasks to be accomplished and set forth the process to achieve the
necessary procedural milestones to be completed in order to meet the January 1,
1998 restructure implementation goal.
 
                                       81
<PAGE>   83
 
     In 1996, the Joint Legislative Conference Committee held hearings related
to electric industry restructure and drafted legislation, AB 1890 (the "Bill"),
which was approved by the legislature in August 1996 and signed by the Governor
on September 23, 1996. The legislation codifies much of the December CPUC
decision as modified in January 1996 and directed the CPUC to proceed with
resolve of outstanding issues resulting in implementation of restructure no
later than January 1, 1998. The Bill accelerated the transition period in which
utilities are allowed to recover their stranded costs from five years to four
years, continued to provide for sanctity of existing contracts with provisions
for voluntary restructure, established an electricity rate freeze for the
transition period and mandated a 10% rate reduction effective January 1, 1998
for small commercial and residential customers through issuance of rate
reduction bonds, and replaced the CPUC renewable technology purchase requirement
with funds specified for use in public service programs.
 
     On December 20, 1996, the CPUC responded to the legislation and issued an
updated procedural roadmap consistent with provisions included in the Bill.
Proceedings are ongoing at the CPUC and FERC for establishment of an Independent
Systems Operator ("ISO") responsible for centralized control and efficient and
reliable operation of the state-wide electric transmission grid, and a Power
Exchange ("PX") responsible for an efficient competitive electric energy auction
open on a non-discriminatory basis to all electric services providers. Other
proceedings now ongoing include the quantification and qualification of utility
stranded costs to be eligible for recovery through competitive transition
charges ("CTC"), market power mitigation through utility divestiture of fossil
generation plants (Pacific Gas & Electric 50%; Southern California Edison,
100%), the unbundling and establishment of rate structure for historical utility
functions, the continuation of public purpose programs and issues related to
issuance of rate reduction bonds. On May 6, 1997, the CPUC issued decisions
which eliminated phase-in and provided for implementation of direct access for
all customers beginning January 1, 1998, and the unbundling of revenue cycle
services, thereby allowing all electric service providers to participate in
metering and billing services.
 
     The California Energy Commission ("CEC") and Legislature have
responsibility for development of a competitive market mechanism for allocation
and distribution of funds made available by the legislation for enhancement of
in-state renewable resource technologies and public interest research and
development programs. Funds are to be available through the four-year transition
period to a fully competitive electric services industry.
 
     In addition to the significant opportunity provided for power producers
such as Calpine through implementation of customer choice (direct access), the
CPUC decision and the AB 1890 restructuring legislation both recognize the
sanctity of existing contracts, provide for mitigation of utility horizontal
market power through divestiture of fossil generation and provide funds for
continuation of public services programs including fuel diversity through
enhancement for in-state renewable technologies (includes geothermal) for the
four-year transition period to a fully competitive electric services industry.
 
     State PUCs also have jurisdiction over the transportation of natural gas by
local distribution companies ("LDCs"). Each state's regulatory laws are somewhat
different; however, all generally require the LDC to obtain approval from the
PUC for the construction of facilities and transportation services if the LDC's
generally applicable tariffs do not cover the proposed transaction. LDC rates
are usually subject to continuing PUC oversight.
 
REGULATION OF CANADIAN GAS
 
     The Canadian natural gas industry is subject to extensive regulation by
governmental authorities. At the federal level, a party exporting gas from
Canada must obtain an export license from the Canadian National Energy Board
("NEB"). The NEB also regulates Canadian pipeline transportation rates and the
construction of pipeline facilities. Gas producers also must obtain a removal
permit or license from provincial authorities before natural gas may be removed
from the province, and provincial authorities may regulate intra-provincial
pipeline and gathering systems. In addition, a party importing natural gas into
the United States first must obtain an import authorization from the U.S.
Department of Energy.
 
                                       82
<PAGE>   84
 
ENVIRONMENTAL REGULATIONS
 
     The exploration for and development of geothermal resources and the
construction and operation of power projects are subject to extensive federal,
state and local laws and regulations adopted for the protection of the
environment and to regulate land use. The laws and regulations applicable to the
Company primarily involve the discharge of emissions into the water and air and
the use of water, but can also include wetlands preservation, endangered
species, waste disposal and noise regulations. These laws and regulations in
many cases require a lengthy and complex process of obtaining licenses, permits
and approvals from federal, state and local agencies.
 
     Noncompliance with environmental laws and regulations can result in the
imposition of civil or criminal fines or penalties. In some instances,
environmental laws also may impose clean-up or other remedial obligations in the
event of a release of pollutants or contaminants into the environment. The
following federal laws are among the more significant environmental laws as they
apply to the Company. In most cases, analogous state laws also exist that may
impose similar, and in some cases more stringent, requirements on the Company as
those discussed below.
 
     Clean Air Act
 
     The Federal Clean Air Act of 1970 (the "Clean Air Act") provides for the
regulation, largely through state implementation of federal requirements, of
emissions of air pollutants from certain facilities and operations. As
originally enacted, the Clean Air Act sets guidelines for emissions standards
for major pollutants (i.e., sulfur dioxide and nitrogen oxide) from newly built
sources. In late 1990, Congress passed the Clean Air Act Amendments (the "1990
Amendments"). The 1990 Amendments attempt to reduce emissions from existing
sources, particularly previously exempted older power plants. The Company
believes that all of the Company's operating plants are in compliance with
federal performance standards mandated for such plants under the Clean Air Act
and the 1990 Amendments. With respect to its Aidlin geothermal plant and one of
its steam field pipelines, the Company's operations have, in certain instances,
necessitated variances under applicable California air pollution control laws.
However, the Company believes that it is in material compliance with such laws
with respect to such facilities.
 
     Clean Water Act
 
     The Federal Clean Water Act (the "Clean Water Act") establishes rules
regulating the discharge of pollutants into waters of the United States. The
Company is required to obtain a wastewater and storm water discharge permit for
wastewater and runoff, respectively, from certain of the Company's facilities.
The Company believes that, with respect to its geothermal operations, it is
exempt from newly-promulgated federal storm water requirements. The Company
believes that it is in material compliance with applicable discharge
requirements under the Clean Water Act.
 
     Resource Conservation and Recovery Act
 
     The Resource Conservation and Recovery Act ("RCRA") regulates the
generation, treatment, storage, handling, transportation and disposal of solid
and hazardous waste. The Company believes that it is exempt from solid waste
requirements under RCRA. However, particularly with respect to its solid waste
disposal practices at the power generation facilities and steam fields located
at The Geysers, the Company is subject to certain solid waste requirements under
applicable California laws. The Company believes that its operations are in
material compliance with such laws.
 
     Comprehensive Environmental Response, Compensation, and Liability Act
 
     The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), requires cleanup of sites from which
there has been a release or threatened release of hazardous substances and
authorizes the United States Environmental Protection Agency ("EPA") to take any
necessary response action at Superfund sites, including ordering potentially
responsible parties ("PRPs") liable for the release to take or pay for such
actions. PRPs are broadly defined under CERCLA to
 
                                       83
<PAGE>   85
 
include past and present owners and operators of, as well as generators of
wastes sent to, a site. As of the present time, the Company is not subject to
liability for any Superfund matters. However, the Company generates certain
wastes, including hazardous wastes, and sends certain of its wastes to
third-party waste disposal sites. As a result, there can be no assurance that
the Company will not incur liability under CERCLA in the future.
 
COMPETITION
 
     The Company competes with independent power producers, including affiliates
of utilities, in obtaining long-term agreements to sell electric power to
utilities. In addition, utilities may elect to expand or create generating
capacity through their own direct investments in new plants. Over the past
decade, obtaining a power sales agreement with a utility has become an
increasingly more difficult, expensive and competitive process. In the past few
years, more contracts have been awarded through some form of competitive
bidding. Increased competition also has lowered profit margins of successful
projects. There also is increasing competition between electric utilities,
particularly in California where the CPUC and the California legislature have
launched an initiative designed to give all electric consumers the ability to
choose between competing suppliers of electricity. The Company believes that the
power marketing business represents an opportunity to take advantage of growing
competition in the electric power industry. The Company also believes that the
power marketing business will be highly competitive.
 
EMPLOYEES
 
     As of October 31, 1997, the Company employed 340 people. None of the
Company's employees are covered by collective bargaining agreements, and the
Company has never experienced a work stoppage, strike or labor dispute. The
Company considers relations with its employees to be good.
 
PROPERTIES
 
     The Company's principal executive office is located in San Jose, California
under a lease that expires in June 2001.
 
     The Company, through its ownership of CGC and Thermal Power Company, has
leasehold interests in 109 leases comprising 27,263 acres of federal, state and
private geothermal resource lands in The Geysers area in northern California.
These leases comprise its West Ford Flat Power Plant, Bear Canyon Power Plant,
PG&E Unit 13 and Unit 16 Steam Fields, SMUDGEO #1 Steam Fields and Thermal Power
Company's 25% undivided interest in the Thermal Power Company Steam Fields which
are operated by Union Oil. In the Glass Mountain and Medicine Lake areas in
northern California, the Company holds leasehold interests in 18 leases
comprising approximately 25,028 acres of federal geothermal resource lands.
 
     In general, under the leases, the Company has the exclusive right to drill
for, produce and sell geothermal resources from these properties and the right
to use the surface for all related purposes. Each lease requires the payment of
annual rent until commercial quantities of geothermal resources are established.
After such time, the leases require the payment of minimum advance royalties or
other payments until production commences, at which time production royalties
are payable. Such royalties and other payments are payable to landowners, state
and federal agencies and others, and vary widely as to the particular lease. The
leases are generally for initial terms varying from 10 to 20 years or for so
long as geothermal resources are produced and sold. Certain of the leases
contain drilling or other exploratory work requirements. In certain cases, if a
requirement is not fulfilled, the lease may be terminated and in other cases
additional payments may be required. The Company believes that its leases are
valid and that it has complied with all the requirements and conditions material
to their continued effectiveness. A number of the Company's leases for
undeveloped properties may expire in any given year. Before leases expire, the
Company performs geological evaluations in an effort to determine the resource
potential of the underlying properties. No assurance can be given that the
Company will decide to renew any expiring leases.
 
     The Company, through its ownership of the Greenleaf 1 Power Plant, owns 77
acres in Sutter County, California.
 
                                       84
<PAGE>   86
 
     The Company owns the Montis Niger Gas Fields, which includes 112 leases
covering approximately 25,600 gross acres and 23,800 net acres.
 
     See "-- Description of Facilities" for a description of the other material
leased or owned properties in which the Company has an interest. The Company
believes that its properties are adequate for its current operations.
 
LEGAL PROCEEDINGS
 
     The Company is involved in various claims and legal actions arising out of
the normal course of business. The Company does not expect that the outcome of
these cases will have a material adverse effect on the Company's financial
position or results of operations.
 
                                       85
<PAGE>   87
 
                                   MANAGEMENT
 
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
 
     The following table sets forth certain information with respect to each
person who is a director or executive officer of the Company.
 
<TABLE>
<CAPTION>
                     NAME                AGE                      POSITION
        -------------------------------  ---     -------------------------------------------
        <S>                              <C>     <C>
        Peter Cartwright...............  67      Chairman of the Board, President, Chief
                                                 Executive Officer and Director
        Ann B. Curtis..................  46      Senior Vice President, Chief Financial
                                                 Officer, Corporate Secretary and Director
        Jeffrey E. Garten..............  50      Director
        Susan C. Schwab................  42      Director
        George J. Stathakis............  67      Director
        John O. Wilson.................  59      Director
        V. Orville Wright..............  76      Director
        Lynn A. Kerby..................  59      Senior Vice President
        Robert D. Kelly................  40      Vice President
        Gloria S. Gee..................  47      Controller and Chief Accounting Officer
</TABLE>
 
     Set forth below is certain information with respect to each director and
executive officer of the Company.
 
     Peter Cartwright founded the Company in 1984 and has served as a Director
and as the Company's President and Chief Executive Officer since inception. Mr.
Cartwright became Chairman of the Board of Directors of the Company in September
1996. From 1979 to 1984, Mr. Cartwright was Vice President and General Manager
of the Western Regional Office of Gibbs & Hill, Inc. ("Gibbs & Hill"), an
architect-engineering firm that specialized in power engineering projects. From
1960 to 1979, Mr. Cartwright worked for General Electric's Nuclear Energy
Division. His responsibilities included plant construction, project management
and new business development. He served on the Board of Directors of nuclear
fuel manufacturing companies in Germany, Italy and Japan. Mr. Cartwright was
responsible for General Electric's technology development and licensing programs
in Europe and Japan. Mr. Cartwright obtained a Master of Science Degree in Civil
Engineering from Columbia University in 1953 and a Bachelor of Science Degree in
Geological Engineering from Princeton University in 1952.
 
     Ann B. Curtis has served as Senior Vice President of the Company since
September 1992 and has been employed by the Company since its inception in 1984.
Ms. Curtis became a Director of the Company in September 1996. She is
responsible for the Company's financial and administrative functions, including
the functions of general counsel, corporate and project finance, accounting,
human resources, public relations and investor relations. Ms. Curtis also serves
as Chief Financial Officer and Corporate Secretary for the Company. From the
Company's inception in 1984 through 1992, she served as the Company's Vice
President for Management and Financial Services. Prior to joining Calpine, Ms.
Curtis was Manager of Administration for the Western Regional Office of Gibbs &
Hill.
 
     Jeffrey E. Garten became a Director of the Company in January 1997. Mr.
Garten has served as Dean of the Yale School of Management and William S.
Beinecke Professor in the Practice of International Trade and Finance since
November 1995. Mr. Garten served as Undersecretary of Commerce of International
Trade in the United States Department of Commerce from November 1993 to October
1995. From October 1990 to October 1992, Mr. Garten managed the merger and
acquisition and Japan business for The Blackstone Group, an investment banking
firm. Prior thereto, Mr. Garten founded and managed The Eliot Group, a small
investment bank, from November 1987 to October 1990, and served as managing
director of Lehman Brothers from January 1979 to November 1987.
 
     Susan C. Schwab became a Director of the Company in January 1997. Ms.
Schwab has served as Dean of the School of Public Affairs at the University of
Maryland since August 1995. Ms. Schwab served as Director, Corporate Business
Development at Motorola, Inc. from July 1993 to August 1995. She also served as
 
                                       86
<PAGE>   88
 
Assistant Secretary of Commerce for the U.S. and Foreign Commercial Service from
March 1989 to May 1993.
 
     George J. Stathakis became a Director of the Company on September 19, 1996
and has served as a Senior Advisor to the Company since December 1994. Mr.
Stathakis has been providing financial, business and management advisory
services to numerous international investment banks since 1985. He also served
as Chairman of the Board and Chief Executive Officer of Ramtron International
Corporation, an advanced technology semiconductor company, from 1990 to 1994.
From 1986 to 1989, he served as Chairman of the Board and Chief Executive
Officer of International Capital Corporation, a subsidiary of American Express.
Prior to 1986, Mr. Stathakis served thirty-two years with General Electric
Corporation in various management and executive positions. During his service
with General Electric Corporation, Mr. Stathakis founded the General Electric
Trading Company and was appointed its first President and Chief Executive.
 
     V. Orville Wright became a Director of the Company in January 1997. Mr.
Wright served in various positions with MCI Communications Corp., including Vice
Chairman and Co-Chief Executive Officer from 1988 to 1991, Vice Chairman and
Chief Executive Officer from 1985 to 1987, and President and Chief Operating
Officer from 1975 to 1985. Prior to 1975, Mr. Wright served in senior positions
at Xerox Corp. from 1973 to 1975, at Amdahl Corporation from 1971 to 1973, at
RCA from 1969 to 1971, and at IBM from 1949 to 1969.
 
     Lynn A. Kerby joined the Company in January 1991 and served as Vice
President of Operations through January 1993, at which time he became a Senior
Vice President for the Company. Prior to joining the Company, Mr. Kerby served
as Senior Vice President-Operations of Guy F. Atkinson Company ("Guy F.
Atkinson"), an engineering and construction company, from 1989 to 1990, and
served in various other positions within Guy F. Atkinson since 1961. Mr. Kerby
served on Calpine's Board of Directors from 1984 to 1988 as a Guy F. Atkinson
representative. He obtained a Bachelor of Science Degree in Civil Engineering
from the University of Idaho in 1961. Mr. Kerby holds a Class A Contractors
License in the states of California, Arizona and Hawaii.
 
     Robert D. Kelly has served as the Company's Vice President, Finance since
April 1994. Mr. Kelly's responsibilities include all project and corporate
finance activities. From 1992 to 1994, Mr. Kelly served as Director-Project
Finance for the Company, and from 1991 to 1992, he served as Project Finance
Manager. Prior to joining the Company, he was the Marketing Manager of
Westinghouse Credit Corporation from 1990 to 1991. From 1989 to 1990, Mr. Kelly
was Vice President of Lloyds Bank PLC. From 1982 to 1989, Mr. Kelly was employed
in various positions with The Bank of Nova Scotia. He obtained a Master of
Business Administration Degree from Dalhousie University, Canada in 1980 and a
Bachelor of Commerce Degree from Memorial University, Canada, in 1979.
 
     Gloria S. Gee has been the Company's Controller and Chief Accounting
Officer since October 1994. Prior to joining the Company, Ms. Gee served as
Chief Financial Officer and co-founder of G&E Engineering Systems, Inc., an
engineering consulting firm, from 1993 to 1994. Ms. Gee's prior experience
includes over 20 years with Pacific Gas & Electric Company, where she most
recently served as Controller from 1989 to 1993. Ms. Gee obtained a Master of
Business Administration Degree from the University of California at Berkeley in
1985 and a Bachelor of Science Degree in Accounting also from the University of
California at Berkeley in 1972.
 
                                       87
<PAGE>   89
 
                             PRINCIPAL STOCKHOLDERS
 
     The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of October 31,
1997 by (i) each person known by the Company to be the beneficial owner of more
than five percent of the outstanding shares of the Company's Common Stock, (ii)
each director of the Company, (iii) certain executive officers of the Company
and (iv) all officers and directors of the Company as a group.
 
<TABLE>
<CAPTION>
                                                          NUMBER OF SHARES         PERCENTAGE OF SHARES
         NAME AND ADDRESS OF BENEFICIAL OWNER           BENEFICIALLY OWNED(1)     BENEFICIALLY OWNED(1)
- ------------------------------------------------------  ---------------------     ----------------------
<S>                                                     <C>                       <C>
J. & W. Seligman & Co. Incorporated(2)................        1,839,330                     9.2%
  100 Park Avenue
  New York, NY 10017
Public Employees Retirement System of Ohio............        1,800,000                     9.0%
  277 East Town Street
  Columbus, OH 43215
Wellington Management Company, LLP(3).................        1,594,700                     8.0%
  75 State Street
  Boston, MA 02109
The Hartford Investment Management Company(4).........        1,560,000                     7.8%
  200 Hopmeadow Street
  Simsbury, CT 06070
Mellon Bank Corporation(5)............................        1,192,000                     6.0%
  One Mellon Bank Center
  Pittsburgh, PA 15258
State Street Research & Management Company(6).........        1,124,300                     5.6%
  One Financial Center, 30th Floor
  Boston, MA 02111-2690
Gardner Lewis Asset Management(7).....................        1,066,900                     5.3%
  285 Wilmington-West Chester Pike
  Chadds Ford, PA 19317
Peter Cartwright(8)...................................          765,953                     3.7%
Ann B. Curtis(8)......................................          200,009                     1.0%
Lynn A. Kerby(8)......................................          108,195                       *
Robert D. Kelly(8)....................................           75,792                       *
Gloria S. Gee(8)......................................            3,995                       *
Jeffrey E. Garten(8)..................................           11,500                       *
Susan C. Schwab(8)....................................           11,500                       *
George J. Stathakis(8)................................           20,099                       *
John O. Wilson(8).....................................           11,500                       *
V. Orville Wright(8)..................................           11,500                       *
All executive officers and directors as a group
  (10 persons)(8).....................................        1,220,043                     5.7%
</TABLE>
 
- ---------------
 
 *  Less than one percent
 
(1) This table is based in part upon information supplied by Schedules 13G filed
    by principal stockholders with the Securities and Exchange Commission (the
    "Commission"). Beneficial ownership is determined in accordance with the
    rules of the Commission and generally includes voting or investment power
    with respect to securities. Shares of Common Stock subject to options,
    warrants and convertible notes currently exercisable or convertible, or
    exercisable or convertible within 60 days after a specified date, are deemed
    outstanding for computing the percentage of the person holding such options
    but are not deemed outstanding for computing the percentage of any other
    person. Except as indicated by footnote, and subject to community property
    laws where applicable, the persons named in the table have sole voting and
    investment power with respect to all shares of Common Stock shown as
    beneficially owned by them. The number of shares of Common Stock outstanding
    as of October 31, 1997 was 20,028,563.
 
                                       88
<PAGE>   90
 
(2) According to the Schedule 13G filed with the Commission, J. & W. Seligman &
    Co. Incorporated possesses sole voting power over 1,590,600 shares and sole
    investment power over 1,839,330 shares.
 
(3) According to the Schedule 13G filed with the Commission, Wellington
    Management Company, LLP possesses shared voting power over 1,586,900 shares
    and shared investment power over 1,594,700 shares.
 
(4) According to the Schedule 13G filed with the Commission, The Hartford
    Investment Management Company possesses shared voting and investment power
    over 1,550,000 shares with Hartford Capital Appreciation Fund, Inc. and
    shared voting and investment power over 10,000 shares with ITT Hartford
    Capital Appreciation Fund.
 
(5) According to the Schedule 13G filed with the Commission, Mellon Bank
    Corporation, Mellon Bank, N.A. and The Dreyfus Corporation beneficially own
    all or a portion of the shares reflected in the table. As indicated in such
    Schedule 13G, (i) Mellon Bank Corporation possesses sole voting power over
    1,192,000 shares, sole investment power over 8,000 shares and shared
    investment power over 1,184,000 shares, (ii) Mellon Bank, N.A. possesses
    sole voting power over 996,000 shares, sole investment power over 8,000
    shares and shared investment power over 988,000 shares, and (iii) The
    Dreyfus Corporation possesses sole voting power and shared investment power
    over 988,000 shares.
 
(6) According to the Schedule 13G filed with the Commission, State Street
    Research & Management Company is a wholly owned subsidiary of Metropolitan
    Life Insurance Company.
 
(7) According to the Schedule 13G filed with the Commission, Gardner Lewis Asset
    Management possesses sole voting power over 935,200 shares and shared voting
    power over 18,000 shares.
 
(8) Represents shares of the Company's Common Stock owned or issuable upon
    exercise of options that are exercisable as of October 31, 1997 or will
    become exercisable within 60 days thereafter.
 
                                       89
<PAGE>   91
 
                            DESCRIPTION OF NEW NOTES
 
GENERAL
 
     The New Notes will be issued under an Indenture (the "Indenture") dated as
of July 8, 1997, among the Company and The Bank of New York, as trustee (the
"Trustee"), in exchange for the Old Notes. No New Notes are currently
outstanding. The terms of the New Notes will include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The New Notes
will be subject to all such terms, and holders of Senior Notes are referred to
the Indenture and the Trust Indenture Act for a statement of such terms. A copy
of the proposed form of the Indenture is available upon request made to the
Company.
 
     The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Indenture, including the definitions of
certain terms therein.
 
     The Company has no sinking fund or mandatory redemption obligations with
respect to the Senior Notes.
 
     The Company is subject to the informational reporting requirements of
Sections 13 and 15(d) under the Exchange Act and, in accordance therewith, will
file certain reports and other information with the Commission. See "Additional
Information." In addition, if Sections 13 and 15(d) cease to apply to the
Company, the Company will covenant in the Indenture to file such reports and
information with the Trustee and the Commission, and mail such reports and
information to holders of the Senior Notes at their registered addresses, for so
long as any Senior Notes remain outstanding.
 
     The Company conducts substantially all of its operations through its
subsidiaries. Creditors of its subsidiaries, including trade creditors, would
have a claim on the subsidiaries' assets that would be prior to the claims of
the holders of the Senior Notes. See "Risk Factors -- Risks Related to Holding
Company Structure."
 
TERMS OF THE SENIOR NOTES
 
     The Old Notes were issued under the Indenture. The Senior Notes will mature
on July 15, 2007. The Senior Notes are limited to $275,000,000 in aggregate
principal amount and are issued in fully registered form in denominations of
$1,000 and any amount which is an integral amount multiple of $1,000 in excess
thereof.
 
     Interest at the annual rate of 8 3/4% is payable semi-annually on January
15 and July 15 of each year while the Senior Notes are outstanding, commencing
on January 15, 1998 (each, an "Interest Payment Date"), to holders of record at
the close of business on the preceding January 1 and July 1, respectively, and
unless other arrangements are made, will be paid by check mailed to such holders
at their registered addresses, as shown on the Senior Note register. Interest
will be computed on the basis of a 360-day year of twelve months of 30 days
each. Interest began to accrue on July 8, 1997. The interest rate on the Senior
Notes will be permanently increased by one-half of one percent per annum if the
Exchange Offer is not consummated, or a registration statement with respect to
the resale of the Senior Notes is not declared effective, by January 4, 1998.
See "-- Registration Rights."
 
     Payments of principal of, and premium (if any) on the Senior Notes will be
made against presentation of the Senior Notes at or after the due date for such
payments, at an office maintained by the Trustee for such purpose at The Bank of
New York, 101 Barclay Street, New York, New York 10286, and the Senior Notes may
be presented for registration of transfer and exchange without service charge,
at such office during normal business hours on any day on which banks in the
Borough of Manhattan, in the City of New York, are open for business.
 
                                       90
<PAGE>   92
 
OPTIONAL REDEMPTION
 
     Except as set forth in the following paragraph, the Company may not redeem
the Senior Notes prior to July 15, 2002. On and after such date, the Company may
redeem the Senior Notes at any time as a whole, or from time to time in part, at
the following redemption prices (expressed in percentages of principal amount),
plus accrued interest to the redemption date, if redeemed during the 12-month
period beginning July 15,
 
<TABLE>
<CAPTION>
                                                                   REDEMPTION
                                      YEAR                           PRICE
                -------------------------------------------------  ----------
                <S>                                                <C>
                2002.............................................   104.3750%
                2003.............................................   102.1875%
                2004 and thereafter..............................   100.0000%
</TABLE>
 
The Company may redeem up to $96.25 million principal amount of Senior Notes
with the proceeds of one or more Public Equity Offerings, at any time as a whole
or from time to time in part, at a redemption price (expressed as a percentage
of principal amount), plus accrued interest to the redemption date, of 108.75%
if redeemed at any time prior to July 15, 2000 if at least $178.75 million
principal amount of Senior Notes remain outstanding after each such redemption.
 
SELECTION FOR REDEMPTION
 
     In the case of any partial redemption, selection of the Senior Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method that complies with applicable legal and securities exchange
requirements, if any, and that the Trustee in its sole discretion shall deem to
be fair and appropriate; provided, however, that no Senior Note of $1,000 in
original principal amount or less shall be redeemed in part. If any Senior Note
is to be redeemed in part only, the notice of redemption relating to such Senior
Note shall state the portion of the principal amount thereof to be redeemed. A
Senior Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the holder thereof upon cancellation of the original
Senior Note.
 
RANKING
 
     The Indebtedness evidenced by the Senior Notes constitutes Senior
Indebtedness of the Company and will rank pari passu in right of payment with
all existing and future Senior Indebtedness of the Company, including, without
limitation, all obligations under the Bank Credit Agreement (as defined herein),
the Working Capital Credit Agreement (as defined herein), the 9 1/4% Senior
Notes, and the 10 1/2% Senior Notes. At September 30, 1997, on a pro forma basis
after giving effect to the sale of the Old Notes and the application of the net
proceeds therefrom, the Company would have had outstanding approximately $560.0
million of Senior Indebtedness. The Company conducts substantially all of its
operations through its subsidiaries. Creditors of its subsidiaries, including
trade creditors, would have a claim on the subsidiaries' assets that would be
prior to the claims of the holders of the Notes. At September 30, 1997, on a pro
forma basis, after giving effect to the sale of the Old Notes and the
application of the net proceeds therefrom, the Company's subsidiaries would have
had $309.5 million of outstanding indebtedness. See "Risk Factors -- Risks
Related to Holding Company Structure."
 
CERTAIN DEFINITIONS
 
     Set forth below is a summary of certain defined terms used in the
Indentures.
 
     "Acquired Indebtedness" means Indebtedness of a Person existing at the time
at which such Person became a Subsidiary and not incurred in connection with, or
in contemplation of, such Person becoming a Subsidiary. Acquired Indebtedness
shall be deemed to be Incurred on the date the acquired Person becomes a
Subsidiary.
 
     "Additional Assets" means (i) any property or assets related to the Line of
Business which will be owned and used by the Company or a Restricted Subsidiary;
(ii) the Capital Stock of a Person that becomes a Restricted Subsidiary as a
result of the acquisition of such Capital Stock by the Company or another
 
                                       91
<PAGE>   93
 
Restricted Subsidiary or (iii) Capital Stock constituting a minority interest in
any Person that at such time is a Restricted Subsidiary.
 
     "Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "-- Covenants -- Transactions with
Affiliates" and "-- Sales of Assets" only, "Affiliate" shall also mean any
beneficial owner of 5% or more of the total Voting Shares (on a Fully Diluted
Basis) of the Company or of rights or warrants to purchase such stock (whether
or not currently exercisable) and any Person who would be an Affiliate of any
such beneficial owner pursuant to the first sentence hereof. For purposes of the
provision described under "-- Covenants -- Limitation on Restricted Payments"
only, "Affiliate" shall also mean any Person of which the Company owns 5% or
more of any class of Capital Stock or rights to acquire 5% or more or any class
of Capital Stock and any Person who would be an Affiliate of any such Person
pursuant to the first sentence hereof.
 
     "Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale leaseback transactions, but excluding
(except as provided for in the provisions described in the last paragraph under
"-- Covenants -- Sales of Assets") those permitted by the provisions described
under "-- Covenants -- Merger and Consolidation" and "-- Covenants -- Limitation
on Sale/Leaseback Transactions") in one or a series of transactions by the
Company or any Restricted Subsidiary to any Person other than the Company or any
Wholly Owned Subsidiary, of (i) all or any of the Capital Stock of the Company
or any Restricted Subsidiary, (ii) all or substantially all of the assets of any
operating unit, Facility, division or line of business of the Company or any
Restricted Subsidiary or (iii) any other property or assets or rights to acquire
property or assets of the Company or any Restricted Subsidiary outside of the
ordinary course of business of the Company or such Restricted Subsidiary.
 
     "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Senior Notes, compounded annually) of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/Leaseback Transaction (including any period for which such lease has
been extended).
 
     "Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of (A) the numbers of years from the date of determination to
the dates of each successive scheduled principal payment of such Indebtedness or
scheduled redemption or similar payment with respect to such Indebtedness or
Preferred Stock multiplied by (B) the amount of such payment by (ii) the sum of
all such payments.
 
     "Bank Credit Agreement" means the Credit Agreement dated September 25,
1996, between the Company and The Bank of Nova Scotia, as amended, refinanced,
replaced, renewed or extended from time to time.
 
     "Board of Directors" means the Board of Directors of the Company or any
authorized committee thereof.
 
     "Business Day" means each day which is not a Legal Holiday.
 
     "Capital Stock" means any and all shares, interests, participations or
other equivalents (however designated) of capital stock of a corporation or any
and all equivalent ownership interests in a Person (other than a corporation).
 
     "Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; the Stated
Maturity thereof shall be the date of the last payment of rent or any other
amount due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty; and "Capitalized Lease
Obligations" means the rental obligations, as aforesaid, under such lease.
 
                                       92
<PAGE>   94
 
     "Change of Control" means the occurrence of any of the following events:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than an underwriter engaged in a firm commitment
underwriting on behalf of the Company, is or becomes the beneficial owner (as
such term is used in Rules 13d-3 and 13d-5 under the Exchange Act, except that
for purposes of this clause (i) a person shall be deemed to have beneficial
ownership of all shares that such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time), directly or
indirectly, of more than 40% of the total Voting Shares of the Company; (ii)
during any period of two consecutive years, individuals who at the beginning of
such period constituted the Board of Directors (together with any new directors
whose election by the Board of Directors or whose nomination for election by the
stockholders was approved by a vote of 66 2/3% of the directors of the Company
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors then in
office; (iii) all or substantially all of the Company's and its Restricted
Subsidiaries' assets are sold, leased, exchanged or otherwise transferred to any
Person or group of Persons acting in concert; or (iv) the Company is liquidated
or dissolved or adopts a plan of liquidation.
 
     "Change of Control Triggering Event" means (A) if a Rating Agency maintains
a rating of the Senior Notes at the time a Change of Control occurs, the
occurrence of a Change of Control and the occurrence of a Rating Decline or (B)
if no Rating Agency maintains a rating of the Notes at the time a Change of
Control occurs, the occurrence of a Change of Control.
 
     "Code" means the Internal Revenue Code of 1986, as amended.
 
     "Company" means the party named as such in the Indenture until a successor
replaces it pursuant to the terms and conditions of the Indenture and thereafter
means the successor.
 
     "Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters to (ii) the Consolidated Interest Expense
(excluding interest capitalized in connection with the construction of a new
Facility which interest is capitalized during the construction of such Facility)
for such four fiscal quarters; provided, however, that if the Company or any
Restricted Subsidiary has Incurred any Indebtedness since the beginning of such
period that remains outstanding or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or
both, both EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to (x) such new Indebtedness
as if such Indebtedness had been Incurred on the first day of such period and
(y) the repayment, redemption, repurchase, defeasance or discharge of any
Indebtedness repaid, redeemed, repurchased, defeased or discharged with the
proceeds of such new Indebtedness as if such repayment, redemption, repurchase,
defeasance or discharge had been made on the first day of such period; provided,
further, that if within the period during which EBITDA or Consolidated Interest
Expense is measured, the Company or any of its Restricted Subsidiaries shall
have made any Asset Sales, (x) the EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive) directly attributable to the assets or
Capital Stock which are the subject of such Asset Sales for such period, or
increased by an amount equal to the EBITDA (if negative), directly attributable
thereto for such period and (y) the Consolidated Interest Expense for such
period shall be reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness for which neither Company nor any
Restricted Subsidiary shall continue to be liable as a result of any such Asset
Sale or repaid, redeemed, defeased, discharged or otherwise retired in
connection with or with the proceeds of the assets or Capital Stock which are
the subject of such Asset Sales for such period; and provided, further, that if
the Company or any Restricted Subsidiary shall have made any acquisition of
assets or Capital Stock (occurring by merger or otherwise) since the beginning
of such period (including any acquisition of assets or Capital Stock occurring
in connection with a transaction causing a calculation to be made hereunder) the
EBITDA and Consolidated Interest Expense for such period shall be calculated,
after giving pro forma effect thereto (and without regard to clause (iv) of the
proviso to the definition of "Consolidated Net Income"), as if such acquisition
of assets or Capital Stock took place on the first day of such period. For all
purposes of this definition, if the date of determination occurs prior to the
completion of the first four full fiscal quarters following the Issue Date, then
"EBITDA" and "Consolidated Interest Expense" shall be calculated after
 
                                       93
<PAGE>   95
 
giving effect on a pro forma basis to the Offering as if the Offering occurred
on the first day of the four full fiscal quarters that were completed preceding
such date of determination.
 
     "Consolidated Current Liabilities," as of the date of determination, means
the aggregate amount of liabilities of the Company and its Consolidated
Restricted Subsidiaries which may properly be classified as current liabilities
(including taxes accrued as estimated), after eliminating (i) all inter-company
items between the Company and any Consolidated Subsidiary and (ii) all current
maturities of long-term Indebtedness, all as determined in accordance with GAAP.
 
     "Consolidated Income Tax Expense" means, for any period, as applied to the
Company, the provision for local, state, federal or foreign income taxes on a
Consolidated basis for such period determined in accordance with GAAP.
 
     "Consolidated Interest Expense" means, for any period, as applied to the
Company, the sum of (a) the total interest expense of the Company and its
Consolidated Restricted Subsidiaries for such period as determined in accordance
with GAAP, including, without limitation, (i) amortization of debt issuance
costs or of original issue discount on any Indebtedness and the interest portion
of any deferred payment obligation, calculated in accordance with the effective
interest method of accounting, (ii) accrued interest, (iii) noncash interest
payments, (iv) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing, (v) interest
actually paid by the Company or any such Subsidiary under any guarantee of
Indebtedness or other obligation of any other Person and (vi) net costs
associated with Interest Rate Agreements (including amortization of discounts)
and Currency Agreements, plus (b) all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued, or scheduled to be paid
or accrued by the Company or its Consolidated Restricted Subsidiaries, plus (c)
one-third of all Operating Lease Obligations paid, accrued and/or scheduled to
be paid by the Company and its Consolidated Restricted Subsidiaries, plus (d)
capitalized interest, plus (e) dividends paid in respect of Preferred Stock of
the Company or any Restricted Subsidiary held by Persons other than the Company
or a Wholly Owned Subsidiary, plus (f) cash contributions to any employee stock
ownership plan to the extent such contributions are used by such employee stock
ownership plan to pay interest or fees to any person (other than the Company or
a Restricted Subsidiary) in connection with loans incurred by such employee
stock ownership plan to purchase Capital Stock of the Company.
 
     "Consolidated Net Income (Loss)" means, for any period, as applied to the
Company, the Consolidated net income (loss) of the Company and its Consolidated
Restricted Subsidiaries for such period, determined in accordance with GAAP,
adjusted by excluding (without duplication), to the extent included in such net
income (loss), the following: (i) all extraordinary gains or losses; (ii) any
net income of any Person if such Person is not a Domestic Subsidiary, except
that (A) the Company's equity in the net income of any such Person for such
period shall be included in Consolidated Net Income (Loss) up to the aggregate
amount of cash actually distributed by such Person during such period to the
Company or a Restricted Subsidiary as a dividend or other distribution and (B)
the equity of the Company or a Restricted Subsidiary in a net loss of any such
Person for such period shall be included in determining Consolidated Net Income
(Loss); (iii) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such Restricted
Subsidiary of such income is not at the time thereof permitted, directly or
indirectly, by operation of the terms of its charter or bylaws or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary or its stockholders; (iv) any net
income (or loss) of any Person combined with the Company or any of its
Restricted Subsidiaries on a "pooling of interests" basis attributable to any
period prior to the date of such combination; (v) any gain (but not loss)
realized upon the sale or other disposition of any property, plant or equipment
of the Company or its Restricted Subsidiaries (including pursuant to any
sale-and-leaseback arrangement) which is not sold or otherwise disposed of in
the ordinary course of business and any gain (but not loss) realized upon the
sale or other disposition by the Company or any Restricted Subsidiary of any
Capital Stock of any Person, provided that losses shall be included on an
after-tax basis; and (vi) the cumulative effect of a change in accounting
principles; and further adjusted by subtracting from such net income the tax
liability of any parent of the Company to the extent of payments made to such
parent by the Company pursuant to any tax sharing agreement or other arrangement
for such period.
 
                                       94
<PAGE>   96
 
     "Consolidated Net Tangible Assets" means, as of any date of determination,
as applied to the Company, the total amount of assets (less accumulated
depreciation or amortization, allowances for doubtful receivables, other
applicable reserves and other properly deductible items) which would appear on a
Consolidated balance sheet of the Company and its Consolidated Restricted
Subsidiaries, determined on a Consolidated basis in accordance with GAAP, and
after giving effect to purchase accounting and after deducting therefrom, to the
extent otherwise included, the amounts of: (i) Consolidated Current Liabilities;
(ii) minority interests in Consolidated Subsidiaries held by Persons other than
the Company or a Restricted Subsidiary; (iii) excess of cost over fair value of
assets of businesses acquired, as determined in good faith by the Board of
Directors; (iv) any revaluation or other write-up in value of assets subsequent
to December 31, 1993 as a result of a change in the method of valuation in
accordance with GAAP; (v) unamortized debt discount and expenses and other
unamortized deferred charges, goodwill, patents, trademarks, service marks,
trade names, copyrights, licenses, organization or developmental expenses and
other intangible items; (vi) treasury stock; and (vii) any cash set apart and
held in a sinking or other analogous fund established for the purpose of
redemption or other retirement of Capital Stock to the extent such obligation is
not reflected in Consolidated Current Liabilities.
 
     "Consolidated Net Worth" means, at any date of determination, as applied to
the Company, stockholders' equity as set forth on the most recently available
Consolidated balance sheet of the Company and its Consolidated Restricted
Subsidiaries (which shall be as of a date no more than 60 days prior to the date
of such computation), less any amounts attributable to Redeemable Stock or
Exchangeable Stock, the cost of treasury stock and the principal amount of any
promissory notes receivable from the sale of Capital Stock of the Company or any
Subsidiary.
 
     "Consolidation" means, with respect to any Person, the consolidation of
accounts of such Person and each of its subsidiaries if and to the extent the
accounts of such Person and such subsidiaries are consolidated in accordance
with GAAP. The term "Consolidated" shall have a correlative meaning.
 
     "Controlled Non-Subsidiary Investment" means any Investment of the type
specified in clause (iv) of the first sentence under
"-- Covenants -- Limitations on Restricted Payments" which is made by the
Company or its Restricted Subsidiaries in an Affiliate other than a Subsidiary;
provided that (i) at the time such Investment is made, no Default or Event of
Default shall have occurred and be continuing (or would result therefrom); (ii)
after giving effect to the Investment and to the Incurrence of any Indebtedness
in connection therewith on a pro forma basis, the Consolidated Coverage Ratio is
at least 1.75:1; (iii) after giving effect to the Investment, the aggregate
Investment made by the Company and its Subsidiaries in Controlled Non-Subsidiary
Investments does not exceed $100,000,000; (iv) the Person in which the
Investment is made is engaged only in the business described under
"-- Covenants -- Limitation on Changes in the Nature of Business" including
Unrelated Businesses to the extent permitted under "-- Covenants -- Limitations
on Changes in the Nature of the Business;" (v) the Company, directly or through
its Restricted Subsidiaries is entitled to (A) in the case of an Investment in
Capital Stock, receive dividends or other distributions on its Investment at the
same time as or prior to, and on a basis pro rata with, any other holder or
holders of Capital Stock of such Person and (B) in the case of an Investment
other than in Capital Stock, receive interest thereon at a rate per annum not
less than the rate on the Notes and, on the liquidation or dissolution of such
Person, receive repayment of the principal thereof prior to the payment of any
dividends or distributions on Capital Stock of such Person; (vi) the Company
directly or through its Restricted Subsidiaries, either (x) controls, under an
operating and management agreement or otherwise, the day to day management and
operation of such Person and any Facility of the Person in which the Investment
is made or (y) has significant influence over the management and operation of
such Person and any Facility of such Person in all material respects
(significant influence to include the right to control or veto any material act
or decision) in connection with such management or operation; and (vii) any
encumbrances or restrictions on the ability of the Person in which the
Investment is made to make the payments, distributions, losses, advances or
transfers referred to in clauses (i) through (iii) under
"-- Covenants -- Limitations on Payment Restrictions Affecting Subsidiaries" in
the written opinion of the President or Chief Financial Officer of the Company
(x) is required in order to obtain necessary financing, (y) is customary for
such financings and (z) applies only to the assets of or revenues of the Person
in whom the Investment is made.
 
                                       95
<PAGE>   97
 
     "Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values to
or under which the Company or any Restricted Subsidiary is a party or a
beneficiary on the Issue Date or becomes a party or beneficiary thereafter.
 
     "Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
 
     "Defaulted Interest" means any interest on any Senior Note which is
payable, but is not punctually paid or duly provided for on any Interest Payment
Date.
 
     "Domestic Subsidiary" means a Restricted Subsidiary that is not a Foreign
Subsidiary.
 
     "EBITDA" means, for any period, as applied to the Company, the sum of
Consolidated Net Income (Loss) (but without giving effect to adjustments,
accruals, deductions or entries resulting from purchase accounting,
extraordinary losses or gains and any gains or losses from any Asset Sales),
plus the following to the extent included in calculating Consolidated Net Income
(Loss): (a) Consolidated Income Tax Expense, (b) Consolidated Interest Expense,
(c) depreciation expense, (d) amortization expense and (e) all other non-cash
items reducing Consolidated Net Income, less all non-cash items increasing
Consolidated Net Income, in each case for such period; provided that, if the
Company has any Subsidiary that is not a Wholly Owned Subsidiary, EBITDA shall
be reduced (to the extent not otherwise reduced by GAAP) by an amount equal to
(A) the consolidated net income (loss) of such Subsidiary (to the extent
included in Consolidated Net Income (Loss)) multiplied by (B) the quotient of
(1) the number of shares of outstanding common stock of such Subsidiary not
owned on the last day of such period by the Company or any Wholly Owned
Subsidiary of the Company divided by (2) the total number of shares of
outstanding common stock of such Subsidiary on the last day of such period.
 
     "Exchangeable Stock" means any Capital Stock which by its terms is
exchangeable or convertible at the option of any Person other than the Company
into another security (other than Capital Stock of the Company which is neither
Exchangeable Stock nor Redeemable Stock).
 
     "Facility" means a power generation facility or energy producing facility,
including any related steam fields or gas reserves.
 
     "Foreign Asset Sale" means an Asset Sale in respect of the Capital Stock or
assets of a Foreign Subsidiary or a Restricted Subsidiary of the type described
in Section 936 of the Code to the extent that the proceeds of such Asset Sale
are received by a Person subject in respect of such proceeds to the tax laws of
a jurisdiction other than the United States of America or any State thereof or
the District of Columbia.
 
     "Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in
a jurisdiction other than the United States of America or a State thereof or the
District of Columbia.
 
     "Fully Diluted Basis" means after giving effect to the exercise of any
outstanding options, warrants or rights to purchase Voting Shares and the
conversion or exchange of any securities convertible into or exchangeable for
Voting Shares.
 
     "GAAP" means generally accepted accounting principles in the United States
of America as in effect and, to the extent optional, adopted by the Company on
the Issue Date, consistently applied, including, without limitation, those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board.
 
     "Guarantee" means, as applied to any obligation, contingent or otherwise,
of any Person, (i) a guarantee, direct or indirect, in any manner, of any part
or all of such obligation (other than by endorsement of negotiable instruments
for collection in the ordinary course of business) and (ii) an agreement, direct
or indirect, contingent or otherwise, the practical effect of which is to insure
in any way the payment or performance (or payment of damages in the event of
nonperformance) of any part or all of such obligation, including the payment of
amounts drawn down under letters of credit.
 
                                       96
<PAGE>   98
 
     "Holder" or "Securityholder" means the Person in whose name a Senior Note
is registered on the Registrar's books.
 
     "Incur" means, as applied to any obligation, to create, incur, issue,
assume, guarantee or in any other manner become liable with respect to,
contingently or otherwise, such obligation, and "Incurred," "Incurrence" and
"Incurring" shall each have a correlative meaning; provided, however, that any
Indebtedness or Capital Stock of a Person existing at the time such Person
becomes (after the Issue Date) a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary; and provided, further, that any amendment,
modification or waiver of any provision of any document pursuant to which
Indebtedness was previously Incurred shall not be deemed to be an Incurrence of
Indebtedness as long as (i) such amendment, modification or waiver does not (A)
increase the principal or premium thereof or interest rate thereon, (B) change
to an earlier date the Stated Maturity thereof or the date of any scheduled or
required principal payment thereon or the time or circumstances under which such
Indebtedness may or shall be redeemed, (C) if such Indebtedness is contractually
subordinated in right of payment to the Securities, modify or affect, in any
manner adverse to the Holders, such subordination, (D) if the Company is the
obligor thereon, provide that a Restricted Subsidiary shall be an obligor, (E)
if such Indebtedness is Non-Recourse Debt, cause such Indebtedness to no longer
constitute Non-Recourse Debt or (F) violate, or cause the Indebtedness to
violate, the provisions described under "-- Covenants -- Limitation on Payment
Restrictions Affecting Subsidiaries" and "-- Limitation on Liens" and (ii) such
Indebtedness would, after giving effect to such amendment, modification or
waiver as if it were an Incurrence, comply with clause (i) of the first proviso
to the definition of "Refinancing Indebtedness."
 
     "Indebtedness" of any Person means, without duplication, (i) the principal
of and premium (if any such premium is then due and owing) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable; (ii) all Capitalized Lease Obligations of
such Person; (iii) all obligations of such Person Incurred as the deferred
purchase price of property, all conditional sale obligations of such Person and
all obligations of such Person under any title retention agreement; (iv) all
obligations of such Person for the reimbursement of any obligor on any letter of
credit, banker's acceptance or similar credit transaction (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in (i) through (iii) above) entered into in the ordinary
course of business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the tenth Business Day following receipt by such Person of a demand
for reimbursement following payment on the letter of credit); (v) Redeemable
Stock of such Person and, in the case of any Subsidiary, any other Preferred
Stock, in either case valued at, in the case of Redeemable Stock, the greater of
its voluntary or involuntary maximum fixed repurchase price exclusive of accrued
and unpaid dividends or, in the case of Preferred Stock that is not Redeemable
Stock, its liquidation preference exclusive of accrued and unpaid dividends;
(vi) contractual obligations to repurchase goods sold or distributed; (vii) all
obligations of such Person in respect of Interest Rate Agreements and Currency
Agreements; (viii) all obligations of the type referred to in clauses (i)
through (vii) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable, directly
or indirectly, as obligor, guarantor or otherwise, including by means of any
guarantee; and (ix) all obligations of the type referred to in clauses (i)
through (viii) of other Persons secured by any Lien on any property or asset of
such Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured; provided,
however, that Indebtedness shall not include trade accounts payable arising in
the ordinary course of business. For purposes hereof, the "maximum fixed
repurchase price" of any Redeemable Stock which does not have a fixed repurchase
price shall be calculated in accordance with the terms of such Redeemable Stock
as if such Redeemable Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Redeemable Stock,
such fair market value to be determined in good faith by the Board of Directors.
The amount of Indebtedness of any Person at any date shall be, with respect to
unconditional obligations, the outstanding balance at such date of all such
obligations as described above and, with respect to any contingent
 
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obligations (other than pursuant to clause (vi) above, which shall be included
to the extent reflected on the balance sheet of such Person in accordance with
GAAP) at such date, the maximum liability determined by such Person's board of
directors, in good faith, as, in light of the facts and circumstances existing
at the time, reasonably likely to be Incurred upon the occurrence of the
contingency giving rise to such obligation.
 
     "Interest Payment Date" means the stated maturity of an installment of
interest on the Senior Notes.
 
     "Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement or other similar agreement or arrangement designed
to protect against fluctuations in interest rates to or under which the Company
or any of its Restricted Subsidiaries is a party or beneficiary on the Issue
Date or becomes a party or beneficiary thereunder.
 
     "Investment" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit or capital contribution to (by means
of any transfer of cash or other property to others or any payment for property
or services for the account or use of others), or any other investment in any
other Person, or any purchase or acquisition by such Person of any Capital
Stock, bonds, notes, debentures or other securities or assets issued or owned by
any other Person (whether by merger, consolidation, amalgamation, sale of assets
or otherwise). For purposes of the definition of "Unrestricted Subsidiary" and
the provisions set forth under "-- Covenants -- Limitation on Restricted
Payments," (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of any Restricted Subsidiary at the time that such Restricted
Subsidiary is designated an Unrestricted Subsidiary and shall exclude the fair
market value of the net assets of any Unrestricted Subsidiary at the time that
such Unrestricted Subsidiary is designated a Restricted Subsidiary and (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer, in each case as determined
by the Board of Directors in good faith. For purposes of determining the
aggregate amount of Investments in Controlled Non-Subsidiary Investments, the
amount of such Investments shall be reduced by an amount equal to the net
payments of interest on Indebtedness, dividends, repayments of interest on
Indebtedness, dividends, repayments of loans or advances, or other transfers of
assets, in each case to the Company or any Restricted Subsidiary from any Person
in whom a Controlled Non-Subsidiary Investment has been made, not to exceed in
the case of any Controlled Non-Subsidiary Investment the amount of Investments
previously made by the Company or any Restricted Subsidiary in such Person.
 
     "Investment Grade" means, with respect to the Senior Notes, a rating of
Baa3 or higher by Moody's together with a rating of BBB- or higher by S&P,
provided that neither of such entities shall have announced or informed the
Company that it is reviewing the rating of the Senior Notes in light of
downgrading the rating thereof.
 
     "Issue Date" means the date on which the Senior Notes are originally issued
under the Indenture.
 
     "Lien" means any mortgage, lien, pledge, charge, or other security interest
or encumbrance of any kind (including any conditional sale or other title
retention agreement and any lease in the nature thereof).
 
     "Line of Business" means the ownership, acquisition, development,
construction, improvement and operation of Facilities.
 
     "Moody's" means Moody's Investors Service, Inc. and its successors.
 
     "Net Available Cash" means, with respect to any Asset Sale, the cash or
cash equivalent payments received by the Company or a Subsidiary in connection
with such Asset Sale (including any cash received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
or when received and also including the proceeds of other property received when
converted to cash or cash equivalents) net of the sum of, without duplication,
(i) all reasonable legal, title and recording tax expenses, reasonable
commissions, and other reasonable fees and expenses incurred directly relating
to such Asset Sale, (ii) all local, state, federal and foreign taxes required to
be paid or accrued as a liability by the Company or any of its Restricted
Subsidiaries as a consequence of such Asset Sale, (iii) payments made to repay
Indebtedness which is secured by any assets subject to such Asset Sale in
accordance with the terms of any
 
                                       98
<PAGE>   100
 
Lien upon or other security agreement of any kind with respect to such assets,
or which must by its terms, or by applicable law, be repaid out of the proceeds
from such Asset Sale and (iv) all distributions required by any contract entered
into other than in contemplation of such Asset Sale to be paid to any holder of
a minority equity interest in such Restricted Subsidiary as a result of such
Asset Sale, so long as such distributions do not exceed such minority holder's
pro rata portion (based on such minority holder's proportionate equity interest)
of the cash or cash equivalent payments described above, net of the amounts set
forth in clauses (i)-(iii) above.
 
     "Net Cash Proceeds" means, with respect to any issuance or sale of Capital
Stock by any Person, the cash proceeds to such Person of such issuance or sale
net of attorneys' fees, accountants' fees, underwriters' or placement agents'
fees, discounts or commissions and brokerage, consultancy and other fees
actually incurred by such Person in connection with such issuance or sale and
net of taxes paid or payable by such Person as a result thereof.
 
     "Non-Convertible Capital Stock" means, with respect to any corporation, any
Capital Stock of such corporation which is not convertible into another security
other than non-convertible common stock of such corporation; provided, however,
that Non-Convertible Capital Stock shall not include any Redeemable Stock or
Exchangeable Stock.
 
     "Non-Recourse Debt" means Indebtedness of the Company or any Restricted
Subsidiary that is Incurred to acquire, construct or develop a Facility provided
that such Indebtedness is without recourse to the Company or any Restricted
Subsidiary or to any assets of the Company or any such Restricted Subsidiary
other than such Facility and the income from and proceeds of such Facility.
 
     "Offering" means the public offering and sale of the Senior Notes.
 
     "Officers' Certificate" means a certificate signed by two officers, one of
whom must be the President, the Treasurer or a Vice President of the Company.
Each Officers' Certificate (other than certificates provided pursuant to TIA
Section 314(a)(4)) shall include the statements provided for in TIA Section
314(e).
 
     "Operating Lease Obligations" means any obligation of the Company and its
Restricted Subsidiaries on a Consolidated basis incurred or assumed under or in
connection with any lease of real or personal property which, in accordance with
GAAP, is not required to be classified and accounted for as a capital lease.
 
     "Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel, if so acceptable, may be an employee of
or counsel to the Company or the Trustee. Each such Opinion of Counsel shall
include the statements provided for in TIA Section 314(e).
 
     "Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
 
     "Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
 
     "Principal" of a Senior Note means the principal of the Senior Note plus,
if applicable, the premium on the Senior Note.
 
     "Public Equity Offering" means an underwritten primary public offering of
equity securities of the Company pursuant to an effective registration statement
under the Securities Act.
 
     "PUHCA" means the Public Utility Holding Company Act of 1935, as amended.
 
     "PURPA" means the Public Utility Regulatory Policies Act of 1978, as
amended.
 
     "Rating Agencies" is defined to mean S&P and Moody's.
 
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<PAGE>   101
 
     "Rating Category" is defined to mean (i) with respect to S&P, any of the
following categories: AAA, AA, A, BBB, BB, B, CCC, CC, C and D (or equivalent
successor categories) and (ii) with respect to Moody's, any of the following
categories: Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C and D (or equivalent successor
categories). In determining whether the rating of the Notes has decreased by one
or more gradations, gradations within Rating Categories (+ and - for S&P; 1, 2
and 3 for Moody's) shall be taken into account (e.g., with respect to S&P, a
decline in a rating from BB+ to BB, as well as from BB- to B+, will constitute a
decrease of one gradation).
 
     "Rating Decline" is defined to mean the occurrence of (i) or (ii) below on,
or within 90 days after, the earliest of (A) the Company having become aware
that a Change of Control has occurred, (B) the date of public notice of the
occurrence of a Change of Control or (C) the date of public notice of the
intention by the Company to approve, recommend or enter into, any transaction
which, if consummated, would result in a Change of Control (which period shall
be extended so long as the rating of the Senior Notes is under publicly
announced consideration or possible downgrade by either of the Rating Agencies),
(i) a decrease of the rating of the Senior Notes by either Rating Agency by one
or more rating gradations or (ii) the Company shall fail to promptly advise the
Rating Agencies, in writing, of such occurrence or any subsequent material
developments or shall fail to use its best efforts to obtain, from at least one
Rating Agency, a written, publicly announced affirmation of its rating of the
Senior Notes, stating that it is not downgrading, and is not considering
downgrading, the Senior Notes.
 
     "Redeemable Stock" means any class or series of Capital Stock of any Person
that (a) by its terms, by the terms of any security into which it is convertible
or exchangeable or otherwise is, or upon the happening of an event or passage of
time would be, required to be redeemed (in whole or in part) on or prior to the
first anniversary of the Stated Maturity of the Senior Notes, (b) is redeemable
at the option of the holder thereof at any time on or prior to the first
anniversary of the Stated Maturity of the Senior Notes (other than on a Change
of Control or Asset Sale, provided that such Change of Control or Asset Sale
shall not yet have occurred) or (c) is convertible into or exchangeable for
Capital Stock referred to in clause (a) or clause (b) above or debt securities
at any time prior to the first anniversary of the Stated Maturity of the Senior
Notes.
 
     "Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness of the Company or a Restricted Subsidiary
existing on the Issue Date or Incurred in compliance with the Indenture
(including Indebtedness of the Company that refinances Indebtedness of any
Restricted Subsidiary and Indebtedness of any Restricted Subsidiary that
refinances Indebtedness of another Restricted Subsidiary) including Indebtedness
that refinances Refinancing Indebtedness; provided, however, that (i) if the
Indebtedness being refinanced is contractually subordinated in right of payment
to the Senior Notes, the Refinancing Indebtedness shall be contractually
subordinated in right of payment to the Senior Notes to at least the same extent
as the Indebtedness being refinanced, (ii) if the Indebtedness being refinanced
is Non-Recourse Debt, such Refinancing Indebtedness shall be Non-Recourse Debt,
(iii) the Refinancing Indebtedness is scheduled to mature either (a) no earlier
than the Indebtedness being refinanced or (b) after the Stated Maturity of the
Notes, (iv) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced and (v) such Refinancing
Indebtedness is in an aggregate principal amount (or if issued with original
issue discount, an aggregate issue price) that is equal to or less than the
aggregate principal amount (or if issued with original issue discount, the
aggregate accreted value) then outstanding (plus fees and expenses, including
any premium, swap breakage and defeasance costs) under the Indebtedness being
refinanced; and provided, further, that Refinancing Indebtedness shall not
include (x) Indebtedness of a Subsidiary of the Company that refinances
Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted
Subsidiary that refinances Indebtedness of an Unrestricted Subsidiary.
 
     "Related Assets" means electric power plants that, on the Issue Date,
produce electricity solely by utilizing steam from steam fields owned and
operated by a Restricted Subsidiary that is a Wholly Owned Subsidiary on the
Issue Date.
 
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<PAGE>   102
 
     "Related Asset Indebtedness" means Non-Recourse Debt of a Restricted
Subsidiary that is a Wholly Owned Subsidiary on the Issue Date, the proceeds of
which are used by such Restricted Subsidiary to finance the acquisition of
Related Assets by such Restricted Subsidiary; provided, however, that (i) such
Related Asset Indebtedness is Incurred contemporaneously with a Refinancing of
all of the Non-Recourse Debt of such Restricted Subsidiary then outstanding and
(ii) the principal amount of such Related Asset Indebtedness shall not exceed
the purchase price of the Related Assets plus reasonable out-of-pocket
transaction costs and expenses of the Company and its Restricted Subsidiaries
required to acquire, or finance the acquisition of, such Related Assets.
 
     "Restricted Subsidiary" means any Subsidiary of the Company that is not
designated an Unrestricted Subsidiary by the Board of Directors.
 
     "S&P" means Standard and Poor's Corporation and its successors.
 
     "Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Subsidiary transfers such
property to a Person and leases it back from such Person, other than leases for
a term of not more than 36 months or between the Company and a Wholly Owned
Subsidiary or between Wholly Owned Subsidiaries.
 
     "Senior Indebtedness" means (i) all obligations consisting of the principal
of and premium, if any, and accrued and unpaid interest (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company whether or not post-filing interest is
allowed in such proceeding), whether existing on the Issue Date or thereafter
Incurred, in respect of (A) Indebtedness of the Company for money borrowed and
(B) Indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which the Company is responsible or liable; (ii)
all Capitalized Lease Obligations of the Company; (iii) all obligations of the
Company (A) for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction, (B) under Interest Rate
Agreements and Currency Agreements entered into in respect of any obligations
described in clauses (i) and (ii) or (C) issued or assumed as the deferred
purchase price of property, and all conditional sale obligations of the Company
and all obligations of the Company under any title retention agreement; (iv) all
guarantees of the Company with respect to obligations of other persons of the
type referred to in clauses (ii) and (iii) and with respect to the payment of
dividends of other Persons; and (v) all obligations of the Company consisting of
modifications, renewals, extensions, replacements and refundings of any
obligations described in clauses (i), (ii), (iii) or (iv); unless, in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is provided that such obligations are subordinated in right of
payment to the Notes, or any other Indebtedness or obligation of the Company;
provided, however, that Senior Indebtedness shall not be deemed to include (1)
any obligation of the Company to any Subsidiary, (2) any liability for Federal,
state, local or other taxes or (3) any accounts payable or other liability to
trade creditors arising in the ordinary course of business (including guarantees
thereof or instruments evidencing such liabilities).
 
     "Significant Subsidiary" means any Subsidiary (other than an Unrestricted
Subsidiary) that would be a "Significant Subsidiary" of the Company within the
meaning of Rule 1-02 under Regulations S-X promulgated by the SEC.
 
     "Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the principal of such security is
due and payable, including pursuant to any mandatory redemption provision (but
excluding any provision providing for the repurchase of such security at the
option of the holder thereof upon the happening of any contingency).
 
     "Subordinated Indebtedness" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is contractually
subordinated or junior in right of payment to the Senior Notes or any other
Indebtedness of the Company.
 
     "Subsidiary" means, as applied to any Person, any corporation, limited or
general partnership, trust, association or other business entity of which an
aggregate of at least a majority of the outstanding Voting Shares or an
equivalent controlling interest therein, of such Person is, at the time,
directly or indirectly, owned by such Person and/or one or more Subsidiaries of
such Person.
 
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<PAGE>   103
 
     "Unrelated Business" means any business other than the Line of Business.
 
     "Unrestricted Subsidiary" means (i) any Subsidiary that at the time of
determination shall be designated an Unrestricted Subsidiary by the Board of
Directors in the manner provided below and (ii) any subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
(including any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, the Company or any other Subsidiary that is not a
Subsidiary of the Subsidiary to be so designated; provided, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, that such designation would be
permitted pursuant to the provisions under "Covenants -- Limitation on
Restricted Payments." The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary of the Company; provided, however, that
immediately after giving effect to such designation (x) the Company could Incur
$1.00 of additional Indebtedness pursuant to the first paragraph of
"Covenants -- Limitation on Incurrence of Indebtedness" and (y) no Default or
Event of Default shall have occurred and be continuing. Any such designation by
the Board of Directors shall be evidenced to the Trustee by promptly filing with
the Trustee a copy of the board resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing provisions; provided, however, that the failure to so file such
resolution and/or Officers' Certificate with the Trustee shall not impair or
affect the validity of such designation.
 
     "U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case under
clauses (i) or (ii) are not callable or redeemable before the maturity thereof.
 
     "Voting Shares," with respect to any corporation, means the Capital Stock
having the general voting power under ordinary circumstances to elect at least a
majority of the board of directors (irrespective of whether or not at the time
stock of any other class or classes shall have or might have voting power by
reason of the happening of any contingency).
 
     "Wholly Owned Subsidiary" means a Subsidiary (other than an Unrestricted
Subsidiary) all the Capital Stock of which (other than directors' qualifying
shares) is owned by the Company or another Wholly Owned Subsidiary.
 
     "Working Capital Credit Agreement" means the Line of Credit Note, dated as
of June 4, 1993, between the Company and The Bank of California, N.A. as
amended, refinanced, renewed or extended from time to time.
 
COVENANTS
 
     The Indenture contains covenants including, among others, the following:
 
     Limitation on Restricted Payments. Under the terms of the Indenture, so
long as any of the Senior Notes are outstanding, the Company shall not, and
shall not permit any Restricted Subsidiary to, directly or indirectly, (i)
declare or pay any dividend on or make any distribution or similar payment of
any sort in respect of its Capital Stock (including any payment in connection
with any merger or consolidation involving the Company) to the direct or
indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Non-Convertible Capital Stock or rights to acquire its
Non-Convertible Capital Stock and dividends or distributions payable solely to
the Company or a Restricted Subsidiary and other than pro rata dividends paid by
a Subsidiary with respect to a series or class of its Capital Stock the majority
of which is held by the Company or a Wholly Owned Subsidiary that is not a
Foreign Subsidiary), (ii) purchase, redeem, defease or otherwise acquire or
retire for value any Capital Stock of the Company or of any direct or indirect
parent of the Company, or, with respect to the Company, exercise any option to
exchange any Capital Stock that by its terms is exchangeable solely at the
option of the Company (other than into Capital Stock of the Company which is
neither Exchangeable Stock nor Redeemable Stock), (iii) purchase, repurchase,
redeem,
 
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defease or otherwise acquire or retire for value, prior to scheduled maturity or
scheduled repayment thereof or scheduled sinking fund payment thereon, any
Subordinated Indebtedness (other than the purchase, repurchase or other
acquisition of Subordinated Indebtedness purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition) or (iv) make any Investment,
other than a Controlled Non-Subsidiary Investment, or a payment described in
clause (vi) of the second sentence under "-- Covenants -- Transactions with
Affiliates," in any Unrestricted Subsidiary or any Affiliate of the Company
other than a Restricted Subsidiary or a Person which will become a Restricted
Subsidiary as a result of any such Investment (each such payment described in
clauses (i)-(iv) of this paragraph, a "Restricted Payment"), unless at the time
of and after giving effect to the proposed Restricted Payment: (1) no Default or
Event of Default shall have occurred and be continuing (or would result
therefrom); (2) the Company would be permitted to Incur an additional $1 of
Indebtedness pursuant to the provisions described in the first paragraph under
"-- Limitation on Incurrence of Indebtedness," and (3) the aggregate amount of
all such Restricted Payments subsequent to the Issue Date shall not exceed the
sum of (A) 50% of aggregate Consolidated Net Income accrued during the period
(treated as one accounting period) from January 1, 1994 to the end of the most
recent fiscal quarter for which financial statements are available (or if such
Consolidated Net Income is a deficit, minus 100% of such deficit), and minus
100% of the amount of any write-downs, write-offs, other negative reevaluations
and other negative extraordinary charges not otherwise reflected in Consolidated
Net Income during such period; (B) if the Senior Notes are Investment Grade
immediately following the Restricted Payment in connection with which this
calculation is made, an additional 25% of Consolidated Net Income for any period
of one or more consecutive completed fiscal quarters ending with the last fiscal
quarter completed prior to the date of such Restricted Payment during which the
Senior Notes were Investment Grade for the entire period; (C) the aggregate Net
Cash Proceeds received by the Company after January 1, 1994 from the sale of
Capital Stock (other than Redeemable Stock or Exchangeable Stock) of the Company
to any person other than the Company, any of its Subsidiaries or an employee
stock ownership plan; (D) the amount by which the principal amount of, and any
accrued interest on, Indebtedness of the Company or its Restricted Subsidiaries
is reduced on the Company's Consolidated balance sheet upon the conversion or
exchange (other than by a Subsidiary) subsequent to the Issue Date of any
Indebtedness of the Company or any Restricted Subsidiary converted or exchanged
for Capital Stock (other than Redeemable Stock or Exchangeable Stock) of the
Company (less the amount of any cash, or the value of any other property,
distributed by the Company or any Restricted Subsidiary upon such conversion or
exchange); (E) an amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from payments of interest on Indebtedness,
dividends, repayments of loans or advances, or other transfers of assets, in
each case to the Company or any Restricted Subsidiary from Unrestricted
Subsidiaries, or from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed in the case of any Unrestricted Subsidiary the
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary; and (F) $15,000,000.
 
     The failure to satisfy the conditions set forth in clauses (2) and (3) of
the first paragraph under "-- Limitation on Restricted Payments" shall not
prohibit any of the following as long as the condition set forth in clause (1)
of such paragraph is satisfied (except as set forth below): (i) dividends paid
within 60 days after the date of declaration thereof if at such date of
declaration such dividend would have complied with the provisions described in
the first paragraph under "-- Limitation on Restricted Payments;" provided,
however, that, notwithstanding clause (1) of the immediately preceding
paragraph, the occurrence or existence of a Default at the time of payment shall
not prohibit the payment of such dividends; (ii) any purchase, redemption,
defeasance, or other acquisition or retirement for value of Capital Stock or
Subordinated Indebtedness of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Capital Stock of the Company
(other than Redeemable Stock or Exchangeable Stock and other than stock issued
or sold to a Subsidiary or to an employee stock ownership plan), provided,
however, that notwithstanding clause (1) of the first paragraph under
"-- Limitation on Restricted Payments," the occurrence or existence of a Default
or Event of Default shall not prohibit, for purposes of this Section, the making
of such purchase, redemption, defeasance or other acquisition or retirement, and
provided, further, such purchase, redemption, defeasance or other acquisition or
retirement shall not be included in the
 
                                       103
<PAGE>   105
 
calculation of Restricted Payments made for purposes of clause (3) of the first
paragraph under "-- Limitation on Restricted Payments," and provided, further,
that the Net Cash Proceeds from such sale shall be excluded from sub-clause (C)
of clause (3) of the first paragraph under "-- Limitation on Restricted
Payments;" (iii) any purchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Indebtedness of the Company made by
exchange for, or out of the proceeds of the substantially concurrent Incurrence
of for cash (other than to a Subsidiary), new Indebtedness of the Company,
provided, however, that (A) such new Indebtedness shall be contractually
subordinated in right of payment to the Securities at least to the same extent
as the Indebtedness being so redeemed, repurchased, defeased, acquired or
retired, (B) if the Indebtedness being purchased, redeemed, defeased or acquired
or retired for value is Non-Recourse Debt, such new Indebtedness shall be
Non-Recourse Debt, (C) such new Indebtedness has a Stated Maturity either (1) no
earlier than the Stated Maturity of the Indebtedness redeemed, repurchased,
defeased, acquired or retired or (2) after the Stated Maturity of the Senior
Notes and (D) such Indebtedness has an Average Life equal to or greater than the
Average Life of the Indebtedness redeemed, repurchased, defeased, acquired or
retired, and provided, further, that such purchase, redemption, defeasance or
other acquisition or retirement shall not be included in the calculation of
Restricted Payments made for purposes of clause (3) of the first paragraph under
"-- Limitation on Restricted Payments;" and (iv) any purchase, redemption,
defeasance or other acquisition or retirement for value of Subordinated
Indebtedness upon a Change of Control or an Asset Sale to the extent required by
the indenture or other agreement pursuant to which such Subordinated
Indebtedness was issued, but only if the Company (A) in the case of a Change of
Control, has made an offer to repurchase the Senior Notes as described under
"-- Covenants -- Change of Control" or (B) in the case of an Asset Sale, has
applied the Net Available Cash from such Asset Sale in accordance with the
provisions described under "-- Covenants -- Sales of Assets."
 
     Limitation on Incurrence of Indebtedness. Under the terms of the Indenture,
the Company shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, Incur any Indebtedness, except that the Company may
Incur Indebtedness if, after giving effect thereto, the Consolidated Coverage
Ratio would be greater than 2:1.
 
     The foregoing provision will not limit the ability of the Company or any
Restricted Subsidiary to Incur the following Indebtedness: (i) Refinancing
Indebtedness (except with respect to Indebtedness referred to in clause (ii),
(iii) or (iv) below); (ii) in addition to any Indebtedness otherwise permitted
to be Incurred hereunder, Indebtedness of the Company at any one time
outstanding in an aggregate principal amount not to exceed $25,000,000 and
provided that the proceeds of such Indebtedness shall not be used for the
purpose of making any Restricted Payments described in clause (i) or (ii) under
"-- Limitation on Restricted Payments;" (iii) Indebtedness of the Company which
is owed to and held by a Wholly Owned Subsidiary and Indebtedness of a Wholly
Owned Subsidiary which is owed to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of any
Capital Stock which results in any such Wholly Owned Subsidiary ceasing to be a
Wholly Owned Subsidiary or any transfer of such Indebtedness (other than to the
Company or a Wholly Owned Subsidiary) shall be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the Company or by a Wholly
Owned Subsidiary, as the case may be; (iv) Indebtedness of the Company under the
Bank Credit Agreement which, when taken together with the aggregate amount of
Indebtedness Incurred pursuant to clause (viii) of this paragraph, is not in
excess of $50,000,000, and Indebtedness of the Company under the Working Capital
Credit Agreement not in excess of $25,000,000; (v) Acquired Indebtedness;
provided, however, that the Company would have been able to Incur such
Indebtedness at the time of the Incurrence thereof pursuant to the immediately
preceding paragraph; (vi) Indebtedness of the Company or a Restricted Subsidiary
outstanding on the Issue Date (other than Indebtedness referred to in clause
(iv) above and Indebtedness being repaid or retired with the proceeds of the
Offering); (vii) Non-Recourse Debt of a Restricted Subsidiary (other than a
Restricted Subsidiary existing on the Issue Date), the proceeds of which are
used to acquire, develop, improve or construct a new Facility of such Restricted
Subsidiary; (viii) guarantees by the Company of Indebtedness of Restricted
Subsidiaries which, but for such guarantees, would be permitted to be Incurred
pursuant to clause (vii) of this paragraph, provided that the aggregate
principal amount of Indebtedness Incurred pursuant to this clause (viii), when
taken together with outstanding Indebtedness Incurred under the Bank Credit
Agreement pursuant to clause (iv) of this paragraph, is not in excess of
$50,000,000; and (ix) Related Asset
 
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<PAGE>   106
 
Indebtedness, provided that at the time of the Incurrence thereof, giving pro
forma effect to the Incurrence thereof, Moody's and S&P shall have affirmed
their respective ratings of the Senior Notes in effect prior to the Incurrence
of such Related Asset Indebtedness.
 
     Notwithstanding the provisions of this covenant described in the first two
paragraphs above, the Indenture provides that the Company shall not Incur any
Indebtedness if the proceeds thereof are used, directly or indirectly, to repay,
prepay, redeem, defease, retire, refund or refinance any Subordinated
Indebtedness unless such repayment, prepayment, redemption, defeasance,
retirement, refunding or refinancing is not prohibited under "-- Limitation on
Restricted Payments" or unless such Indebtedness shall be contractually
subordinated to the Senior Notes at least to the same extent as such
Subordinated Indebtedness.
 
     Limitation on Payment Restrictions Affecting Subsidiaries. Under the terms
of the Indenture, the Company shall not, and shall not permit any Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (i)
pay dividends to or make any other distributions on its Capital Stock, or pay
any Indebtedness or other obligations owed to the Company or any other
Restricted Subsidiary, (ii) make any Investments in the Company or any other
Restricted Subsidiary or (iii) transfer any of its property or assets to the
Company or any other Restricted Subsidiary; provided, however, that the
foregoing shall not apply to (a) any encumbrance or restriction existing
pursuant to the Indenture or any other agreement or instrument as in effect or
entered into on the Issue Date; (b) any encumbrance or restriction with respect
to a Subsidiary pursuant to an agreement relating to any Acquired Indebtedness;
provided, however, that such encumbrance or restriction was not Incurred in
connection with or in contemplation of such Subsidiary becoming a Subsidiary;
(c) any encumbrance or restriction pursuant to an agreement effecting a
refinancing of Indebtedness referred to in clause (a) or (b) above or contained
in any amendment or modification with respect to such Indebtedness; provided,
however, that the encumbrances and restrictions contained in any such agreement,
amendment or modification are no less favorable in any material respect with
respect to the matters referred to in clauses (i), (ii) and (iii) above than the
encumbrances and restrictions with respect to the Indebtedness being refinanced,
amended or modified; (d) in the case of clause (iii) above, customary
non-assignment provisions of (a) any leases governing a leasehold interest, (B)
any supply, license or other agreement entered into in the ordinary course of
business of the Company or any Subsidiary or (C) any security agreement relating
to a Lien permitted by Section 3.7(l), that, in the reasonable determination of
the President or Chief Financial Officer of the Company (x) is required in order
to obtain such financing and (v) is customary for such financings; (e) any
restrictions with respect to a Subsidiary imposed pursuant to an agreement
entered into for the sale or disposition of all or substantially all of the
Capital Stock or assets of such Subsidiary pending the closing of such sale or
disposition; (f) any encumbrance imposed pursuant to the terms of Indebtedness
incurred pursuant to clause (vii) of the proviso to the covenant described under
"-- Limitation on Incurrence of Indebtedness" above, provided that such
encumbrance in the written opinion of the President or Chief Financial Officer
of the Company, (x) is required in order to obtain such financing, (y) is
customary for such financings and (z) applies only to the assets of or revenues
of the applicable Facility or (g) any encumbrance or restriction existing by
reason of applicable law.
 
     Limitation on Sale/Leaseback Transactions. Under the terms of the
Indenture, the Company shall not, and shall not permit any Restricted Subsidiary
to, enter into any Sale/Leaseback Transaction unless (i) the Company or such
Subsidiary would be entitled to create a Lien on such property securing
Indebtedness in an amount equal to the Attributable Debt with respect to such
transaction without equally and ratably securing the Securities pursuant to the
covenant entitled "Limitation on Liens" or (ii) the net proceeds of such sale
are at least equal to the fair value (as determined by the Board of Directors)
of such property and the Company or such Subsidiary shall apply or cause to be
applied an amount in cash equal to the net proceeds of such sale to the
retirement, within 30 days of the effective date of any such arrangement, of
Senior Indebtedness or Indebtedness of a Restricted Subsidiary; provided,
however, that in addition to the transactions permitted pursuant to the
foregoing clauses (i) and (ii), the Company or any Restricted Subsidiary may
enter into a Sale/Leaseback Transaction as long as the sum of (x) the
Attributable Debt with respect to such Sale/Leaseback Transaction and all other
Sale/Leaseback Transactions entered into pursuant to this proviso, plus (y) the
amount of outstanding Indebtedness secured by Liens Incurred pursuant to the
final proviso to
 
                                       105
<PAGE>   107
 
the covenant described under "-- Limitation on Liens" below, does not exceed 10%
of Consolidated Net Tangible Assets as determined based on the consolidated
balance sheet of the Company as of the end of the most recent fiscal quarter for
which financial statements are available; and provided, further, that a
Restricted Subsidiary that is not a Restricted Subsidiary on the Issue Date may
enter into a Sale/Leaseback Transaction with respect to property owned by such
Restricted Subsidiary, the proceeds of which are used to acquire, develop,
construct, or repay (within 365 days of the commencement of commercial operation
of such Facility) Indebtedness Incurred to acquire, develop or construct, a new
Facility of such Restricted Subsidiary, as long as neither the Company nor any
other Restricted Subsidiary shall have any obligation or liability in connection
therewith.
 
     Limitation on Liens. Under the terms of the Indenture, the Company shall
not, and shall not permit any Restricted Subsidiary to, directly or indirectly,
incur or permit to exist any Lien of any nature whatsoever on any of its
properties (including, without limitation, Capital Stock), whether owned at the
date of such Indenture or thereafter acquired, other than (a) pledges or
deposits made by such Person under workers' compensation, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for payment of Indebtedness) or leases to which
such Person is a party, or deposits to secure statutory or regulatory
obligations of such Person or deposits of cash of United States Government bonds
to secure surety, appeal or performance bonds to which such Person is a party,
or deposits as security for contested taxes or import duties or for the payment
of rent, in each case Incurred in the ordinary course of business; (b) Liens
imposed by law such as carriers', warehousemen's and mechanics' Liens, in each
case, arising in the ordinary course of business and with respect to amounts not
yet due or being contested in good faith by appropriate legal proceedings
promptly instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made; or other Liens arising out of judgments or awards against
such Person with respect to which such Person shall then be diligently
prosecuting appeal or other proceedings for review; (c) Liens for property taxes
not yet subject to penalties for non-payment or which are being contested in
good faith and by appropriate legal proceedings promptly instituted and
diligently conducted and for which a reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP shall have been made; (d)
Liens in favor of issuers or surety bonds or letters of credit issued pursuant
to the request of and for the account of such Person in the ordinary course of
its business; provided, however, that such letters of credit may not constitute
Indebtedness; (e) minor survey exceptions, minor encumbrances, easements or
reservations of, or rights of others for, rights of way, sewers, electric lines,
telegraph and telephone lines and other similar purposes, or zoning or other
restrictions as to the use of real properties or liens incidental to the conduct
of the business of such Person or to the ownership of its properties which were
not Incurred in connection with Indebtedness or other extensions of credit and
which do not in the aggregate materially adversely affect the value of said
properties or materially impair their use in the operation of the business of
such Person; (f) Liens securing Indebtedness Incurred to finance the
construction or purchase of, or repairs, improvements or additions to, property,
which shall include, without limitation, Liens on the stock of the Restricted
Subsidiary that has purchased or owns such property; provided, however, that the
Lien may not extend to any other property owned by the Company or any Restricted
Subsidiary at the time the Lien is incurred, and the Indebtedness secured by the
Lien may not be issued more than 270 days after the later of the acquisition,
completion of construction, repair, improvement, addition or commencement of
full operation of the property subject to the Lien; (g) Liens existing on the
Issue Date (other than Liens relating to Indebtedness or other obligations being
repaid or liens that are otherwise extinguished with the proceeds of the
Offering); (h) Liens on property or shares of stock of a Person at the time such
Person becomes a Subsidiary; provided, however, that any such lien may not
extend to any other property owned by the Company or any Restricted Subsidiary;
(i) Liens on property at the time the Company or a Subsidiary acquires the
property, including any acquisition by means of a merger or consolidation with
or into the Company or a Subsidiary; provided, however, that such Liens are not
incurred in connection with, or in contemplation of, such merger or
consolidation; and provided, further, that the Lien may not extend to any other
property owned by the Company or any Restricted Subsidiary; (j) Liens securing
Indebtedness or other obligations of a Subsidiary owing to the Company or a
Wholly Owned Subsidiary; (k) Liens incurred by a Person other than the Company
or any Subsidiary on assets that are the subject of a Capitalized Lease
Obligation to which the Company or a Subsidiary is a party; provided,
 
                                       106
<PAGE>   108
 
however, that any such Lien may not secure Indebtedness of the Company or any
Subsidiary (except by virtue of clause (ix) of the definition of "Indebtedness")
and may not extend to any other property owned by the Company or any Restricted
Subsidiary; (l) Liens Incurred by a Restricted Subsidiary on its assets to
secure Non-Recourse Debt Incurred pursuant to clause (vii) of the second
paragraph under "-- Limitation on Incurrence of Indebtedness" above, provided
that such Lien (A) is incurred at the time of the initial Incurrence of such
Indebtedness and (B) does not extend to any assets or property of the Company or
any other Restricted Subsidiary; (m) Liens not in respect of Indebtedness
arising from Uniform Commercial Code financing statements for informational
purposes with respect to leases Incurred in the ordinary course of business and
not otherwise prohibited by this Indenture; (n) Liens not in respect of
Indebtedness consisting of the interest of the lessor under any lease Incurred
in the ordinary course of business and not otherwise prohibited by this
Indenture; (o) Liens which constitute banker's liens, rights of set-off or
similar rights and remedies as to deposit accounts or other funds maintained
with any bank or other financial institution, whether arising by operation of
law or pursuant to contract; (p) Liens to secure any refinancing, refunding,
extension, renewal or replacement (or successive refinancings, refundings,
extensions, renewals or replacements) as a whole, or in part, of any
Indebtedness secured by any Lien referred to in the foregoing clauses (f), (g),
(h) and (i), provided, however, that (x) such new Lien shall be limited to all
or part of the same property that secured the original Lien (plus improvements
on such property) and (y) the Indebtedness secured by such Lien at such time is
not increased (other than by an amount necessary to pay fees and expenses,
including premiums, related to the refinancing, refunding, extension, renewal or
replacement of such Indebtedness); and (q) Liens by which the Senior Notes are
secured equally and ratably with other Indebtedness of the Company pursuant to
the provisions described under "-- Covenants -- Limitations on Liens," without
effectively providing that the Senior Notes shall be secured equally and ratably
with (or prior to) the obligations so secured for so long as such obligations
are so secured; provided, however, that the Company may incur other Liens to
secure Indebtedness as long as the sum of (x) the amount of outstanding
Indebtedness secured by Liens incurred pursuant to this proviso plus (y) the
Attributable Debt with respect to all outstanding leases in connection with
Sale/Leaseback Transactions entered into pursuant to the proviso under
"-- Limitation on Sale/Leaseback Transactions," does not exceed 10% of
Consolidated Net Tangible Assets as determined with respect to the Company as of
the end of the most recent fiscal quarter for which financial statements are
available.
 
     Change of Control. Under the terms of the Indenture, in the event of a
Change of Control Triggering Event, the Company shall make an offer to purchase
(the "Change of Control Offer") the Senior Notes then outstanding at a purchase
price equal to 101% of the principal amount (excluding any premium) thereof plus
accrued and unpaid interest to the Change of Control Purchase Date (as defined
below) on the terms set forth in this provision. The date on which the Company
shall purchase the Senior Notes pursuant to this provision (the "Change of
Control Purchase Date") shall be no earlier than 30 days, nor later than 60
days, after the notice referred to below is mailed, unless a longer period shall
be required by law. The Company shall notify the Trustee in writing promptly
after the occurrence of any Change of Control Triggering Event of the Company's
obligation to offer to purchase all of the Senior Notes.
 
     Notice of a Change of Control Offer shall be mailed by the Company to the
Holders of the Senior Notes at their last registered address (with a copy to the
Trustee and the Paying Agent) within thirty (30) days after a Change in Control
Triggering Event has occurred. The Change of Control Offer shall remain open
from the time of mailing until a date not more than five (5) Business Days
before the Change of Control Purchase Date. The notice shall contain all
instructions and materials necessary to enable such Holders to tender (in whole
or in part) the Senior Notes pursuant to the Change of Control Offer. The
notice, which shall govern the terms of the Change of Control Offer, shall
state: (a) that the Change of Control Offer is being made pursuant to the
Indenture; (b) the purchase price and the Change of Control Purchase Date; (c)
that any Senior Note not surrendered or accepted for payment will continue to
accrue interest; (d) that any Senior Note accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Purchase Date; (e) that any Holder electing to have a Senior Note
purchased (in whole or in part) pursuant to a Change of Control Offer will be
required to surrender the Senior Note, with the form entitled "Option of Holder
to Elect Purchase" on the reverse of the Senior Note completed, to the Paying
Agent at the address specified in the notice (or otherwise make effective
delivery of the Senior Note pursuant
 
                                       107
<PAGE>   109
 
to book-entry procedures and the related rules of the applicable depositories)
at least five (5) Business Days before the Change of Control Purchase Date; and
(f) that any Holder will be entitled to withdraw his or her election if the
Paying Agent receives, not later than three (3) Business Days prior to the
Change of Control Purchase Date, a telegram, telex, facsimile transmission or
letter setting forth the name of the Holder, the principal amount of the Senior
Note the Holder delivered for purchase and a statement that such Holder is
withdrawing his or her election to have the Senior Note purchased.
 
     On the Change of Control Purchase Date, the Company shall (i) accept for
payment the Senior Notes, or portions thereof, surrendered and properly tendered
and not withdrawn, pursuant to the Change of Control Offer, (ii) deposit with
the Paying Agent, no later than 11:00 a.m. eastern standard time, money, in
immediately available funds, sufficient to pay the purchase price of all the
Senior Notes or portions thereof so accepted and (iii) deliver to the Trustee,
no later than 11:00 a.m. eastern standard time, the Senior Notes so accepted
together with an Officers' Certificate stating that such Senior Notes have been
accepted for payment by the Company. The Paying Agent shall promptly mail or
deliver to Holders of Senior Notes so accepted payment in an amount equal to the
purchase price. Holders whose Securities are purchased only in part will be
issued new Senior Notes equal in principal amount to the unpurchased portion of
the Senior Notes surrendered.
 
     Transactions with Affiliates. Under the terms of the Indenture, the Company
shall not, and shall not permit any Restricted Subsidiary to, directly or
indirectly, enter into, permit to exist, renew or extend any transaction or
series of transactions (including, without limitation, the sale, purchase,
exchange or lease of any assets or property or the rendering of any services)
with any Affiliate of the Company unless (i) the terms of such transaction or
series of transactions are (A) no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than would be obtainable in a
comparable transaction or series of related transactions in arm's-length
dealings with an unrelated third-party and (B) set forth in writing, if such
transaction or series of transactions involve aggregate payments or
consideration in excess of $1,000,000, and (ii) with respect to a transaction or
series of transactions involving the sale, purchase, lease or exchange of
property or assets having a value in excess of $5,000,000, such transaction or
series of transactions has been approved by a majority of the disinterested
members of the Board of Directors or, if there are no disinterested members of
the Board of Directors, the Board of Directors of the Company shall have
received a written opinion of a nationally recognized investment banking firm
stating that such transaction or series of transactions is fair to the Company
or such Restricted Subsidiary from a financial point of view. The foregoing
provisions do not prohibit (i) the payment of reasonable fees to directors of
the Company and its subsidiaries who are not employees of the Company or its
subsidiaries; (ii) any transaction between the Company and a Wholly Owned
Subsidiary or between Wholly Owned Subsidiaries otherwise permitted by the terms
of the Indenture; (iii) the payment of any Restricted Payment which is expressly
permitted to be paid pursuant to the second paragraph under
"-- Covenants -- Limitation on Restricted Payments;" (iv) any issuance of
securities or other reasonable payments, awards or grants, in cash or otherwise,
pursuant to, or the funding of, employment arrangements approved by the Board of
Directors; (v) the grant of stock options or similar rights to employees and
directors of the Company pursuant to plans approved by the Board of Directors;
(vi) loans or advances to employees in the ordinary course of business; (vii)
any repurchase, redemption or other retirement of Capital Stock of the Company
held by employees of the Company or any of its Subsidiaries upon death,
disability or termination of employment at a price not in excess of the fair
market value thereof approved by the Board of Directors; (viii) any transaction
between or among the Company and any Subsidiary in the ordinary course of
business and consistent with past practices of the Company and its Subsidiaries;
(ix) payments of principal, interest and commitment fees under the Bank Credit
Agreement; and (x) any agreement to do any of the foregoing. Any transaction
which has been determined, in the written opinion of an independent nationally
recognized investment banking firm, to be fair, from a financial point of view,
to the Company or the applicable Restricted Subsidiary shall be deemed to be in
compliance with this provision.
 
     Sales of Assets. Under the terms of the Indenture, neither the Company nor
any Restricted Subsidiary shall consummate any Asset Sale unless (i) the Company
or such Restricted Subsidiary receives consideration at the time of such Asset
Sale at least equal to the fair market value, as determined in good faith by the
Board of Directors, of the shares or assets subject to such Asset Sale, (ii) at
least 60% of the consideration
 
                                       108
<PAGE>   110
 
thereof received by the Company or such Restricted Subsidiary is in the form of
cash or cash equivalents which are promptly converted into cash by the Person
receiving such payment and (iii) an amount equal to 100% of the Net Available
Cash is applied by the Company (or such Subsidiary, as the case may be) as set
forth herein. Under the terms of the Indenture, the Company shall not permit any
Unrestricted Subsidiary to make any Asset Sale unless such Unrestricted
Subsidiary receives consideration at the time of such Asset Sale at least equal
to the fair market value of the shares or assets so disposed of as determined in
good faith by the Board of Directors.
 
     Under the terms of the Indenture, within 365 days (such period being the
"Application Period") following the consummation of an Asset Sale, the Company
or such Restricted Subsidiary shall apply the Net Available Cash from such Asset
Sale as follows: (i) first, to the extent the Company or such Restricted
Subsidiary elects, to reinvest in Additional Assets (including by means of an
investment in Additional Assets by a Restricted Subsidiary with Net Available
Cash received by the Company or another Restricted Subsidiary); (ii) second, to
the extent of the balance of such Net Available Cash after application in
accordance with clause (i), and to the extent the Company or such Restricted
Subsidiary elects (or is required by the terms of any Senior Indebtedness or any
Indebtedness of such Restricted Subsidiary), to prepay, repay or purchase Senior
Indebtedness (other than Senior Notes) or Indebtedness (other than any Preferred
Stock) of a Restricted Subsidiary (in each case other than Indebtedness owed to
the Company or an Affiliate of the Company); (iii) third, to the extent of the
balance of such Net Available Cash after application in accordance with clauses
(i) and (ii), and to the extent the Company or such Restricted Subsidiary
elects, to purchase Senior Notes; and (iv) fourth, to the extent of the balance
of such Net Available Cash after application in accordance with clauses (i),
(ii) and (iii), to make an offer to purchase the Senior Notes at not less than
their principal amount plus accrued interest (if any) pursuant to and subject to
the conditions set forth in the Indenture; provided, however, that in connection
with any prepayment, repayment or purchase of Indebtedness pursuant to clause
(ii), (iii) or (iv) above, the Company or such Restricted Subsidiary shall
retire such Indebtedness and cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. To the extent that any Net Available Cash from any Asset
Sale remains after the application of such Net Available Cash in accordance with
this paragraph, the Company or such Restricted Subsidiary may utilize such
remaining Net Available Cash in any manner not otherwise prohibited by the
Indenture.
 
     To the extent that any or all of the Net Available Cash of any Foreign
Asset Sale is prohibited or delayed by applicable local law from being
repatriated to the United States, the portion of such Net Available Cash so
affected shall not be required to be applied at the time provided above, but may
be retained by the applicable Restricted Subsidiary so long, but only so long,
as the applicable local law will not permit repatriation to the United States
(the Company hereby agreeing to promptly take or cause the applicable Restricted
Subsidiary to promptly take all actions required by the applicable local law to
permit such repatriation). Once such repatriation of any of such affected Net
Available Cash is permitted under the applicable local law, such repatriation
shall be immediately effected and such repatriated Net Available Cash will be
applied in the manner set forth in this provision as if such Asset Sale had
occurred on the date of such repatriation.
 
     Notwithstanding the foregoing, to the extent that the Board of Directors
determines, in good faith, that repatriation of any or all of the Net Available
Cash of any Foreign Asset Sale would have a material adverse tax consequence to
the Company, the Net Available Cash so affected may be retained outside of the
United States by the applicable Restricted Subsidiary for so long as such
material adverse tax consequence would continue.
 
     Under the Indenture, the Company shall not be required to make an offer to
purchase the Senior Notes if the Net Available Cash available from an Asset Sale
(after application of the proceeds as provided in clauses (i) and (ii) of the
second paragraph above) is less than $1,000,000 for any particular Asset Sale
(which lesser amounts shall not be carried forward for purposes of determining
whether an offer is required with respect to the Net Available Cash from any
subsequent Asset Sale).
 
     Notwithstanding the foregoing, this provision shall not apply to, or
prevent any sale of assets, property, or Capital Stock of Subsidiaries to the
extent that the fair market value (as determined in good faith by the
 
                                       109
<PAGE>   111
 
Board of Directors) of such asset, property or Capital Stock, together with the
fair market value of all other assets, property, or Capital Stock of
Subsidiaries sold, transferred or otherwise disposed of in Asset Sales during
the twelve month period preceding the date of such sale, does not exceed 5% of
Consolidated Net Tangible Assets as determined as of the end of the most recent
fiscal quarter for which financial statements are available (it being understood
that this provision shall only apply with respect to the fair market value of
such asset, property or Capital Stock in excess of 5% of consolidated Net
Tangible Assets), and no violation of this provision shall be deemed to have
occurred as a consequence thereof.
 
     In the event of the transfer of substantially all (but not all) of the
property and assets of the Company as an entirety to a Person in a transaction
permitted under the covenant described under "-- Merger and Consolidation," the
Successor Corporation shall be deemed to have sold the properties and assets of
the Company not so transferred for purposes of this covenant, and shall comply
with the provisions of this covenant with respect to such deemed sale as if it
were an Asset Sale.
 
     Limitation on the Issuance of Capital Stock and the Incurrence of
Indebtedness of Restricted Subsidiaries. Pursuant to the terms of the Indenture,
the Company shall not permit any Restricted Subsidiary, directly or indirectly,
to issue or sell, and shall not permit any Person other than the Company or a
Wholly Owned Subsidiary to own (except to the extent that any such Person may
own on the Issue Date), any shares of such Restricted Subsidiary's Capital Stock
(including options, warrants or other rights to purchase shares of Capital
Stock) except, to the extent otherwise permitted by the Indenture, (i) to the
Company or another Restricted Subsidiary that is a Wholly Owned Subsidiary of
the Company, or (ii) if, immediately after giving effect to such issuance and
sale, such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary for purposes of the Indenture; provided, however, that a Restricted
Subsidiary that has an interest in a Facility may sell shares of Non-Convertible
Stock that is not Preferred Stock if, after giving effect to such sale, the
Company or a Wholly Owned Subsidiary continues to hold at least a majority of
each class of Capital Stock of such Restricted Subsidiary. The Company shall not
permit any Restricted Subsidiary, directly or indirectly, to Incur Indebtedness
other than pursuant to the second paragraph under "-- Limitation on Incurrence
of Indebtedness."
 
     Limitation on Changes in the Nature of the Business. The Indenture provides
that the Company and its Subsidiaries shall engage only in the business of
acquiring, constructing, managing, developing, improving, owning and operating
Facilities, as well as any other activities reasonably related to the foregoing
activities (including acquiring and holding reserves), including but not limited
to investing in Facilities; provided that up to 10% of the Company's
Consolidated total assets may be used in Unrelated Businesses without
constituting a violation of this covenant. In addition, the Company will, and
will cause its Subsidiaries, to conduct their respective businesses in a manner
so as to maintain the exemption of the Company and its Subsidiaries from
treatment as a public utility holding company under PUHCA or an electric utility
or public utility under any federal, state or local law; provided, however, to
the extent that any such law is amended following the Issue Date in such a
manner that would (absent application of this proviso) make compliance with this
paragraph result in a material adverse effect on the Company's results of
operations or financial condition, then the Company shall not be required to
comply with this paragraph, but only to the extent of actions or failures to act
that would (absent application of this proviso) constitute violations of this
Covenant solely as a result of such amendment.
 
     Limitation on Subsidiary Investments. The Indenture provides that the
Company will not permit any Subsidiary with an interest in a Facility to make
any investment in or merge with any other person with an interest in a power
generation facility or, except in connection with the acquisition of Related
Assets by such Subsidiary, in an Unrelated Business.
 
     Merger and Consolidation. Under the terms of each of the Indentures, the
Company shall not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other corporation or
sell, assign, convey, transfer or lease or otherwise dispose of all or
substantially all of its properties and assets as an entirety to any Person or
group of affiliated Persons unless: (i) either (A) the Company shall be the
continuing Person, or (B) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or to which the properties and
assets of the Company as
 
                                       110
<PAGE>   112
 
an entirety are transferred (the "Successor Corporation") shall be a corporation
organized and existing under the laws of the United States or any State thereof
or the District of Columbia and shall expressly assume, by an indenture
supplemental to the Indenture, executed and delivered to the Trustee, in form
and substance reasonably satisfactory to the Trustee, all the obligations of the
Company under the Indenture and the Senior Notes; (ii) immediately before and
immediately after giving effect to such transaction on a pro forma basis (and
treating any Indebtedness which becomes an obligation of the Company (or the
Successor Corporation if the Company is not the continuing obligor under the
Indenture) or any Restricted Subsidiary as a result of such transaction as
having been Incurred by such Person at the time of such transaction), no Default
shall have occurred and be continuing; (iii) the Company shall have delivered,
or caused to be delivered, to the Trustee an Officers' Certificate and, as to
legal matters, an Opinion of Counsel, each in form and substance reasonably
satisfactory to the Trustee, each stating that such consolidation, merger or
transfer and such supplemental indenture comply with the Indenture and that all
conditions precedent herein provided for relating to such transaction have been
complied with; (iv) immediately after giving effect to such transaction on a pro
forma basis (and treating any Indebtedness which becomes an obligation of the
Company (or the Successor Corporation if the Company is not the continuing
obligor under the Indenture) or a Restricted Subsidiary in connection with or as
a result of such transaction as having been Incurred by such Person at the time
of such transaction), the Company (or the Successor Corporation if the Company
is not the continuing obligor under the Indenture) shall have a Consolidated Net
Worth in an amount which is not less than the Consolidated Net Worth of the
Company immediately prior to such transaction; and (v) immediately after giving
effect to such transaction on a pro forma basis (and treating any Indebtedness
which becomes an obligation of the Company (or the Successor Corporation if the
Company is not the continuing obligor under the Indenture) or a Restricted
Subsidiary in connection with or as a result of such transaction as having been
Incurred by such Person at the time of such transaction), the Consolidated
Coverage Ratio of the Company (or the Successor Corporation if the Company is
not the continuing obligor under the Indenture) is at least 1.10:1, or, if less,
equal to the Consolidated Coverage Ratio of the Company immediately prior to
such transaction; provided that, if the Consolidated Coverage Ratio of the
Company before giving effect to such transaction is within the range set forth
in column (A) below, then the pro forma Consolidated Coverage Ratio of the
Company (or the Successor Corporation if the Company is not the continuing
obligor under the Indenture) shall be at least equal to the lesser of (1) the
ratio determined by multiplying the percentage set forth in column (B) below by
the Consolidated Coverage Ratio of the Company prior to such transaction and (2)
the ratio set forth in column (C) below:
 
<TABLE>
<CAPTION>
                                     (A)                       (B)       (C)
                ---------------------------------------------  ----     -----
                <S>                                            <C>      <C>
                1.11:1 to 1.99:1.............................  100%     1.6:1
                2.00:1 to 2.99:1.............................   90%     2.1:1
                3.00:1 to 3.99:1.............................   80%     2.4:1
                4.00:1 or more...............................   70%     2.5:1
</TABLE>
 
Notwithstanding the foregoing clauses (ii), (iv) and (v), any Restricted
Subsidiary (other than a Subsidiary having an interest in a Facility) may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company or any Wholly Owned Subsidiary or Wholly Owned
Subsidiaries (other than a Subsidiary or Subsidiaries which have an interest in
a Facility) and no violation of this provision will be deemed to have occurred
as a consequence thereof, as long as the requirements of clauses (i) and (iii)
are satisfied in connection therewith.
 
     Upon any such assumption by the Successor Corporation, except in the case
of a lease, the Successor Corporation shall succeed to and be substituted for
the Company under the Indenture and the Senior Notes and the Company shall
thereupon be released from all obligations under the Indenture and under the
Senior Notes and the Company as the predecessor corporation may thereupon or at
any time thereafter be dissolved, wound up or liquidated. The Successor
Corporation thereupon may cause to be signed, and may issue either in its own
name or in the name of the Company, all or any of the Senior Notes issuable
under the Indenture which theretofore shall not have been signed by the Company
and delivered to the Trustee; and, upon the order of the Successor Corporation
instead of the Company and subject to all the terms, conditions and limitations
prescribed in the Indenture, the Trustee shall authenticate and shall deliver
any Senior Notes
 
                                       111
<PAGE>   113
 
which the Successor Corporation thereafter shall cause to be signed and
delivered to the Trustee for that purpose. All the Senior Notes so issued shall
in all respects have the same legal rank and benefit under the Indenture as the
Senior Notes theretofore or thereafter issued in accordance with the terms of
the Indenture as though all such Senior Notes had been issued at the date of the
execution of the Indenture.
 
     In the case of any such consolidation, merger or transfer, such changes in
form (but not in substance) may be made in the Senior Notes thereafter to be
issued as may be appropriate.
 
EVENTS OF DEFAULT
 
     "Events of Default" are defined in the Indenture as (a) default for 30 days
in payment of any interest installment due and payable on the Senior Notes, (b)
default in payment of the principal when due on any Senior Note, or failure to
redeem or purchase Senior Notes when required pursuant to the Indenture or the
Senior Notes, (c) default in performance of any other covenants or agreements in
the Indenture or in the Notes Senior for 30 days after written notice to the
Company by the Trustee or to the Company and the Trustee by the holders of at
least 25% in principal amount of the Senior Notes then outstanding, (d) there
shall have occurred either (i) a default by the Company or any Subsidiary under
any instrument or instruments under which there is or may be secured or
evidenced any Indebtedness of the Company or any Subsidiary of the Company
(other than the Senior Notes) having an outstanding principal amount of
$2,000,000 (or its foreign currency equivalent) or more individually or
$5,000,000 (or its foreign currency equivalent) or more in the aggregate that
has caused the holders thereof to declare such Indebtedness to be due and
payable prior to its Stated Maturity or (ii) a default by the Company or any
Subsidiary in the payment when due of any portion of the principal under any
such instrument, and such unpaid portion exceeds $2,000,000 (or its foreign
currency equivalent) individually or $5,000,000 (or its foreign currency
equivalent) in the aggregate and is not paid, or such default is not cured or
waived, within any grace period applicable thereto, unless such Indebtedness is
discharged within 20 days of the Company or a Restricted Subsidiary becoming
aware of such default; provided, however, that the foregoing shall not apply to
any default on Non-Recourse Indebtedness; (e) any final judgment or order (not
covered by insurance) for the payment of money shall be rendered against the
Company or any Significant Subsidiary in an amount in excess of $2,000,000 (or
its foreign currency equivalent) individually or $5,000,000 (or its foreign
currency equivalent) in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) and shall not be discharged, and there shall be any period of
30 consecutive days following entry of the final judgment or order in excess of
$2,000,000 (or its foreign currency equivalent) individually or that causes the
aggregate amount for all such final judgments or orders outstanding against all
such Persons to exceed $5,000,000 (or its foreign currency equivalent) during
which a stay of enforcement of such final judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect; and (f) certain events of
bankruptcy, insolvency and reorganization of the Company.
 
     If any Event of Default (other than an Event of Default described in clause
(f) with respect to the Company) occurs and is continuing, the Indenture
provides that the Trustee by notice to the Company, or the Holders of at least
25% in principal amount of the Senior Notes by notice to the Company and the
Trustee, may declare the principal amount of the Senior Notes and any accrued
and unpaid interest to be due and payable immediately. If an Event of Default
described in clause (f) with respect to the Company occurs, the principal of and
interest on all the Senior Notes shall ipso facto become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holders of Senior Notes. The Holders of a majority in principal amount of
the Senior Notes by notice to the Trustee may rescind any such declaration and
its consequences if the rescission would not conflict with any judgment or
decree and if all existing Events of Default have been cured or waived other
than the non-payment of principal of or interest on the Senior Notes which shall
have become due by such declaration.
 
     The Company must file annually with the Trustee a certificate describing
any Default by the Company in the performance of any conditions or covenants
that has occurred under the Indenture and its status. The Company must give the
Trustee written notice within 30 days of any Default under the Indenture that
could mature into an Event of Default described in clause (c), (d), (e) or (f)
of the second preceding paragraph.
 
                                       112
<PAGE>   114
 
     The Trustee is entitled, subject to the duty of the Trustee during a
Default to act with the required standard of care, to be indemnified before
proceeding to exercise any right or power under the Indenture at the direction
of the Holders of the Senior Notes or which requires the Trustee to expend or
risk its own funds or otherwise incur any financial liability. The Indenture
also provides that the Holders of a majority in principal amount of the Senior
Notes issued under the Indenture may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee; however, the Trustee may refuse to
follow any such direction that conflicts with law or the Indenture, is unduly
prejudicial to the rights of other Holders of the Senior Notes, or would involve
the Trustee in personal liability.
 
     The Indenture provides that while the Trustee generally must mail notice of
a Default or Event of Default to the holders of the Senior Notes within 90 days
of occurrence, the Trustee may withhold notice to the Holders of the Senior
Notes of any Default or Event of Default (except in payment on the Senior Notes)
if the Trustee in good faith determines that the withholding of such notice is
in the interest of the Holders of the Senior Notes.
 
MODIFICATION OF THE INDENTURE
 
     Under the terms of the Indenture, the Company and the Trustee may, with the
consent of the Holders of a majority in principal amount of the outstanding
Senior Notes, amend or supplement the Indenture or the Senior Notes except that
no amendment or supplement may, without the consent of each affected Holder, (i)
reduce the principal of or change the Stated Maturity of any Senior Note, (ii)
reduce the rate of or change the time of payment of interest on any Senior Note,
(iii) change the currency of payment of the Senior Notes, (iv) reduce the
premium payable upon the redemption of any Senior Note, or change the time at
which any such Senior Note may or shall be redeemed, (v) reduce the amount of
Senior Notes, the holders of which must consent to an amendment or supplement or
(vi) change the provisions of the Indenture relating to waiver of past defaults,
rights of Holders of the Senior Notes to receive payments or the provisions
relating to amendments of the Indenture that require the consent of Holders of
each affected Senior Note.
 
ACTIONS BY NOTEHOLDERS
 
     Under the terms of the Indenture, a Holder of Senior Notes may not pursue
any remedy with respect to the Indenture or the Senior Notes (except actions for
payment of overdue principal or interest), unless (i) the Holder has given
notice to the Trustee of a continuing Event of Default, (ii) Holders of at least
25% in principal amount of the Senior Notes have made a written request to the
Trustee to pursue such remedy, (iii) such Holder or Holders have offered the
Trustee security or indemnity reasonably satisfactory to it against any loss,
liability or expense, (iv) the Trustee has not complied with such request within
60 days of such request and offer and (v) the Holders of a majority in principal
amount of the Senior Notes have not given the Trustee an inconsistent direction
during such 60-day period.
 
DEFEASANCE, DISCHARGE AND TERMINATION
 
     Defeasance and Discharge. The Indenture provides that the Company will be
discharged from any and all obligations in respect of the Senior Notes, and the
provisions of the Indenture will no longer be in effect with respect to such
Senior Notes (except for, among other matters, certain obligations to register
the transfer or exchange of such Senior Notes, to replace stolen, lost or
mutilated Senior Notes, to maintain paying agencies and to hold monies for
payment in trust, and the rights of holders to receive payments of principal and
interest thereon), on the 123rd day after the date of the deposit with the
Trustee, in trust, of money or U.S. Government Obligations that, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money, or a combination thereof, in an amount sufficient to
pay the principal of and interest on such Senior Notes, when due in accordance
with the terms of the Indenture and such Senior Notes. Such a trust may only be
established if, among other things, (i) the Company has delivered to the Trustee
either (a) an Opinion of Counsel (who may not be employed by the Company) to the
effect that Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit, defeasance and discharge and will be
subject to federal income tax on the same amount and in the
 
                                       113
<PAGE>   115
 
same manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred, which Opinion of Counsel must refer
to and be based upon a ruling of the Internal Revenue Service or a change in
applicable federal income tax law occurring after the date of the Indenture or
(b) a ruling of the Internal Revenue Service to such effect and (ii) no Default
under the Indenture shall have occurred and be continuing on the date of such
deposit or during the period ending on the 123rd day after such date of deposit
and such deposit shall not result in or constitute a Default or result in a
breach or violation of, or constitute a default under, any other agreement or
instrument to which the Company is a party or by which the Company is bound.
 
     Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to the provisions described in clauses (iv) and (v)
under "-- Merger and Consolidation" and all the covenants described herein under
"-- Covenants," clause (c) under "-- Events of Default" with respect to such
covenants and clauses (iv) and (v) under "-- Merger and Consolidation," and
clauses (d) and (e) under "-- Events of Default" shall be deemed not to be
Events of Default under the Indenture, and the provisions described herein under
"-- Ranking" shall not apply, upon the deposit with the Trustee, in trust, of
money or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of and interest on the Senior Notes
issued thereunder when due in accordance with the terms of the Indenture. Such a
trust may only be established if, among other things, the provisions described
in clause (ii) of the immediately preceding paragraph have been satisfied and
the Company has delivered to the Trustee an Opinion of Counsel (who may not be
an employee of the Company) to the effect that the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such deposit
and defeasance of certain covenants and Events of Default and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
 
     Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Senior Notes, as described in the immediately
preceding paragraph and such Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
or U.S. Government Obligations on deposit with the Trustee will be sufficient to
pay principal of and interest on Senior Notes on the respective dates on which
such amounts are due but may not be sufficient to pay amounts due on such Senior
Notes, at the time of the acceleration resulting from such Event of Default.
However, the Company shall remain liable for such payments.
 
     Termination of Company's Obligations in Certain Circumstances. The
Indenture further provides that the Company will be discharged from any and all
obligations in respect of the Senior Notes and the provisions of such Indenture
will no longer be in effect with respect to the Senior Notes (except to the
extent provided under "-- Defeasance and Discharge") if such Senior Notes mature
within one year or all of them are to be called for redemption within one year
under arrangements satisfactory to the Trustee for giving the notice of
redemption, and the Company deposits with the Trustee, in trust, money or U.S.
Government Obligations that, through the payment of interest and principal in
respect thereof in accordance with their terms, will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on
such Senior Notes when due in accordance with the terms of the Indenture and
such Senior Notes. Such a trust may only be established if, among other things,
(i) no Default under the Indenture shall have occurred and be continuing on the
date of such deposit, (ii) such deposit will not result in or constitute a
Default or result in a breach or violation of, or constitute a Default under,
any other agreement or instrument to which the Company is a party or by which it
is bound and (iii) the Company has delivered to the Trustee an Opinion of
Counsel stating that such conditions have been complied with. Pursuant to this
provision, the Company is not required to deliver an Opinion of Counsel to the
effect that Holders will not recognize income, gain or loss for U.S. federal
income tax purposes as a result of such deposit and termination, and there is no
assurance that Holders would not recognize income, gain or loss for U.S. federal
income tax purposes as a result thereof or that Holders would be subject to U.S.
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and termination had not
occurred.
 
                                       114
<PAGE>   116
 
UNCLAIMED MONEY
 
     Under the terms of the Indenture, subject to any applicable abandoned
property law, the Trustee will pay to the Company upon request any money held by
it for the payment of principal or interest that remains unclaimed for two
years. After payment to the Company, Holders of Senior Notes entitled to such
money must look to the Company for payment as general creditors.
 
CONCERNING THE TRUSTEE AND PAYING AGENT
 
     The Bank of New York will act as Trustee under the Indenture and will
initially be Paying Agent and Registrar for the Senior Notes. The Company may
have in the future other relationships with such bank. Notices to the Trustee,
Paying Agent and Registrar under the Indenture should be directed to The Bank of
New York, 101 Barclay Street, 21st Floor, New York, New York 10286, Attention:
Corporate Trust Trustee Administration.
 
GOVERNING LAW
 
     Under the terms of the Indenture, the laws of the State of New York govern
the Indenture and the Senior Notes.
 
BOOK ENTRY; DELIVERY AND FORM
 
     The Old Notes were and the New Notes will be issued in fully registered
form without interest coupons. No Senior Notes will be issuable in bearer form.
Old Notes sold in reliance on Rule 144A are represented by two, permanent global
Notes in definitive, fully registered form without interest coupons (the "Global
Notes") and have been deposited with the Trustee as custodian for DTC and
registered in the name of a nominee of DTC.
 
THE GLOBAL NOTES
 
     Upon the issuance of the Global Notes, DTC or its custodian credited, on
its internal system, the
respective principal amount of the individual beneficial interests represented
by such Global Notes to the accounts of persons who have accounts with such
depositary. Ownership of beneficial interests in a Global Notes are limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in the Global
Notes will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). Qualified Institutional Buyers may hold their
interests in the Global Notes directly through DTC if they are participants in
such system, or indirectly through organizations which are participants in such
system.
 
     So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Senior Notes represented by such Global Note for all
purposes under the Indenture and the Senior Notes. No beneficial owner of an
interest in a Global Note will be able to transfer that interest except in
accordance with DTC's applicable procedures, in addition to those provided for
under the Indenture and, if applicable, those of Euroclear and Cedel.
 
     Payments of the principal of, and interest on, the Global Notes will be
made to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither the Company, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficiary ownership interests.
 
     The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records of
DTC or
 
                                       115
<PAGE>   117
 
its nominee. The Company also expects that payments by participants to owners of
beneficial interests in such Global Note held through such participants will be
governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
 
     Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Cedel will be effected in the ordinary way
in accordance with their respective rules and operating procedures.
 
     DTC has advised the Company that it will take any action permitted to be
taken by a holder of Senior Notes (including the presentation of Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in the Global Notes is credited and only in
respect of such portion of the aggregate principal amount of Senior Notes as to
which such participant or participants has or have given such direction.
However, if there is an Event of Default under the Notes, DTC will exchange the
Global Notes for Certificated Senior Notes which it will distribute to its
participants and which will be legended as set forth under the heading "Transfer
Restrictions."
 
     DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934. DTC was
created to hold securities for its participants and facilitate the clearance and
settlement of securities transactions between participants through electronic
book-entry changes in accounts of its participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
 
     Although DTC, Euroclear and Cedel have agreed to the foregoing procedures
in order to facilitate transfers of interest in the Global Notes among
participants of DTC, Euroclear and Cedel, they are under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their respective operations.
 
CERTIFICATED NOTES
 
     If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by the Company
within 90 days, the Company will issue Certificated Senior Notes in exchange for
the Global Notes which will bear the legend referred to under the heading
"Transfer Restrictions."
 
                   DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
 
10 1/2% SENIOR NOTES DUE 2006
 
     On May 16, 1996, the Company issued $180.0 million aggregate principal
amount of 10 1/2% Senior Notes in an underwritten public offering. The 10 1/2%
Senior Notes are senior unsecured obligations of the Company and rank pari passu
with the Senior Notes.
 
     The 10 1/2% Senior Notes bear interest at a rate of 10 1/2% per annum
payable semi-annually on May 15, and November 15 of each year and mature on May
15, 2006. The 10 1/2% Senior Notes are redeemable at the option of the Company,
in whole or in part, at any time after May 15, 2001 at the various redemption
prices set forth in the 10 1/2% Senior Note Indenture, plus accrued interest to
the date of redemption. In addition, prior to May 15, 1999, up to $63.0 million
of 10 1/2% Senior Notes may be redeemed at 110.50% of the principal
 
                                       116
<PAGE>   118
 
amount thereof, plus accrued interest, with the net proceeds of one or more
public equity offerings by the Company.
 
     Upon a Change of Control Triggering Event (as defined in the 10 1/2%
Indenture), each holder of 10 1/2% Senior Notes will have the right to require
the Company to repurchase such 10 1/2% Senior Notes at 101% of the principal
amount thereof plus accrued and unpaid interest to the repurchase date. The
Revolving Credit Facility limits the Company's ability to redeem the 10 1/2%
Senior Notes.
 
     Similar to the Indenture governing the Senior Notes (and subject to similar
qualifications), the 10 1/2% Indenture contains certain covenants that, among
other things, limits (i) the incurrence of additional debt by the Company and
its subsidiaries, (ii) the payment of dividends on and redemptions of capital
stock by the Company and its subsidiaries, (iii) the use of proceeds from the
sale of assets and subsidiary stock, (iv) transactions with affiliates, (v) the
incurrence of liens, (vi) sale and leaseback transactions and (vii)
consolidations, mergers and certain transfers of assets.
 
     The foregoing summary describes certain provisions of the 10 1/2% Indenture
and the 10 1/2% Senior Notes, a copy of each of which is available upon request
made to the Company. The foregoing summary does not purport to be complete and
is subject to and is qualified in its entirety by reference to the 10 1/2%
Indenture and the form of 10 1/2% Senior Notes.
 
9 1/4% SENIOR NOTES DUE 2004
 
     On February 17, 1994, the Company issued $105.0 million aggregate principal
amount of 9 1/4% Senior Notes in an underwritten public offering. The 9 1/4%
Senior Notes are senior unsecured obligations of the Company and rank pari passu
with the Senior Notes.
 
     The 9 1/4% Senior Notes bear interest at a rate of 9 1/4% per annum payable
semi-annually on February l and August l of each year and mature on February 1,
2004. The 9 1/4% Senior Notes are redeemable at the option of the Company, in
whole or in part, at any time after February 1, 1999 at the various redemption
prices set forth in the 9 1/4% Senior Note Indenture, plus accrued interest to
the date of redemption.
 
     Upon a Change of Control Triggering Event (as defined in the 9 1/4%
Indenture), each holder of 9 1/4% Senior Notes will have the right to require
the Company to repurchase such 9 1/4% Senior Notes at 101% of the principal
amount thereof plus accrued and unpaid interest to the repurchase date. The
Revolving Credit Facility limits the Company's ability to redeem the 9 1/4%
Senior Notes.
 
     Similar to the Indenture governing the Senior Notes (and subject to similar
qualifications), the 9 1/4% Indenture contains certain covenants that, among
other things, limits (i) the incurrence of additional debt by the Company and
its subsidiaries, (ii) the payment of dividends on and redemptions of capital
stock by the Company and its subsidiaries, (iii) the use of proceeds from the
sale of assets and subsidiary stock, (iv) transactions with affiliates, (v) the
incurrence of liens, (vi) sale and leaseback transactions and (vii)
consolidations, mergers and certain transfers of assets.
 
     The foregoing summary describes certain provisions of the 9 1/4% Indenture
and the 9 1/4% Senior Notes, a copy of each of which is available upon request
made to the Company. The foregoing summary does not purport to be complete and
is subject to and is qualified in its entirety by reference to the 9 1/4%
Indenture and the form of 9 1/4% Senior Notes.
 
OTHER
 
     See "Business -- Description of Facilities" and "Management's Discussion
and Analysis of Results of Operations and Financial Condition" for a description
of other indebtedness of the Company, including the Revolving Credit Facility.
 
                                       117
<PAGE>   119
 
                             TRANSFER RESTRICTIONS
 
     Unless and until an Old Note is exchanged for a New Note pursuant to the
Exchange Offer, it will bear the following legend on the face thereof.
 
          "This Note (or its predecessor) was originally issued in a transaction
     exempt from registration under the United States Securities Act of 1933
     (the "Securities Act"), and this Note may not be offered, sold or otherwise
     transferred in the absence of such registration or an applicable exemption
     therefrom. Each purchaser of this Note is hereby notified that the seller
     of this Note may be relying on the exemption from the provisions of Section
     5 of the Securities Act provided by Rule 144A thereunder.
 
          The holder of this Note agrees for the benefit of the Company that (A)
     this Note may be offered, resold, pledged or otherwise transferred, only
     (i) to a person whom the seller reasonably believes is a qualified
     institutional buyer (as defined in Rule 144A under the Securities Act) in a
     transaction meeting the requirements of Rule 144A, (ii) outside the United
     States in a transaction in accordance with Rule 904 under the Securities
     Act, (iii) pursuant to an exemption from registration under the Securities
     Act provided by Rule 144 thereunder (if available), or (iv) pursuant to an
     effective registration statement under the Securities Act, in each of cases
     (i) through (iv) in accordance with any applicable securities laws of any
     State of the United States, and (B) the holder will, and each subsequent
     holder is required to, notify any purchaser of this Note from it of the
     resale restrictions referred to in (A) above."
 
                   CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
 
     The discussion set forth in this summary is based on the provisions of the
Internal Revenue Code of 1986, as amended, final, temporary and proposed
Treasury regulations thereunder ("Treasury Regulations"), and administrative and
judicial interpretations thereof, all as in effect on the date hereof and all of
which are subject to change (possibly on a retroactive basis). Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could affect the tax consequences to holders of Senior Notes.
 
     This summary is for general information only and does not purport to
address all of the federal income tax consequences that may be applicable to a
holder of Senior Notes. The tax treatment of a holder of Senior Notes may vary
depending on its particular situation. For example, certain holders, including
individual retirement and other tax-deferred accounts, insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and individuals who are not citizens or residents of the United
States, may be subject to special rules not discussed below. In addition, this
discussion addresses the tax consequences to the initial holders of the Senior
Notes and not the tax consequences to subsequent transfers of the Senior Notes.
 
     EACH HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL
INCOME TAX CONSEQUENCES SET FORTH BELOW AND ANY OTHER FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF EXCHANGING OLD NOTES FOR NEW NOTES AND OF HOLDING
AND DISPOSING OF THE NEW NOTES.
 
EXCHANGE OFFER
 
     Under Section 1001 of the Code modifications in debt instruments may in
certain cases be deemed to constitute a taxable exchange of the existing debt
instrument for a new debt instrument. The Internal Revenue Service (the "IRS")
has issued Regulations providing rules for determining when a modification of a
debt instrument constitutes a taxable exchange. Because the terms of the New
Notes do not modify significantly the terms of the Old Notes, each New Note will
be viewed as a continuation of the corresponding Old Note, the issuance of the
New Note will be disregarded for federal income tax purposes, and a holder
exchanging an Old Note for a New Note (as well as a non-exchanging holder) will
not recognize any gain or loss as a result of the Exchange (or the Exchange
Offer).
 
                                       118
<PAGE>   120
 
STATED INTEREST
 
     A holder of a New Note will be required to report as income for federal
income tax purposes interest earned on a New Note in accordance with the
holder's method of tax accounting. A holder of a New Note using the accrual
method of accounting for tax purposes is, as a general rule, required to include
interest in ordinary income as such interest accrues, while a cash basis holder
must include interest income when cash payments are received (or made available
for receipt) by such holder.
 
ORIGINAL ISSUE DISCOUNT
 
     If the New Notes are issued with original issue discount ("OID") within the
meaning of Sections 1272 and 1273 of the Code and the pertinent Treasury
Regulations, holders of the New Notes generally will be required to include such
OID in gross income as it accrues in advance of the receipt of the cash
attributable to such income. The total amount of OID with respect to each New
Note will be any excess of its "stated redemption price at maturity" over its
"issue price"; provided that a New Note will not be deemed to have OID if such
excess is less than 1/4 of 1% of the New Note's stated redemption price at
maturity multiplied by the number of complete years to its maturity from its
issue date. The "issue price" of a New Note will be equal to its fair market
value when issued. The "stated redemption price at maturity" of a New Note is
the sum of all payments provided by the New Note other than "qualified stated
interest" payments. The term "qualified stated interest" generally means stated
interest that is unconditionally payable in cash or property (other than debt
instruments of the issuer) at least annually at a single fixed rate.
 
     A holder of a New Note must include OID in income for federal income tax
purposes as it accrues under a "constant yield method" in advance of receipt of
cash payments attributable to such income, regardless of such holder's method of
accounting for tax purposes. The Company will furnish to the IRS and to record
holders of the New Notes information with respect to the OID, if any, accruing
during the calendar year (as well as interest paid during that year).
 
SALE, EXCHANGE, OR REDEMPTION OF A NOTE
 
     Upon the sale, exchange (other than pursuant to the Exchange as discussed
above), or redemption of a Senior Note, a holder will recognize taxable gain or
loss equal to the difference between (i) the amount of cash and the fair market
value of property received (other than amounts received attributable to interest
not previously taken into account, which amount will be treated as interest
received), and (ii) the holder's adjusted tax basis in the Senior Note. A
holder's adjusted tax basis in a Senior Note generally will equal the cost of
the Senior Note to the holder, increased by the amount of any OID previously
included in income by the holder with respect to the Senior Note and reduced by
any payments previously received by the holder with respect to the Senior Note,
other than qualified stated interest payments, and by any premium amortization
deductions previously claimed by the holder. Provided the Senior Note is a
capital asset in the hands of the holder and has been held for more than one
year, any gain or loss recognized by the holder will generally be a long-term
capital gain or loss.
 
BACKUP WITHHOLDING
 
     Under the backup withholding rules, a holder of a Senior Note may be
subject to a backup withholding at the rate of 31% on interest paid on the
Senior Note or on any other cash payment with respect to the sale or redemption
of the Senior Note, unless (i) such holder is a corporation or comes under
certain other exempt categories and when required demonstrates this fact or (ii)
such holder provides a correct taxpayer identification number, certifies as to
no loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules in the Treasury
Regulations. Prospective holders of the Senior Notes (who have not previously
furnished a Form W-9 with respect to the Old Notes) will be required to complete
a Form W-9 in order to provide the required information to the Company. A holder
of a Senior Note who does not provide the Company with the holder's correct
taxpayer identification number may be subject to penalties imposed by the IRS.
 
                                       119
<PAGE>   121
 
     The Company will report to the holders of the Senior Notes and to the IRS
the amount of any "reportable payments" for each calendar year and the amount of
tax withheld, if any, with respect to payments on the Senior Notes.
 
     Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against the holder's federal income tax liability, provided
that the required information is furnished to the IRS.
 
     THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER SHOULD
CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE
EXCHANGE, OWNERSHIP, AND DISPOSITION OF THE SENIOR NOTES (INCLUDING THE
APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS).
 
                              PLAN OF DISTRIBUTION
 
     Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale for a period of 180 days from the date of this Prospectus,
or such shorter period as will terminate when all Old Notes acquired by
broker-dealers for their own accounts as a result of market-making activities or
other trading activities have been exchanged for New Notes and resold by such
broker-dealers.
 
     The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own accounts
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market or, in negotiated transactions or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such New
Notes. Any broker-dealer that resells New Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"Underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
 
     For a period of 180 days from the date of this Prospectus, or such shorter
period as will terminate when all Old Notes acquired by broker-dealers for their
own accounts as a result of market-making activities or other trading activities
have been exchanged for New Notes and resold by such broker-dealers, the Company
will promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to indemnify such
broker-dealers against certain liabilities, including liabilities under the
Securities Act.
 
                                 LEGAL MATTERS
 
     The validity of the New Notes will be passed upon for the Company by
Brobeck, Phleger & Harrison LLP, San Francisco, California.
 
                                       120
<PAGE>   122
 
                                    EXPERTS
 
     The consolidated financial statements of the Company as of December 31,
1996 and 1995 and for the three years ended December 31, 1996, 1995 and 1994,
and the financial statements of BAF Energy, A California Limited Partnership as
of October 31, 1995 and 1994 and for the three years ended October 31, 1995,
1994 and 1993 included in this Prospectus have been audited by Arthur Andersen
LLP, independent public accountants, as stated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports. In the reports for the Company, that firm states
that with respect to Sumas Cogeneration Company, L.P., its opinion is based on
the reports of other independent public accountants, namely Moss Adams LLP.
 
     The consolidated financial statements of Sumas Cogeneration Company, L.P.
and Subsidiary as of December 31, 1996 and 1995 and for the three years ended
December 31, 1996, 1995 and 1994 included in this Prospectus have been audited
by Moss Adams LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon authority of said
firm as experts in giving said reports.
 
     The financial statements of Gilroy Energy Company, a wholly owned
subsidiary of Gilroy Foods, Inc. which in turn is a wholly owned subsidiary of
McCormick & Company, Inc., at November 30, 1995 and 1994, and for each of the
two years in the period ended November 30, 1995, appearing in this Prospectus
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
 
                             AVAILABLE INFORMATION
 
     Calpine is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, information statements and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at Seven World
Trade Center, 13th Floor, New York, New York 10048 and Northwest Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such material can be obtained by mail from the Commission's Public Reference
Section at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Commission also maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants, such as
the Company, that file electronically with the Commission. The address of the
site is http://www.sec.gov. In addition, the Common Stock of the Company is
listed on the New York Stock Exchange and other information concerning the
Company may be inspected at the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
 
                           INCORPORATION BY REFERENCE
 
     The following reports have been filed by the Company with the Commission
and are specifically incorporated herein by reference: (i) the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, (ii) the Company's
Proxy Statement dated April 15, 1997, (iii) the Company's Quarterly Reports on
Form 10-Q for the three months ended March 31, 1997, the six months ended June
30, 1997, and the nine months ended September 30, 1997 and (iv) the Company's
Current Reports on Form 8-K dated June 5, 1997, June 24, 1997 and July 2, 1997.
 
     All documents filed by Calpine with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Offering shall be deemed to be incorporated by reference in this Offering
Circular and to be a part of this Offering Circular from the date of the filing
of such document. Any statement contained herein or in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Offering Circular to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be
 
                                       121
<PAGE>   123
 
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Offering circular.
 
     Calpine hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus is delivered,
upon written or oral request of such person, a copy of any or all of the
information that has been incorporated by reference in this Prospectus (not
including exhibits to the information that is incorporated by reference herein
unless such exhibits are specifically incorporated by reference into the
information that this Prospectus incorporates). Requests for such information
should be directed to Calpine Corporation, 50 West San Fernando Street, San
Jose, California 95113, Attention: Investor Relations (telephone number:
408-995-5115).
 
                                       122
<PAGE>   124
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                       PAGE
                                                                                       -----
<S>                                                                                    <C>
CALPINE CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants.............................................    F-2
Consolidated Balance Sheets, December 31, 1996 and 1995..............................    F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and
  1994...............................................................................    F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
  1996, 1995 and 1994................................................................    F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995
  and 1994...........................................................................    F-6
Notes to Consolidated Financial Statements for the Years Ended December 31, 1996,
  1995 and 1994......................................................................    F-7
Condensed Consolidated Balance Sheets, September 30, 1997 (unaudited) and December
  31, 1996...........................................................................   F-32
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
  September 30, 1997 and 1996 (unaudited)............................................   F-33
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September
  30, 1997 and 1996 (unaudited)......................................................   F-34
Notes to Condensed Consolidated Financial Statements for the Nine Months Ended
  September 30, 1997.................................................................   F-35
SUMAS COGENERATION COMPANY, L.P. AND SUBSIDIARY
Report of Independent Auditors.......................................................   F-43
Consolidated Balance Sheet, December 31, 1996 and 1995...............................   F-44
Consolidated Statement of Income for the Years Ended December 31, 1996, 1995 and
  1994...............................................................................   F-45
Consolidated Statement of Changes in Partners' Equity for the Years Ended December
  31, 1996, 1995 and 1994............................................................   F-46
Consolidated Statement of Cash Flows for the Years Ended December 31, 1996, 1995 and
  1994...............................................................................   F-47
Notes to Consolidated Financial Statements for the Years Ended December 31, 1996,
  1995 and 1994......................................................................   F-48
BAF ENERGY, A CALIFORNIA LIMITED PARTNERSHIP
Report of Independent Public Accountants.............................................   F-56
Balance Sheets, October 31, 1995 and 1994............................................   F-57
Statements of Income for the Years Ended October 31, 1995, 1994 and 1993.............   F-58
Statements of Partners' Equity for the Years Ended October 31, 1995, 1994 and 1993...   F-59
Statements of Cash Flows for the Years Ended October 31, 1995, 1994 and 1993.........   F-60
Notes to Financial Statements for the Years Ended October 31, 1995, 1994 and 1993....   F-61
Condensed Balance Sheets as of January 31, 1996 (unaudited) and October 31, 1995.....   F-65
Condensed Statements of Income for the Three Months Ended January 31, 1996 and 1995
  (unaudited)........................................................................   F-66
Condensed Statements of Cash Flows for the Three Months Ended January 31, 1996 and
  1995 (unaudited)...................................................................   F-67
Notes to Condensed Financial Statements as of January 31, 1996.......................   F-68
GILROY ENERGY COMPANY
Report of Independent Auditors.......................................................   F-70
Balance Sheets, November 30, 1995 and 1994 and May 31, 1996 (unaudited)..............   F-71
Statements of Income for the Years Ended November 30, 1995 and 1994 and for the Six
  Months Ended May 31, 1996 and 1995 (unaudited).....................................   F-72
Statement of Shareholder's Equity for the Years Ended November 30, 1995 and 1994 and
  for the Six Months Ended May 31, 1996 (unaudited)..................................   F-73
Statements of Cash Flows for the Years Ended November 30, 1995 and 1994 and for the
  Six Months Ended May 31, 1996 and 1995 (unaudited).................................   F-74
Notes to Financial Statements for the Years Ended November 30, 1995 and 1994 and for
  the Six Months Ended May 31, 1996 and 1995 (unaudited).............................   F-75
</TABLE>
 
                                       F-1
<PAGE>   125
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To The Board of Directors
of Calpine Corporation:
 
     We have audited the accompanying consolidated balance sheets of Calpine
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Sumas Cogeneration Company, L.P. ("Sumas"), the investment in which is reflected
in the accompanying financial statements using the equity method of accounting.
The investment in Sumas represents approximately 1% of the Company's total
assets at December 31, 1996 and 1995. The Company has recorded income of $6.4
million and losses of $3.0 million and $2.9 million representing its share of
the net income or loss of Sumas for the years ended December 31, 1996, 1995 and
1994, respectively. The financial statements of Sumas were audited by other
auditors whose report has been furnished to us and our opinion, insofar as it
relates to the amounts included for Sumas, is based solely on the report of
other auditors.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
 
     In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Calpine Corporation and subsidiaries as of December
31, 1996 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
 
                                          ARTHUR ANDERSEN LLP
 
San Jose, California
March 7, 1997
 
                                       F-2
<PAGE>   126
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995
                                 (IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                          1996          1995
                                                                       ----------     --------
<S>                                                                    <C>            <C>
Current assets:
  Cash and cash equivalents..........................................  $  100,010     $ 21,810
  Accounts receivable
     from related parties............................................       2,826        2,177
     from others.....................................................      39,962       17,947
  Acquisition project receivables....................................         791        8,805
  Collateral securities, current portion.............................       5,470           --
  Interest receivable on collateral securities.......................       1,065           --
  Prepaid operating lease............................................      12,668           --
  Other current assets...............................................       8,395        5,491
                                                                       ----------     --------
          Total current assets.......................................     171,187       56,230
Property, plant and equipment, net...................................     650,053      447,751
Investments in power projects........................................      13,937        8,218
Collateral securities, net of current portion........................      89,806           --
Notes receivable from related parties................................      18,182       19,391
Notes receivable from Coperlasa......................................      17,961        6,394
Restricted cash......................................................      55,219        9,627
Other assets.........................................................      13,870        6,920
                                                                       ----------     --------
          Total assets...............................................  $1,030,215     $554,531
                                                                       ==========     ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of non-recourse project financing..................  $   30,627     $ 84,708
  Notes payable and short-term borrowings............................       6,865        1,177
  Accounts payable...................................................      18,363        6,876
  Accrued payroll and related expenses...............................       3,912        2,789
  Accrued interest payable...........................................       7,332        7,050
  Other accrued expenses.............................................       7,870        2,657
                                                                       ----------     --------
          Total current liabilities..................................      74,969      105,257
Long-term line of credit.............................................          --       19,851
Non-recourse project financing, net of current portion...............     278,640      190,642
Notes payable........................................................          --        6,348
Senior Notes.........................................................     285,000      105,000
Deferred income taxes, net...........................................     100,385       97,621
Deferred lease incentive.............................................      78,521           --
Other liabilities....................................................       9,573        4,585
                                                                       ----------     --------
          Total liabilities..........................................     827,088      529,304
                                                                       ----------     --------
Commitments and contingencies (Note 28)
Stockholders' equity
  Common stock, $0.001 par value per share; authorized 100,000,000
     shares in 1996 and 33,760,000 shares in 1995; issued and
     outstanding 19,843,400 shares in 1996 and 10,387,693 shares in
     1995............................................................          20           10
  Additional paid-in capital.........................................     165,412        6,214
  Retained earnings..................................................      37,726       19,034
  Cumulative translation adjustment..................................         (31)         (31)
                                                                       ----------     --------
          Total stockholders' equity.................................     203,127       25,227
                                                                       ----------     --------
          Total liabilities and stockholders' equity.................  $1,030,215     $554,531
                                                                       ==========     ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-3
<PAGE>   127
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                               1996         1995         1994
                                                             --------     --------     --------
<S>                                                          <C>          <C>          <C>
Revenue:
  Electricity and steam sales..............................  $199,464     $127,799     $ 90,295
  Service contract revenue.................................     6,455        7,153        7,221
  Income (loss) from unconsolidated investments in power
     projects..............................................     6,537       (2,854)      (2,754)
  Interest income on loans to power projects...............     2,098           --           --
                                                             ---------    ---------    ---------
          Total revenue....................................   214,554      132,098       94,762
                                                             ---------    ---------    ---------
Cost of revenue:
  Plant operating expenses.................................    61,894       33,162       14,944
  Depreciation.............................................    39,818       26,264       21,202
  Production royalties.....................................    10,793       10,574       11,153
  Operating lease expense..................................     9,295        1,542           --
  Service contract expenses................................     7,400        5,846        5,546
                                                             ---------    ---------    ---------
          Total cost of revenue............................   129,200       77,388       52,845
                                                             ---------    ---------    ---------
Gross profit...............................................    85,354       54,710       41,917
Project development expenses...............................     3,867        3,087        1,784
General and administrative expenses........................    14,696        8,937        7,323
Provision for write-off of project development costs.......        --           --        1,038
                                                             ---------    ---------    ---------
          Income from operations...........................    66,791       42,686       31,772
Other (income) expense:
  Interest expense
     Related party.........................................       894        1,663          375
     Other.................................................    44,400       30,491       23,511
  Other income, net........................................    (6,259)      (1,895)      (1,988)
                                                             ---------    ---------    ---------
     Income before provision for income taxes..............    27,756       12,427        9,874
  Provision for income taxes...............................     9,064        5,049        3,853
                                                             ---------    ---------    ---------
          Net income.......................................  $ 18,692     $  7,378     $  6,021
                                                             =========    =========    =========
Earnings per share:
  Weighted average shares outstanding......................    14,680           --           --
                                                             =========    =========    =========
  Earnings per share.......................................  $   1.27           --           --
                                                             =========    =========    =========
As adjusted earnings per share assuming conversion of
  preferred stock:
  Weighted average shares outstanding......................        --       14,151           --
                                                             =========    =========    =========
  Earnings per share.......................................        --     $   0.52           --
                                                             =========    =========    =========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-4
<PAGE>   128
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                          PREFERRED STOCK    COMMON STOCK     ADDITIONAL              CUMULATIVE
                                          ---------------   ---------------    PAID-IN     RETAINED   TRANSLATION
                                          SHARES   AMOUNT   SHARES   AMOUNT    CAPITAL     EARNINGS   ADJUSTMENT    TOTAL
                                          ------   ------   ------   ------   ----------   --------   ----------   --------
<S>                                       <C>      <C>      <C>      <C>      <C>          <C>        <C>          <C>
Balance, December 31, 1993..............     --     $ --    10,388    $ 10     $  6,214    $ 7,235       $(31)     $ 13,428
  Dividend ($0.40 per share)............     --       --       --       --           --       (800)        --          (800)
  Net income............................     --       --       --       --           --      6,021         --         6,021
                                          ------    ----    ------    ----     --------    -------       ----      --------
Balance, December 31, 1994..............     --       --    10,388      10        6,214     12,456        (31        18,649
  Dividend ($0.40 per share)............     --       --       --       --           --       (800)        --          (800)
  Net income............................     --       --       --       --           --      7,378         --         7,378
                                          ------    ----    ------    ----     --------    -------       ----      --------
Balance, December 31, 1995..............     --       --    10,388      10        6,214     19,034        (31)       25,227
  Issuance of preferred stock...........  5,000       50       --       --       49,950         --         --        50,000
  Conversion of preferred stock to
    common stock........................  (5,000)    (50)   2,179        3           47         --         --            --
  Issuance of common stock, net.........     --       --    7,276        7      109,172         --         --       109,179
  Tax benefit from stock options
    exercised...........................     --       --       --       --           29         --         --            29
  Net income............................     --       --       --       --           --     18,692         --        18,692
                                          ------    ----    ------    ----     --------    -------       ----      --------
Balance, December 31, 1996..............     --     $ --    19,843    $ 20     $165,412    $37,726       $(31)     $203,127
                                          ======    ====    ======    ====     ========    =======       ====      ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-5
<PAGE>   129
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                              1996         1995         1994
                                                                            --------     --------     --------
<S>                                                                         <C>          <C>          <C>
Cash flows from operating activities:
  Net income............................................................    $ 18,692     $  7,378     $  6,021
  Adjustments to reconcile net income to net cash provided by operating
     activities:
     Depreciation and amortization, net.................................      36,600       25,931       20,342
     Deferred income taxes, net.........................................       2,028       (1,027)       3,180
     (Income) loss from unconsolidated investments in power projects....      (5,263)       2,854        2,754
     Provision for write-off of project development costs and other.....          --           --        1,038
     Change in operating assets and liabilities:
       Accounts receivable..............................................     (12,652)      (3,354)      (2,578)
       Acquisition project receivables..................................       8,014       (8,805)          --
       Other current assets.............................................      (6,521)        (737)          79
       Accounts payable and accrued expenses............................      15,636        6,847        6,218
       Deferred revenue.................................................       3,347       (2,434)      (2,858)
                                                                            ---------    --------     --------
          Net cash provided by operating activities.....................      59,881       26,653       34,196
                                                                            ---------    --------     --------
Cash flows from investing activities:
  Acquisition of property, plant and equipment..........................     (24,057)     (17,434)      (7,023)
  Acquisition of Greenleaf, net of cash on hand.........................          --      (14,830)          --
  Watsonville transaction, net of cash on hand..........................          --          494           --
  Acquisition of TPC, net of cash on hand...............................          --           --      (62,770)
  Loans to Coperlasa....................................................     (12,926)      (6,062)          --
  (Increase) decrease in notes receivable...............................       2,750         (286)     (13,556)
  Investment in collateral securities...................................     (98,446)          --           --
  King City transaction, net of cash on hand............................     (11,567)          --           --
  Maturities of collateral securities...................................       2,900           --           --
  Acquisition of Gilroy, net of cash on hand............................    (138,073)          --           --
  Capitalized project costs.............................................      (5,887)      (1,258)        (175)
  Decrease (increase) in restricted cash................................     (41,591)       1,186         (900)
  Other, net............................................................          63         (307)         (20)
                                                                            ---------    --------     --------
          Net cash used in investing activities.........................    (326,834)     (38,497)     (84,444)
                                                                            ---------    --------     --------
Cash flows from financing activities:
  Payment of dividends..................................................          --         (800)        (800)
  Net borrowings from (repayments of) line of credit....................     (19,851)      19,851      (52,595)
  Borrowings from non-recourse project financing........................     119,760       76,026       60,000
  Repayments of non-recourse project financing..........................     (84,708)     (79,388)     (12,735)
  Proceeds from short-term borrowings...................................      45,000        2,683        4,500
  Repayments of short-term borrowings...................................     (46,177)      (6,006)          --
  Proceeds from issuance of Senior Notes................................     180,000           --      105,000
  Proceeds from issuance of preferred stock.............................      50,000           --           --
  Proceeds from issuance of common stock................................     109,208           --           --
  Financing costs.......................................................      (8,079)      (1,239)      (3,921)
  Proceeds from note payable............................................          --           --        5,167
  Repayment of notes payable -- FMRP....................................          --           --      (36,807)
  Other, net............................................................          --           --       (1,200)
                                                                            ---------    --------     --------
          Net cash provided by financing activities.....................     345,153       11,127       66,609
                                                                            ---------    --------     --------
Net increase (decrease) in cash and cash equivalents....................      78,200         (717)      16,361
Cash and cash equivalents, beginning of period..........................      21,810       22,527        6,166
                                                                            ---------    --------     --------
Cash and cash equivalents, end of period................................    $100,010     $ 21,810     $ 22,527
                                                                            =========    ========     ========
Supplementary information -- cash paid during the year for:
  Interest..............................................................    $ 43,805     $ 32,162     $ 19,890
  Income taxes..........................................................       6,947        4,294          683
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-6
<PAGE>   130
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
 1. ORGANIZATION AND OPERATIONS OF THE COMPANY
 
     Calpine Corporation ("Calpine"), a Delaware corporation, and subsidiaries
(collectively, the "Company") are engaged in the development, acquisition,
ownership and operation of power generation facilities in the United States and
selected international markets. The Company has ownership interests in and
operates geothermal steam fields, geothermal power generation facilities, and
natural gas-fired cogeneration facilities in northern California and Washington.
Each of the generation facilities produces electricity for sale to utilities.
Thermal energy produced by the gas-fired cogeneration facilities is sold to
governmental and industrial users, and steam produced by the geothermal steam
fields is sold to utility-owned power plants. For the year ended December 31,
1996, primarily all electricity and steam sales revenue from consolidated
subsidiaries was derived from sales to two customers in northern California (see
Note 27), of which 48% related to geothermal activities. In 1996, the Company
began marketing power and energy services to utilities and other end users.
 
     In July 1996, the Company's Board of Directors authorized the
reincorporation of the Company into Delaware in connection with the Company's
initial public offering. In addition, the Board of Directors approved a stock
split of approximately 5.194-for-1. On September 13, 1996, the reincorporation
of the Company and the stock split became effective. The accompanying financial
statements reflect the reincorporation and the stock split as if such
transactions had been effective for all periods (see Note 24).
 
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Principles of Consolidation -- The consolidated financial statements
include the accounts of Calpine Corporation and its wholly owned and
majority-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation. Prior to 1994, the Company
acquired Calpine Geysers Company, L.P. ("CGC"). During 1994, the Company formed
Calpine Thermal Power, Inc. ("Calpine Thermal") and Calpine Siskiyou Geothermal
Partners, L.P. (see Notes 4 and 7, respectively). Calpine Thermal acquired
Thermal Power Company ("TPC") during 1994. During 1995, the Company formed
Calpine Greenleaf Corporation ("Calpine Greenleaf"), Calpine Monterey
Cogeneration, Inc. ("CMCI") and Calpine Vapor, Inc. ("Calpine Vapor"). Calpine
Greenleaf indirectly acquired two operating gas-fired cogeneration plants (see
Note 5) and CMCI acquired an operating lease for a gas-fired cogeneration
facility (see Note 6). Calpine Vapor made loans to fund construction of new
geothermal wells in Mexico (see Note 8). During 1996, the Company formed Calpine
King City Cogen L.L.C. ("CKCC"), Calpine Gilroy Cogen, L.P. ("Gilroy"), and
Pasadena Cogeneration, L.P. CKCC completed an operating lease transaction for a
gas-fired cogeneration plant (see Note 9) and Calpine Gilroy acquired the assets
of a gas-fired cogeneration plant in California (see Note 10). In December 1996,
Pasadena Cogeneration entered into an energy sales agreement and will construct
a 240 megawatt gas-fired power plant (see Note 11).
 
     Accounting for Jointly Owned Geothermal Properties -- The Company uses the
proportionate consolidation method to account for TPC's 25% interest in jointly
owned geothermal properties. TPC has a steam sales agreement with Pacific Gas
and Electric Company ("PG&E") pursuant to which the steam derived from its
interest in the properties is sold (see Note 4).
 
     Use of Estimates in Preparation of Financial Statements -- The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The most significant estimates with regard to these
financial statements relate to future development costs and total productive
resources of the geothermal facilities (see Property, Plant and Equipment and
Note 7), the estimated "free steam" liability (see Note 3), receivables which
the Company believes to be collectible (see Note 15) and the realization of
deferred income taxes (see Note 21). Additionally, the Company believes that
certain industry restructuring
 
                                       F-7
<PAGE>   131
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
(see Note 28, Regulation and CPUC Restructuring) will not have a material effect
on existing power service agreements ("PSA") and, accordingly, will not have a
material effect on existing business or results of operations.
 
     Revenue Recognition -- Revenue from electricity and steam sales is
recognized upon transmission to the customer. Revenues from contracts entered
into or acquired since May 21, 1992 are recognized at the lesser of amounts
billable under the contract or amounts recognizable at an average rate over the
term of the contract. The Company's power sales agreements related to CGC were
entered into prior to May 1992. Had the Company applied this principle, the
revenues of the Company recorded for the years ended December 31, 1996, 1995 and
1994, would have been approximately $16.1 million, $12.6 million, and $11.9
million less, respectively.
 
     The Company performs operations and maintenance services for all projects
in which it has an interest, except for TPC and the geothermal investment in
Mexico. Revenue from investees is recognized on these contracts when the
services are performed. Revenue from consolidated subsidiaries is eliminated in
consolidation.
 
     Cash and Cash Equivalents -- The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. The carrying amount of these instruments approximates fair value
because of their short maturity.
 
     Restricted Cash -- The Company is required to maintain cash balances that
are restricted by provisions of its debt agreements and by regulatory agencies.
The Company's debt agreements specify restrictions based on debt service
payments and drilling costs for the following year. Regulatory agencies require
cash to be restricted to ensure that funds will be available to restore property
to its original condition. Restricted cash is invested in accounts earning
market rates; therefore, the carrying value approximates fair value. Such cash
is excluded from cash and cash equivalents for the purposes of the statements of
cash flows.
 
     Investment in Collateral Securities -- The Company's investments in
collateral securities are related to the King City transaction (see Note 9) and
are classified as held-to-maturity and stated at amortized cost. The investments
in debt securities mature at various dates through August 2018 in amounts equal
to a portion of the lease payment. The fair value of held-to-maturity securities
was determined based on the quoted market prices at the reporting date for the
securities.
 
     The components of held-to-maturity securities by major security type as of
December 31, 1996 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                                    UNREALIZED
                                                     AMORTIZED       AGGREGATE        HOLDING
                                                        COST        FAIR VALUE         GAINS
                                                     ----------     -----------     -----------
        <S>                                          <C>            <C>             <C>
        Debt securities issued by the United
          States...................................   $ 54,826        $56,737         $ 1,911
        Corporate debt securities..................     40,450         40,499              49
                                                       -------        -------          ------
                                                      $ 95,276        $97,236         $ 1,960
                                                       =======        =======          ======
</TABLE>
 
     Concentration of Credit Risk -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of cash
and accounts / notes receivable. The Company's cash accounts are held by eight
major financial institutions. The Company's accounts / notes receivable are
concentrated within entities engaged in the energy industry, mainly within the
United States, some of which are related parties. Certain of the Company's notes
receivable are with a company in Mexico (see Note 15).
 
     Property, Plant and Equipment -- Property, plant and equipment are stated
at cost less accumulated depreciation and amortization.
 
                                       F-8
<PAGE>   132
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
     The Company capitalizes costs incurred in connection with the development
of geothermal properties, including costs of drilling wells and overhead
directly related to development activities, together with the costs of
production equipment, the related facilities and the operating power plants.
Geothermal properties include the value attributable to the geothermal resources
of CGC and all of the property, plant and equipment of Calpine Thermal. Proceeds
from the sale of geothermal properties are applied against capitalized costs,
with no gain or loss recognized.
 
     Geothermal costs, including an estimate of future development costs to be
incurred and the estimated costs to dismantle, are amortized by the units of
production method based on the estimated total productive output over the
estimated useful lives of the related steam fields. Depreciation of the
buildings and roads is computed using the straight-line method over their
estimated useful lives. It is reasonably possible that the estimate of useful
lives, total units of production or total capital costs to be amortized using
the units of production method could differ materially in the near term from the
amounts assumed in arriving at current depreciation expense. These estimates are
affected by such factors as the ability of the Company to continue selling steam
and electricity to customers at estimated prices, changes in prices of
alternative sources of energy such as hydro-generation and gas, and changes in
the regulatory environment.
 
     Gas-fired power production facilities include the cogeneration plants and
related equipment and are stated at cost. Depreciation is recorded utilizing the
straight-line method over the estimated original useful life of up to thirty
years. The value of the above-market pricing provided in PSAs acquired is
recorded in property, plant and equipment and is amortized over the life of the
PSA or operating lease. When assets are disposed of, the cost and related
accumulated depreciation are removed from the accounts, and the resulting gains
or losses are included in the results of operations.
 
     As of December 31, 1996 and 1995, the components of property, plant and
equipment are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                   1996         1997
                                                                 --------     --------
        <S>                                                      <C>          <C>
        Geothermal properties..................................  $297,002     $296,495
        Buildings, machinery and equipment.....................   277,572      198,358
        Power sales agreement..................................   145,957           --
        Miscellaneous assets...................................    11,287        2,425
                                                                  -------      -------
                                                                  731,818      497,278
        Less accumulated depreciation and amortization.........   100,674       60,511
                                                                  -------      -------
                                                                  631,144      436,767
        Land...................................................       754          754
        Construction in progress...............................    18,155       10,230
                                                                  -------      -------
          Property, plant and equipment, net...................  $650,053     $447,751
                                                                  =======      =======
</TABLE>
 
     Investments in Power Projects -- The Company accounts for its
unconsolidated investments in power projects under the equity method. The
Company's share of income from these investments is calculated according to the
Company's equity ownership or in accordance with the terms of the appropriate
partnership agreement (see Note 14).
 
     Capitalized Project Costs -- The Company capitalizes project development
costs upon the execution of a memorandum of understanding or a letter of intent
for a power or steam sales agreement. These costs include professional services,
salaries, permits and other costs directly related to the development of a new
project. Outside services and other third-party costs are capitalized for
acquisition projects. Upon the start-up of plant operations or the completion of
an acquisition, these costs are generally transferred to property, plant and
 
                                       F-9
<PAGE>   133
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
equipment and amortized over the estimated useful life of the project.
Capitalized project costs are charged to expense when the Company determines
that the project will not be consummated or is impaired.
 
     Earnings Per Share and As Adjusted Earnings Per Share -- For the calendar
year ending after the Company's initial public offering in September 1996, net
income per share was computed using the weighted average number of common and
common equivalent shares using the treasury stock method for outstanding stock
options. Net income per share also gives effect to common equivalent shares from
convertible preferred shares from the original date of issuance that
automatically converted upon completion of the Company's initial public offering
(using the if-converted method).
 
     For the year ended December 31, 1995, as adjusted net income per share was
computed using the weighted average number of common equivalent shares, which
includes the net additional number of shares which would be issuable upon the
exercise of outstanding stock options, assuming the Company used the proceeds
received to purchase additional shares at an assumed public offering price. Net
income per share also gives effect to common equivalent shares from preferred
stock that converted upon the closing of the Company's initial public offering
assuming such shares were outstanding from the beginning of the period in
accordance with Securities and Exchange Commission staff policy. Earnings per
share prior to 1995 have not been presented since such amounts are not deemed
meaningful due to the significant change in the Company's capital structure that
occurred in connection with its initial public offering.
 
     Power Marketing -- The Company, through its wholly owned subsidiary Calpine
Power Services Company ("CPSC"), markets power and energy services to utilities,
wholesalers, and end users. CPSC provides these services by entering into
contracts to purchase or supply electricity at specified delivery points and
specified future dates. In some cases, CPSC utilizes option agreements to manage
its exposure to market fluctuations. At December 31, 1996, CPSC held forward
sales and purchase contracts with notional quantities of approximately 724,000
megawatt hours and 631,600 megawatt hours, respectively.
 
     Net open positions may exist due to the origination of new transactions and
the Company's evaluation of changing market conditions. The open position
exposes the Company to the risk that fluctuating market prices may adversely
impact its financial position or results of operations. However, the net open
position is actively managed. The impact of such fluctuations on the Company's
financial position is not necessarily indicative of the impact of price
fluctuations throughout the year. CPSC values its portfolio using the aggregate
lower of cost or market method. An allowance is recorded currently for net
aggregate losses of the entire portfolio resulting from the effect of market
changes on the net open positions. Net gains are recognized when realized.
 
     With respect to open power contracts, CPSC has established certain reserves
and allowances, principally for adverse changes in market conditions prior to
termination of the commitments. At December 31, 1996, the Company had recorded
allowances of approximately $917,000 which is included in Service contract
revenue in the accompanying consolidated statement of operations.
 
     The Company's credit risk associated with power contracts results from the
risk of loss as a result of non-performance by counterparties. The Company
reviews and assesses counterparty risk to limit any material impact to its
financial position and results of operations. The Company does not anticipate
non-performance by the counterparties. The Company sets credit limits prior to
entering into transactions and has not obtained collateral or other security.
 
     Impact of Recent Accounting Pronouncements -- In March 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of. This pronouncement requires that
long-lived assets and certain identifiable intangible assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss is to be
recognized when the sum of undiscounted cash flows is less than the carrying
amount
 
                                      F-10
<PAGE>   134
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
of the asset. Measurement of the loss for assets that the entity expects to hold
and use are to be based on the fair market value of the asset. The Company
adopted SFAS No. 121 effective January 1, 1996, and determined that adoption of
this pronouncement had no material impact on the results of operations or
financial condition as of January 1, 1996.
 
     In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which
simplifies the standards for computing earnings per share previously found in
Accounting Principles Board Opinion ("APBO") No. 15. SFAS No. 128 replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share, which excludes dilution. SFAS No. 128 also requires dual presentation
of basic and diluted earnings per share on the face of the income statement for
all entities with complex capital structures and requires a reconciliation.
Diluted earnings per share is computed similarly to fully diluted earnings per
share pursuant to APBO No. 15. SFAS No. 128 must be adopted for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. SFAS No. 128 requires restatement
of all prior-period earnings per share data presented. The Company has not yet
quantified the effect of adopting SFAS No. 128.
 
     Reclassifications -- Prior years' amounts in the consolidated financial
statements have been reclassified where necessary to conform to the 1996
presentation.
 
 3. CALPINE GEYSERS COMPANY, L.P.
 
     CGC, a wholly owned subsidiary of the Company, is the owner of two
operating geothermal power plants and their respective steam fields, Bear Canyon
and West Ford Flat, and three geothermal steam fields, which provide steam to
PG&E's Unit 13 and Unit 16 power plants and to Sacramento Municipal Utility
District's ("SMUD") geothermal power plant. The power plants and steam fields
are located in The Geysers area of northern California. Electricity from CGC's
two operating geothermal power plants is sold to PG&E under 20-year agreements.
 
     Under the PG&E Unit 16 and the SMUD agreements, if the quantity of steam
delivered is less than 50% of the units' capacities, then neither PG&E nor SMUD
is required to make payment for steam delivered during such month until the cost
of the affected power plant has been completely amortized. Further, both PG&E
and SMUD can terminate their agreements with written notice under conditions
specified in the agreement if further operation of the plants becomes
uneconomical. In the event that CGC terminates the agreements, PG&E or SMUD may
require CGC to assign them all rights, title and interest to the wells, lands
and related facilities. In consideration for such an assignment to SMUD, SMUD
shall reimburse CGC for its original costs net of depreciation for any
associated materials or facilities.
 
     CGC revenues from sales of steam were calculated considering a future
period when steam would be delivered without receiving corresponding revenue.
The estimated "free steam" obligation was recorded at an average rate over
future steam production as deferred revenue in 1993. As of December 31, 1993,
the Company had deferred revenue of $8.6 million. During 1994, based on
estimates and analyses performed, the Company determined that these deliveries
would no longer be required for a customer and reversed approximately $5.9
million of its deferred revenue liability. This reversal was recorded as a $1.9
million purchase price reduction to property, plant and equipment, with the
remaining $4.0 million as an increase in revenue. Concurrently, $800,000 of the
revenue increase was reserved for future construction of gathering systems
required for future production of the steam fields, with the offset recorded in
property, plant and equipment.
 
     In October 1994, PG&E agreed to the termination of the free steam provision
for one of the geothermal steam fields. During 1995, CGC took additional
measures regarding future capital commitments and other
 
                                      F-11
<PAGE>   135
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
actions which will increase steam production and, based on additional analyses
and estimates performed, the Company recognized the remaining $2.7 million of
previously deferred revenue.
 
     On April 19, 1993, the Company acquired Freeport-McMoRan Resource Partners,
L.P.'s ("FMRP") interest in CGC for $23.0 million in cash and non-recourse notes
payable to FMRP totaling $40.5 million. On February 17, 1994, the Company
exercised its option to prepay the notes utilizing a discount rate of 10% by
paying $36.9 million including interest in full satisfaction of its obligations
under the FMRP notes. The difference between the original carrying amount of the
notes and the prepayment was recorded as an adjustment to the purchase price.
 
 4. CALPINE THERMAL POWER, INC.
 
     On September 9, 1994, Calpine Thermal acquired the outstanding capital
stock of TPC for a total purchase price of $66.5 million, consisting of a $60.0
million cash payment and the issuance by Calpine of a non-interest bearing
promissory note to Natomas in the amount of $6.5 million (discounted to $5.2
million), which is due September 9, 1997. Calpine received payments of $3.0
million from the seller, which represented cash from TPC's operations for the
period from July 1, 1994 to September 8, 1994. These payments were treated as
purchase price adjustments.
 
     Calpine Thermal owns a 25% undivided interest in certain producing
geothermal steam fields located at The Geysers area of northern California.
Union Oil Company of California owns the remaining 75% interest in the steam
fields, which deliver geothermal steam to twelve operating plants owned by PG&E.
The steam fields currently provide the twelve operating plants with sufficient
steam to generate approximately 604 megawatts of electricity.
 
     Steam from Calpine Thermal's steam field is sold to PG&E under a steam
sales agreement. In addition, Calpine Thermal receives a monthly capacity
maintenance fee, which provides for effluent disposal costs and facilities
support costs, and a monthly fee for PG&E's right to curtail its power plants.
The steam price, capacity maintenance and curtailment fees are adjusted
annually. Calpine Thermal is required to compensate PG&E for the unused capacity
of its geothermal power plants due to insufficient field capacities of its steam
supply (offset payment).
 
     In accordance with the steam sales agreement, PG&E may curtail the power
plants which receive steam from the Union Oil/Calpine Thermal Steam Fields in
order to produce energy from lower cost sources. However, PG&E is constrained by
its contractual obligation to operate all the power plants at a minimum of 40%
of the field capacity during any given year. During 1995 and 1996, Calpine
Thermal experienced extensive curtailments of steam production due to low gas
prices and abundant hydro power.
 
     In March 1996, the Company and Union Oil entered into an alternative
pricing agreement with PG&E for any steam produced in excess of 40% of average
field capacity as defined in the steam sales contract. The alternative pricing
agreement is effective through December 31, 2000. Under the alternative pricing
agreement, PG&E has the option to purchase a portion of the steam PG&E would
likely curtail under the existing steam sales agreement. The price for this
portion of steam will be set by the Company and Union Oil with the intent that
it be at competitive prices.
 
     The steam sales agreement between Calpine Thermal and PG&E terminates two
years after the closing of the last PG&E operating unit. PG&E may terminate the
agreement upon a one-year written notice to Calpine Thermal. In the event the
agreement is terminated by PG&E, Calpine Thermal has the right to purchase
PG&E's facilities at PG&E's unamortized cost. Calpine Thermal will provide
capacity maintenance services for five years after termination by PG&E or
closure of the last PG&E operating unit. Alternatively, Calpine Thermal may
terminate the agreement upon a two-year written notice to PG&E. PG&E has the
right
 
                                      F-12
<PAGE>   136
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
to take assignment of Calpine Thermal's facilities on the date of termination.
In such a case, Calpine Thermal would generally continue to pay offset payments
for 36 months following the date of termination.
 
 5. CALPINE GREENLEAF CORPORATION
 
     On April 21, 1995, Calpine Greenleaf acquired the outstanding capital stock
of Portsmouth Leasing Corporation, LFC No. 38 Corp. and LFC No. 60 Corp.
(collectively, the "Acquired Companies") for $80.5 million. The purchase price
included a cash payment of $20.3 million and the assumption of project debt
totaling $60.2 million. In April 1996, the Company finalized the purchase price.
 
     The acquisition was accounted for as a purchase, and the purchase price has
been allocated to the acquired assets and liabilities based on their estimated
fair values. The adjusted allocation of the purchase price is as follows (in
thousands):
 
<TABLE>
        <S>                                                                 <C>
        Current assets....................................................  $  6,572
        Property, plant and equipment.....................................   122,545
                                                                            --------
                  Total assets............................................   129,117
                                                                            --------
        Current liabilities...............................................    (1,079)
        Deferred income taxes, net........................................   (46,580)
                                                                            --------
                  Total liabilities.......................................   (47,659)
                                                                            --------
        Net purchase price................................................  $ 81,458
                                                                            ========
</TABLE>
 
     The Acquired Companies own 100% of the assets of two 49.5 megawatt natural
gas-fired cogeneration facilities Greenleaf 1 and Greenleaf 2 (collectively, the
"Greenleaf Power Plants"), located in Yuba City in northern California.
Electrical energy generated by the Greenleaf Power Plants is sold to PG&E
pursuant to two long-term PSAs (expiring in 2019) at prices equal to PG&E's full
short-run avoided operating costs, adjusted annually. The PSA also includes
payment provisions for firm capacity payments through 2019 for up to 49.2
megawatts on each unit and as-delivered capacity on excess deliveries. PG&E, at
its discretion, may curtail purchases of electricity from the Greenleaf Power
Plants due to hydro-spill or uneconomic cost conditions. The thermal energy
generated is used by thermal hosts adjacent to the Greenleaf Power Plants.
 
     Gas for the Greenleaf Power Plants is supplied by Montis Niger, Inc.
("MNI"). On January 31, 1997, the Company purchased MNI for $7.5 million.
 
 6. CALPINE MONTEREY COGENERATION, INC.
 
     On June 29, 1995, CMCI acquired a 14.5-year operating lease (through
December 2009) for a 28.5 megawatt natural gas-fired cogeneration power plant
located in Watsonville, California. The Company acquired the operating lease
from Ford Motor Credit Company for $900,000. The Watsonville Power Plant sells
electricity to PG&E under a 20-year PSA, generally at prices equal to PG&E's
full short-run avoided operating costs. Basic and contingent lease rental
payments are described in Note 26. The power plant also provides steam to two
local food processing plants. The Company also provides project and fuels
management services.
 
 7. CALPINE SISKIYOU GEOTHERMAL PARTNERS, L.P.
 
     In 1994, the Company formed a partnership with Trans-Pacific Geothermal
Corporation ("TGC") to build a geothermal power generation facility located at
Glass Mountain in northern California. TGC had previously signed a memorandum of
understanding ("MOU") with Bonneville Power Administration ("BPA") and the
Springfield, Oregon Utility Board ("SUB") to develop the project at Vale,
Oregon. BPA and SUB consented in August 1994 to the assignment of the MOU to the
partnership and the relocation of the
 
                                      F-13
<PAGE>   137
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
project to Glass Mountain. The MOU contemplated execution of a 45-year power
purchase agreement subject to satisfaction of certain conditions precedent and
included an option for an additional 100 megawatts. The partnership is
consolidated as the Company owns a controlling interest.
 
     In December 1996, the partnership and BPA entered into a settlement
agreement which restructured the rights and obligations of the parties. In
return for the payment of $12.0 million by BPA to the partnership and the grant
by the partnership to BPA of future options to purchase power at Glass Mountain,
the partnership and BPA terminated the MOU and certain ancillary agreements. In
addition, BPA will pay the partnership additional consideration should certain
future events occur related to the ongoing environmental review of the Glass
Mountain project. Following the settlement with BPA, TGC withdrew from the
partnership.
 
     Of the $12.0 million received by the partnership in December 1996, $4.7
million was allocated to TGC, of which $3.0 million was received by the Company
in payment of a loan (see Note 15). Previously capitalized project costs were
charged to expense, and no significant gain or loss was included in net income
for the year 1996.
 
     At December 31, 1996, the Company had $4.0 million of geothermal leases at
Glass Mountain recorded as Property, plant and equipment, net in the
accompanying consolidated balance sheet. The Company is continuing to pursue the
development of Glass Mountain, and expects to recover the cost of such leases
from the future development of the resource.
 
 8. CALPINE VAPOR, INC.
 
     In November 1995, Calpine Vapor entered into agreements with Constructora y
Perforadora Latina, S.A. de C.V. ("Coperlasa") and certain Mexican bank lenders
to loan funds to Coperlasa in connection with a geothermal steam production
contract at the Cerro Prieto geothermal resource in Baja California, Mexico. The
resource currently produces electricity from geothermal power plants owned and
operated by Comision Federal de Electricidad ("CFE"), Mexico's national utility.
The steam field contract is between Coperlasa and CFE. Calpine Vapor loaned
$18.5 million to Coperlasa, and received fees for technical services provided to
the project. At December 31, 1996, notes receivable (see Note 15) totaled $18.0
million. The Company is deferring the recognition of income on this loan until
the Cerro Prieto project generates sufficient cash flows available for
distribution to support the collectibility of interest earned.
 
     In December 1995, Calpine Vapor also paid $1.5 million for an option to
purchase an equity interest in Coperlasa. The option is being amortized over the
estimated repayment period of the Coperlasa loan and is included in Other
assets.
 
 9. KING CITY TRANSACTION
 
     In April 1996, the Company entered into a long-term operating lease with
BAF Energy, A California Limited Partnership ("BAF"), for a 120 megawatt natural
gas-fired cogeneration power plant located in King City, California. The power
plant generates electricity for sale to PG&E pursuant to a long-term PSA through
2019 and provides steam to a vegetable processing plant.
 
     The Company makes semi-annual lease payments to BAF on each February 15 and
August 15, a portion of which is supported by a $95.0 million collateral fund
owned by the Company. The collateral fund consists of investment grade and U.S.
Treasury Securities that mature serially in amounts equal to a portion of the
lease payment. The collateral fund securities are classified as held-to-maturity
investments (see Note 2). As of December 31, 1996, future rent payments are
$24.4 million for 1997, $23.8 million for 1998, $19.4 million for 1999, $20.1
million for 2000, $20.8 million for 2001, and $183.2 million thereafter.
Included in the accompanying December 31, 1996 balance sheet is approximately
$12.7 million of unamortized prepaid lease costs.
 
                                      F-14
<PAGE>   138
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
     The Company recorded the value of the above-market pricing provided in the
PSA as an asset which is included in property, plant and equipment. The Company
has also recorded a deferred lease incentive of $78.5 million at December 31,
1996 equal to the value of the above-market payments to be received. The asset
and liability are being amortized over the life of the power sales agreement and
lease, respectively.
 
10. GILROY TRANSACTION
 
     On August 29, 1996, the Company acquired a 120 megawatt natural gas-fired
cogeneration power plant located in Gilroy, California. The cost of the Gilroy
Power Plant was $125.0 million plus certain contingent consideration, which is
expected to be $24.1 million. The Company recorded the value of the above-market
pricing provided in the PSA of $82.1 million as an asset which is included in
Property, plant and equipment.
 
     Electricity generated by the Gilroy Power Plant is sold to PG&E pursuant to
a long-term PSA terminating in 2018. The PSA contains payment provisions for
capacity and energy. The Gilroy power plant also produces and sells thermal
energy to ConAgra, Inc.
 
  Pro Forma Consolidated Results
 
     The following unaudited pro forma consolidated results for the Company give
effect to (i) the King City Transaction and (ii) the Gilroy Transaction as if
such transactions had occurred on January 1, 1996; unaudited pro forma
consolidated results are also provided for the effects of the above
transactions, and (iii) the Watsonville operating lease acquired on June 28,
1995, and (iv) the Greenleaf Transaction, as if such transactions had occurred
on January 1, 1995 (in thousands, except per share amounts):
 
<TABLE>
<CAPTION>
                                                                   1996         1995
                                                                 --------     --------
        <S>                                                      <C>          <C>
        Revenue................................................  $237,924     $221,447
        Net income.............................................  $ 18,954     $ 11,288
        Earnings per share.....................................  $   1.29     $   0.80
</TABLE>
 
11. PASADENA COGENERATION PROJECT
 
     The Company has entered into a development agreement with Phillips
Petroleum Company ("Phillips") to construct and operate a 240 megawatt gas-fired
cogeneration project at the Phillips Houston Chemical Complex ("HCC") located in
Pasadena, Texas. In December 1996, the Company entered into an Energy Sales
Agreement with Phillips pursuant to which Phillips will purchase all of HCC's
steam and electricity requirements of approximately 90 megawatts. It is
anticipated that the remainder of available electricity output will be sold into
the competitive market. The Company provided a $3.0 million letter of credit to
Phillips to secure the performance under the project development agreement. The
Company also entered into a credit agreement with ING U.S. Capital Corporation
to provide $98.6 million of non-recourse project financing. In accordance with
the credit agreement, the Company contributed $53.1 million in cash to the
project, of which the remaining $41.0 million is included in Restricted cash in
the accompanying consolidated balance sheet. The Company commenced construction
in February 1997, with commercial operation scheduled to begin in October 1998.
There can be no assurances that the Company will be successful in completing any
additional PSAs or that the anticipated schedule for construction will be met.
 
12. ACCOUNTS RECEIVABLE
 
     At December 31, 1996, accounts receivable of $42.8 million included $1.9
million to be received from the Los Angeles Department of Water and Power for
reimbursement of costs related to the Coso development project incurred by the
Company in prior years. Such amount was received in 1997.
 
                                      F-15
<PAGE>   139
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
     Accounts receivable from related parties at December 31, 1996 and 1995
include the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                      1996       1995
                                                                     ------     ------
        <S>                                                          <C>        <C>
        O.L.S. Energy-Agnews, Inc..................................  $  687     $  806
        Geothermal Energy Partners, Ltd............................     350        462
        Sumas Cogeneration Company, L.P............................     590        908
        Electrowatt Ltd. and subsidiaries..........................   1,199          1
                                                                     -------    -------
                                                                     $2,826     $2,177
                                                                     =======    =======
</TABLE>
 
     At December 31, 1996, the $1.2 million receivable from Electrowatt Ltd. was
for reimbursement of costs for the sale of Electrowatt's ownership of Calpine
common stock during the Company's initial public offering.
 
13. ACQUISITION PROJECT RECEIVABLES
 
     In connection with an unsuccessful bid to acquire O'Brien Environmental
Energy, Inc. ("OEE") in 1995 through the U.S. Bankruptcy Court, the Company
incurred and capitalized project acquisition costs. On November 8, 1996, the
court denied Calpine's application for approval of such costs and fees and the
Company recorded a $3.7 million loss for unrecoverable amounts (included in
Other income, net in the accompanying consolidated statement of operations). The
Company is appealing the court's decision.
 
     The Company also purchased $1.9 million of accounts receivable from two
subsidiaries of OEE. Payments were made to the Company based on cash
availability for each subsidiary. In February 1996, the Company received
approximately $1.1 million against these receivables.
 
     The Company purchased for $900,000 from Stewart & Stevenson, Inc. ("S&S") a
participation interest in a $1.0 million note issued by OEE. The Company
received principal plus accrued interest in 1996.
 
     The Company purchased all of S&S's rights and obligations in a Subordinated
Loan Agreement and Note between S&S and O'Brien (Newark) Cogeneration, Inc. The
purchase price was $2.8 million and the notes bore interest at prime plus 2.0%.
The Company received principal plus accrued interest in 1996.
 
14. INVESTMENTS IN POWER PROJECTS
 
     The Company has unconsolidated investments in power projects which are
accounted for under the equity method. Financial information related to these
investments is as follows (in thousands):
 
<TABLE>
<CAPTION>
                                             SUMAS
                                          COGENERATION
                                            COMPANY,             O.L.S.                 GEOTHERMAL
                                              L.P.         ENERGY-AGNEWS, INC.     ENERGY PARTNERS, LTD.
                                          ------------     -------------------     ---------------------
    <S>                                   <C>              <C>                     <C>
    1996
    Operating revenue.....................   $ 44,092            $11,023                  $22,302
    Net income (loss).....................      8,494               (840)                   6,367
    Assets................................    129,273             37,160                   69,249
    Liabilities...........................    125,652             36,711                   38,304
    Company's percentage ownership........         (a)                20%                       5%
    Equity investments in power
      projects............................     11,382                124                    1,556
    Project development costs.............        875                 --                       --
                                            --------            --------                 --------
    Total investments in power projects...     12,257                124                    1,556
                                            ========            ========                 ========
    Company's share of net income
      (loss)..............................   $  6,396            $  (190)                 $   331
                                            ========            ========                 ========
</TABLE>
 
                                      F-16
<PAGE>   140
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
<TABLE>
<CAPTION>
                                             SUMAS
                                          COGENERATION
                                            COMPANY,             O.L.S.                 GEOTHERMAL
                                              L.P.         ENERGY-AGNEWS, INC.     ENERGY PARTNERS, LTD.
                                          ------------     -------------------     ---------------------
    <S>                                   <C>              <C>                     <C>
    1995
    Operating revenue.....................   $ 31,526            $10,779                  $21,676
    Net income (loss).....................     (6,098)              (483)                   5,538
    Assets................................    122,802             40,330                   76,017
    Liabilities...........................    123,377             39,034                   51,439
    Company's percentage ownership........         (a)                20%                       5%
    Equity investments in power
      projects............................      5,763                314                    1,229
    Project development costs.............        912                 --                       --
                                            --------             -------                  -------
    Total investments in power projects...      6,675                314                    1,229
                                            ========             =======                  =======
    Company's share of net income
      (loss)..............................   $ (3,049)           $   (82)                 $   227
                                            ========             =======                  =======
</TABLE>
 
<TABLE>
<CAPTION>
                                             SUMAS
                                          COGENERATION
                                            COMPANY,             O.L.S.                 GEOTHERMAL
                                              L.P.         ENERGY-AGNEWS, INC.     ENERGY PARTNERS, LTD.
                                          ------------     -------------------     ---------------------
    <S>                                   <C>              <C>                     <C>
    1994
    Operating revenue.....................   $ 32,060            $11,985                  $21,721
    Net income (loss).....................     (5,777)              (415)                   5,548
    Assets................................    130,148             42,596                   77,081
    Liabilities...........................    124,625             40,864                   58,041
    Company's percentage ownership........         (a)                20%                       5%
    Equity investments in power
      projects............................      8,812                396                      952
    Project development costs.............        946                  8                       --
                                            --------             -------                  -------
    Total investments in power projects...      9,758                404                      952
                                            ========             =======                  =======
    Company's share of net income
      (loss)..............................   $ (2,888)           $  (143)                 $   277
                                            ========             =======                  =======
</TABLE>
 
- ---------------
 
(a) Distributions will be made out of operating income after certain required
    deposits are made and certain minimum balances are met. After receiving
    certain preferential distributions, the Company will have a 50% interest in
    the profits and losses of Sumas until earning a 24.5% pre-tax cumulative
    return on its investment, at which time the Company's interest in Sumas will
    be reduced to 11.33%.
 
     Sumas Cogeneration Company, L.P. -- Sumas Cogeneration Company, L.P.
("Sumas") is a Delaware limited partnership formed between Sumas Energy, Inc.
("SEI"), a Washington State Subchapter S corporation, and Whatcom Cogeneration
Partners, L.P. ("Whatcom"), a wholly owned partnership of the Company. SEI is
the general partner and Whatcom is the limited partner. Sumas has a wholly owned
Canadian subsidiary, ENCO Gas, Ltd. ("ENCO"), which is incorporated in New
Brunswick, Canada.
 
     Sumas owns and operates a 125 megawatt natural gas-fired cogeneration power
plant. In connection with the Sumas power plant is a lumber dry kiln facility
and a 3.5 mile private natural gas pipeline. ENCO acquired, developed and is
operating a portfolio of proven natural gas reserves in British Columbia and
Alberta, Canada to provide a dedicated fuel supply for the Sumas Power Plant.
 
     Sumas produces and sells electrical energy to Puget Sound Power & Light
Company ("Puget") under a 20-year agreement for an average 123 megawatts. Sumas
leases the dry kiln facility and sells steam to Socco, Inc. ("Socco"), a custom
lumber drying operation owned by an affiliated individual.
 
                                      F-17
<PAGE>   141
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
     Construction financing was provided through a $95.2 million construction
and term loan agreement with The Prudential Insurance Company of America
("Prudential") and Credit Suisse, an affiliate of the Company. In addition, ENCO
has a $24.8 million loan agreement with Prudential and Credit Suisse. On May 25,
1993, the entire $120.0 million was converted to a term loan.
 
     In addition, the Company provides operations and maintenance services to
Sumas and receives a fixed fee of $1.1 million per year adjusted annually for
inflation, an annual base fee of $150,000 per year also adjusted annually for
inflation and certain other reimbursable expenses. The Company is entitled to an
annual performance bonus of up to $400,000 based upon the achievement of certain
performance levels. This arrangement will expire upon the date Whatcom receives
its 24.5% pre-tax return or 10 years, subject to renewal terms, whichever is
later. The Company recorded revenue of approximately $2.0 million, $2.0 million,
and $1.9 million associated with this arrangement during the years ended
December 31, 1996, 1995 and 1994, respectively.
 
     O.L.S. Energy-Agnews, Inc. -- The Company has a 20% interest in O.L.S.
Energy-Agnews, Inc., a joint venture with GATX Capital Corporation, which owns
and operates a 29 megawatt gas-fired combined-cycle cogeneration facility at the
State-owned Agnews Developmental Center ("Center") in San Jose, California. The
cogeneration plant provides the Center with all of its thermal and electric
requirements. Excess electricity is sold to PG&E under a Standard Offer No. 4
contract. The Company's original investment was $1.8 million.
 
     In addition to its interest as stated above, the Company has been
contracted by the joint venture to provide operations and maintenance services
at cost plus overhead and fees, as specified. The Company recorded revenue of
$2.0 million, $1.5 million, and $1.4 million associated with this service
agreement and for other services provided to the joint venture for the years
ended December 31, 1996, 1995 and 1994, respectively.
 
     In January 1990, O.L.S. Energy-Agnews, Inc. entered into a credit agreement
with Credit Suisse providing for a $28.0 million loan. The loan is secured by
all of the assets of the Agnews Power Plant and bears interest on the unpaid
principal balance based on the London Interbank Offered Rate ("LIBOR") plus a
margin rate varying between 0.05% and 1.5%.
 
     Geothermal Energy Partners, Ltd. -- During 1989, the Company acquired a 5%
interest in Geothermal Energy Partners Ltd. ("GEP"). GEP was established in 1988
to develop, finance and construct a 20 megawatt geothermal power production
facility located in The Geysers area of northern California. The facility began
operations on June 6, 1989.
 
     In addition to its interest as stated above, the Company has been
contracted by GEP to provide operations and maintenance services at cost plus
overhead and fees, as specified. The Company recorded revenue of $4.0 million,
$3.5 million and $3.7 million associated with this service agreement to GEP for
the years ended December 31, 1996, 1995 and 1994, respectively.
 
     The Company accounts for its investment in GEP under the equity method
because control of the project is deemed to be shared under the terms of the
partnership agreement, and the Company has significant influence over the
operation of the venture.
 
15. NOTES RECEIVABLE
 
     In May 1993, in accordance with the Sumas partnership agreement, the
Company was entitled to receive a distribution of $1.5 million and SEI, the
Company's partner in Sumas, was required to make a capital contribution of $1.5
million. In order to meet SEI's $1.5 million capital contribution requirement,
the Company loaned $1.5 million to the sole shareholder of SEI, who in turn
loaned the funds to SEI, who in turn contributed the capital to Sumas. The loan
bears interest at 20% and is secured by a security interest in the
 
                                      F-18
<PAGE>   142
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
loan between SEI and its sole shareholder. The Company will receive payments of
50% of SEI's cash distributions from Sumas. The payments will first reduce any
accrued and unpaid interest and then reduce the principal balance. On May 25,
2003, all unpaid principal and interest is due.
 
     In March 1994, the Company loaned $10.0 million to the sole shareholder of
SEI. The loan matures in 10 years and bears interest at 16.25%. The loan is
secured by a pledge to Calpine of SEI's interest in Sumas. In order to provide
for the payment of principal and interest on the loan, an additional 12 1/2% of
the cash flow generated by Sumas was assigned to Calpine. The Company deferred
the recognition of interest income from these notes until Sumas generated net
income. In 1996, the Company recognized a total of $2.1 million of interest
income related to the above two loans, which represents the portion of Sumas'
earnings not recognized by Calpine related to its equity investment in Sumas.
 
     In August 1994, the Company entered into a loan agreement providing for
loans up to $4.8 million to Trans-Pacific Geothermal Glass Mountain Ltd.
("TGGM"), a subsidiary of TGC (see Note 7). The loan bore interest at 10% and
had a maturity date which was based on certain future events. The loan was
secured by a pledge to Calpine of the partner's interest in the Glass Mountain
project. The Company was deferring the recognition of income from this note
until the Glass Mountain project generated sufficient income to support the
collectibility of interest earned. At December 1, 1996, $4.1 million was
outstanding. In December 1996, the Company received $3.0 million from TGGM in
payment of the loan and recorded a $1.1 million loss for uncollectible amounts,
which was included in Other income, net (see Note 7).
 
     As of December 31, 1996, Calpine Vapor had notes receivable of $18.0
million from Coperlasa and associated unamortized loan acquisition fees of $1.1
million (see Note 8). Interest accrues on the outstanding notes receivable at
approximately 18.9%. The Company is deferring the recognition of income from
this note until the Cerro Prieto project generates sufficient cash flows
available for distribution to support the collectibility of interest earned.
 
16. REVOLVING CREDIT FACILITY AND LINES OF CREDIT
 
     At December 31, 1996, the Company had a $50.0 million three-year credit
facility available with a consortium of commercial lending institutions which
include The Bank of Nova Scotia, International Nederlanden U.S. Capital
Corporation, Sumitomo Bank of California and Canadian Imperial Bank of Commerce.
As of December 31, 1996, the Company had no borrowings and $5.9 million of
letters of credit outstanding, which reflect $3.0 million to secure performance
with the Pasadena Power Plant and $2.9 million related to operating expenses at
CMCI. Borrowings bear interest at The Bank of Nova Scotia's base rate or at
LIBOR plus an applicable margin. Interest is paid on the last day of each
interest period for such loans, but not less often than quarterly, based on the
principal amount outstanding during the period for base rate loans, and on the
last day of each applicable interest period, but not less often than 90 days,
for LIBOR loans. The credit agreement expires in September 1999. The credit
agreement specified that the Company maintain certain covenants with which the
Company was in compliance. Commitment fees related to this line of credit are
charged based on 0.50% of committed unused credit.
 
     At December 31, 1995, the Company had a $50.0 million credit facility with
Credit Suisse (whose parent company owns approximately 44.9% of Electrowatt Ltd.
("Electrowatt"), the former indirect sole owner of the Company prior to the
initial public offering on September 25, 1996). At December 31, 1995, the
Company had $19.9 million of borrowings outstanding, bearing interest at LIBOR
plus 0.5% (6.4% at December 31, 1995). Interest could be paid at either LIBOR or
the Credit Suisse base rate, plus applicable margins in both cases. The credit
agreement specified that the Company maintain certain covenants with which the
Company was in compliance. The Company terminated its Credit Suisse credit
facility on September 25, 1996.
 
                                      F-19
<PAGE>   143
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
     At December 31, 1996, the Company had a loan facility with available
borrowings totaling $1.2 million. There were no borrowings and $900,000 of
letters of credit outstanding as of December 31, 1996. At December 31, 1995, the
Company had three loan facilities with available borrowings totaling $10.2
million. Borrowings and letters of credit outstanding were $1.2 million and $3.8
million as of December 31, 1995, respectively. Interest is payable at variable
interest rates based on bank base rates, LIBOR or prime plus applicable margins
in all cases (approximately 7.6% at December 31, 1995 on borrowings). The credit
agreements specified that the Company maintain certain covenants with which the
Company was in compliance.
 
17. WORKING CAPITAL LOAN
 
     The Company has a $5.0 million working capital loan agreement with a bank
providing for advances and letters of credit. The aggregate unpaid principal of
the working capital loan is payable in full at least once a year, with the final
payment of principal, interest and fees due June 30, 1998. Interest on
borrowings accrues at the option of the Company at either a base rate, LIBOR, or
a certificate of deposit rate (plus applicable margins in all cases) over the
term of the loan. No borrowings were outstanding at December 31, 1996 and 1995.
The Company had letters of credit outstanding of $459,000 at December 31, 1996
and 1995. Outstanding letters of credit bear interest at 0.625% payable
quarterly.
 
18. NON-RECOURSE PROJECT FINANCING
 
     The components of non-recourse project financing as of December 31, 1996
and 1995 are (in thousands):
 
<TABLE>
<CAPTION>
                                                                   1996         1995
                                                                 --------     --------
        <S>                                                      <C>          <C>
        Senior-term loans:
          Fixed rate portion...................................  $ 73,000     $ 99,400
          Variable rate portion................................    20,000       20,000
          Premium on debt......................................     1,824        2,959
                                                                 --------     --------
                  Total senior-term loans......................    94,824      122,359
        Junior-term loans......................................    19,965       19,965
        Notes payable to banks.................................   194,478      133,026
                                                                 --------     --------
                  Total long-term debt.........................   309,267      275,350
                  Less current portion.........................    30,627       84,708
                                                                 --------     --------
                  Long-term debt, less current portion.........  $278,640     $190,642
                                                                 ========     ========
</TABLE>
 
     The Company entered into the Senior-Term Loans and Junior-Term Loans in
connection with the Company's acquisition of CGC in 1993.
 
     Senior-Term Loans -- Principal and interest are payable in quarterly
installments at variable amounts with the final payment of principal, interest
and fees due June 30, 2002. A portion of the senior-term loans bears interest
fixed at 9.93% (see discussion on swap agreement below) with the remainder
accruing interest at LIBOR plus an applicable margin (6.75% and 6.69% at
December 31, 1996 and 1995, respectively) over the term of the loan,
collateralized by all of CGC's assets and the Company's interest in CGC. The
premium is amortized over the life of the fixed rate portion of the loan using
the interest method.
 
     Junior-Term Loans -- Principal and interest are payable in quarterly
installments at variable amounts beginning September 30, 2002 with the final
payment of principal, interest and fees due June 30, 2005; interest accrues at
LIBOR plus an applicable margin (7.75% and 7.69% at December 31, 1996 and 1995,
respectively) over the term of the loan, collateralized by all of CGC's assets
and the Company's interest in CGC.
 
                                      F-20
<PAGE>   144
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
     The Company entered into two interest rate swap agreements to minimize the
impact of changes in interest rates on a portion of its senior-term loans. These
agreements fix the interest on this portion at 9.93%. At December 31, 1996, the
swap agreements applied to debt with a principal balance total of $73.0 million.
The interest rate swap agreements mature through December 31, 2000. The premium
on debt was recorded in conjunction with the acquisition as discussed above. The
amortization of the premium adjusts the effective interest rate on the
fixed-rate debt to 7.05% per annum. The floating interest rate associated with
this portion of the senior-term loans was LIBOR plus an applicable margin (6.63%
at December 31, 1996 and 6.99% at December 31, 1995). The Company is exposed to
credit risk in the event of non-performance by the other parties to the swap
agreements.
 
     Notes Payable to Banks -- In September 1994, the Company entered into a
two-year agreement with The Bank of Nova Scotia to finance the acquisition of
TPC. In May 1996, a portion of the net proceeds from the Company's issuance of
the 10 1/2% Senior Notes Due 2006 was utilized to repay the total $57.0 million
of borrowings under this agreement.
 
     In June 1995, the Company entered into an agreement with Sumitomo Bank to
finance the acquisition of the Greenleaf Power Plants. Of the $74.7 million debt
outstanding at December 31, 1996, $59.0 million bears interest fixed at 7.4%,
with the remaining floating rate portion accruing interest at LIBOR plus an
applicable margin (6.24% as of December 31, 1996). At December 31, 1995, $76.0
million of debt was outstanding, of which $60.0 million was at the fixed
interest rate of 7.4%, with the remaining floating rate portion accruing
interest at approximately 6.5%. This debt is secured by all of the assets of
Greenleaf 1 and 2. Interest on the floating rate portion may be at Sumitomo's
base rate plus an applicable margin or at LIBOR plus an applicable margin.
Interest on base rate loans is paid at the end of each calendar quarter, and
interest on LIBOR based loans is paid on each maturity date, but not less often
than quarterly, based on the principal amount outstanding during the period. At
the Company's discretion, the LIBOR based loans may be held for various maturity
periods of at least 1 month up to 12 months. The $74.7 million debt will be
repaid quarterly, with a final maturity date of December 31, 2010.
 
     On August 29, 1996, the Company entered into an agreement with Banque
Nationale de Paris ("BNP") to finance the acquisition of the Gilroy Power Plant.
As of December 31, 1996, BNP had provided a $119.8 million loan consisting of a
15-year tranche in the amount of $84.8 million and an 18-year tranche in the
amount of $35.0 million. In addition, BNP provided two additional tranches for
the payment of certain contingent consideration, which at December 31, 1996
totaled $19.6 million. The debt is secured by all of the assets of the Gilroy
Power Plant. A portion of the BNP notes bears interest fixed at a weighted
average of 6.6% (see discussion below), with the remainder accruing interest at
LIBOR plus an applicable margin (6.6% at December 31, 1996). Interest on the
floating rate portion may be at BNP's base rate plus an applicable margin or at
LIBOR plus an applicable margin. Interest on base rate loans is payable not less
often than quarterly. Interest on LIBOR based loans is paid on each maturity
date, but not less often than quarterly. At the Company's discretion, LIBOR
based loans may be held for various maturity periods of at least 1 month and up
to 12 months. The $119.8 million debt will be repaid semi-annually beginning
August 31, 1997, with a final maturity date of August 28, 2011. Commitment fees
are charged based on 1% to 1.125% of committed unused credit.
 
     The Company entered into four interest rate swap agreements to minimize the
impact of changes in interest rates. These agreements fix the interest on $87.5
million of principal at a weighted average interest rate of 6.6%. The interest
rate swap agreements mature through August 2011. The Company is exposed to
credit risk in the event of non-performance by the other parties to the swap
agreements.
 
                                      F-21
<PAGE>   145
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
     The annual principal maturities of the non-recourse debt outstanding at
December 31, 1996 are as follows (in thousands):
 
<TABLE>
            <S>                                                         <C>
            1997......................................................  $ 30,627
            1998......................................................    32,658
            1999......................................................    24,183
            2000......................................................    24,851
            2001......................................................    24,631
            Thereafter................................................   170,493
                                                                        --------
                                                                         307,443
            Unamortized premium on fixed portion of senior loans......     1,824
                                                                        --------
                      Total...........................................  $309,267
                                                                        ========
</TABLE>
 
     The carrying value of $73.0 million and $99.4 million of the senior-term
loan as of December 31, 1996 and 1995, respectively, has an effective rate of
9.93% under the Company's interest rate swap agreements (7.05% after
consideration of the debt premium). Based on the borrowing rates currently
available to the Company for bank loans with similar terms and maturities, the
fair value of the debt as of December 31, 1996 and 1995 is approximately $83.2
million and $107.3 million, respectively. The carrying value of the remaining
$20.0 million of the senior-term and the $20.0 million junior-term loans and the
notes payable to banks approximate the debts' fair market value as the rates are
variable and based on the current LIBOR rate.
 
     The non-recourse debt is held by subsidiaries of Calpine. The debt
agreements of the Company's subsidiaries and other affiliates governing the
non-recourse project financing generally restrict their ability to pay
dividends, make distributions or otherwise transfer funds to the Company. The
dividend restrictions in such agreements generally require that, prior to the
payment of dividends, distributions or other transfers, the subsidiary or other
affiliate must provide for the payment of other obligations, including operating
expenses, debt service and reserves.
 
     On December 20, 1996, the Company entered into a credit agreement with ING
U.S. Capital Corporation to provide $98.6 million of non-recourse project
financing for the Pasadena Cogeneration Project (see Note 11). No borrowings
were outstanding at December 31, 1996. Interest is payable at ING's base rate or
the Federal Funds Rate plus an applicable margin on the last day of each
calendar quarter, or at LIBOR plus an applicable margin upon maturity of the
loan, but no less than quarterly. All interest is due and payable upon
conversion of the construction loan to a term loan. Subject to the terms of the
credit agreement, all or part of the construction loan will be converted to a
term loan upon completion of construction. Commitment fees are charged based on
0.375% of committed unused credit.
 
19. NOTES PAYABLE
 
     At December 31, 1996, the Company had a non-interest bearing promissory
note for $6.5 million payable to Natomas Energy Company, a wholly owned
subsidiary of Maxus Energy Company. This note has been discounted to yield 8.0%
per annum, due September 9, 1997. The carrying amount of $6.2 million at
December 31, 1996 approximates fair market value.
 
     In January 1995, the Company purchased the working interest covering
certain properties in its geothermal properties at CGC from Santa Fe Geothermal,
Inc. The purchase price included $6.0 million cash, and a $750,000 non-interest
bearing note discounted to yield 9% per annum and due on December 26, 1997. The
Company may repay all or any part of the note at any time without penalty. The
carrying value of $686,000 of the discounted non-interest bearing note at
December 31, 1996 approximates fair market value.
 
                                      F-22
<PAGE>   146
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
20. SENIOR NOTES
 
     On May 16, 1996, the Company issued $180.0 million aggregate principal
amount of 10 1/2% Senior Notes Due 2006. The net proceeds of $174.9 million were
used to repay $53.7 million of borrowings under the Credit Suisse Credit
Facility, $57.0 million of non-recourse project financing and $45.0 million of
borrowings from The Bank of Nova Scotia. The remaining $19.2 million was
available for general corporate purposes. Transaction costs of $5.1 million
incurred in connection with the public debt offering were recorded as a deferred
charge and are amortized over the ten-year life of the 10 1/2% Senior Notes Due
2006.
 
     The 10 1/2% Senior Notes Due 2006 will mature on May 15, 2006. The Company
has no sinking fund or mandatory redemption obligations with respect to the
10 1/2% Senior Notes Due 2006. Interest is payable semi-annually on May 15 and
November 15. Based on the traded yield to maturity, the approximate fair market
value of the 10 1/2% Senior Notes Due 2006 was $191.7 million as of December 31,
1996.
 
     On February 17, 1994, the Company completed a $105.0 million public debt
offering of 9 1/4% Senior Notes Due 2004. Transaction costs of $4.1 million
incurred in connection with the public debt offering were recorded as a deferred
charge and are amortized over the ten-year life of the 9 1/4% Senior Notes Due
2004.
 
     The 9 1/4% Senior Notes Due 2004 will mature on February 1, 2004. The
Company has no sinking fund or mandatory redemption obligations with respect to
the 9 1/4% Senior Notes Due 2004. Interest is payable semi-annually on February
1 and August 1. Based on the traded yield to maturity, the approximate fair
market value of the 9 1/4% Senior Notes Due 2004 was $105.7 million as of
December 31, 1996.
 
     The Senior Note indentures specify that the Company maintain certain
covenants with which the Company was in compliance. The Company may, under
certain circumstances, be limited in its ability to make restricted payments, as
defined, which include dividends and certain purchases and investments, incur
additional indebtedness and engage in certain transactions.
 
21. PROVISION FOR INCOME TAXES
 
     The Company follows the liability method of accounting for income taxes
whereby deferred income taxes are recognized for the tax consequences of
"temporary differences" to the extent they are not reduced by net operating loss
and tax credit carryforwards by applying enacted statutory rates.
 
     The components of the deferred tax liability as of December 31, 1996 and
1995 are (in thousands):
 
<TABLE>
<CAPTION>
                                                                 1996          1995
                                                               ---------     ---------
        <S>                                                    <C>           <C>
        Expenses deductible in a future period...............  $   3,329     $   1,674
        Net operating loss and credit carryforwards..........     19,856        19,480
        Other differences....................................      1,186         2,034
                                                               ---------     ---------
             Deferred tax asset, before valuation
               allowance.....................................     24,371        23,188
        Valuation allowance..................................       (692)         (749)
                                                               ---------     ---------
             Deferred tax asset..............................     23,679        22,439
                                                               ---------     ---------
        Property differences.................................   (119,842)     (116,314)
        Difference in taxable income and income from
          investments recorded on the equity method..........     (2,753)       (2,311)
        Other differences....................................     (1,469)       (1,435)
                                                               ---------     ---------
             Deferred tax liabilities........................   (124,064)     (120,060)
                                                               ---------     ---------
                  Net deferred tax liability.................  $(100,385)    $ (97,621)
                                                               =========     =========
</TABLE>
 
                                      F-23
<PAGE>   147
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
     The net operating loss and credit carryforwards consist of Federal and
State net operating loss carryforwards which expire 2005 through 2010 and 2000,
respectively, and Federal and State alternative minimum tax credit carryforwards
which can be carried forward indefinitely. At December 31, 1996, the Federal and
State net operating loss carryforwards were approximately $23.8 million and
$12.0 million, respectively. At December 31, 1996, the State net operating
losses have been fully reserved for in the valuation allowance due to the
limited carryforward period allowed by the State of California. At December 31,
1996, Federal and State alternative minimum tax credit carryforwards were
approximately $6.7 million and $1.7 million, respectively.
 
     Realization of the deferred tax assets and federal net operating loss
carryforwards is dependent, in part, on generating sufficient taxable income
prior to expiration of the loss carryforwards. In September 1996, the Company
underwent an ownership change as a result of the initial public offering of the
Company's common stock. This ownership change limits the amount of net operating
loss and credit carryforwards available to offset current tax liabilities.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized based on estimates of
future taxable income. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
 
     In 1996, the Company decreased its deferred income tax liability by
$769,000 to reflect the change in California's state income tax rate from 9.3%
to 8.84% effective January 1, 1997.
 
     The provision for income taxes for the years ended December 31, 1996, 1995
and 1994 consists of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                            1996       1995       1994
                                                           ------     ------     ------
        <S>                                                <C>        <C>        <C>
        Current:
          Federal........................................  $5,671     $3,085     $   96
          State..........................................   1,805      1,163        365
        Deferred:
          Federal........................................   3,890        816      2,546
          State..........................................    (801)       (15)       547
             Adjustment in state tax rate................    (769)        --         --
             Revision in prior years' tax estimates......    (732)        --         --
             Increase in valuation allowance.............      --         --        299
                                                           ------     ------     ------
                  Total provision........................  $9,064     $5,049     $3,853
                                                           ======     ======     ======
</TABLE>
 
     The Company's effective rate for income taxes for the years ended December
31, 1996, 1995 and 1994 differs from the U.S. statutory rate, as reflected in
the following reconciliation.
 
<TABLE>
<CAPTION>
                                                                1996     1995     1994
                                                                ----     ----     ----
        <S>                                                     <C>      <C>      <C>
        U.S. statutory tax rate...............................  35.0%    35.0%    35.0%
        State income tax, net of Federal benefit..............   6.0      6.0      6.0
        Depletion allowance...................................  (2.3)    (0.3)    (8.6)
        Effect of change in tax rates.........................  (3.0)     --       --
        Revision in prior years' tax estimates................  (2.6)     --       --
        Increase in valuation allowance.......................   --       --       7.8
        Other, net............................................  (0.4)    (0.1)    (1.2)
                                                                ----     ----     ----
                  Effective income tax rate...................  32.7%    40.6%    39.0%
                                                                ====     ====     ====
</TABLE>
 
                                      F-24
<PAGE>   148
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
22. RETIREMENT SAVINGS PLAN
 
     The Company has a defined contribution savings plan under Section 401(a)
and 501(a) of the Internal Revenue Code. The plan provides for tax deferred
salary deductions and after-tax employee contributions. Employees automatically
become participants on the first quarterly entry date after completion of three
months of service. Contributions include employee salary deferral contributions
and a 3% employer profit-sharing contribution. Employer profit-sharing
contributions in 1996, 1995, and 1994 totaled $485,000, $350,000 and $311,000,
respectively.
 
23. PREFERRED STOCK
 
     The Company had 5,000,000 authorized shares of Series A Preferred Stock,
all of which were issued on March 21, 1996 to Electrowatt. The shares of Series
A Preferred Stock were not publicly traded. No dividends were payable on the
Series A Preferred Stock. The Series A Preferred Stock contained provisions
regarding liquidation and conversion rights. Upon the consummation of the
Company's initial public offering, all of the Series A Preferred Stock was
converted into approximately 2.2 million shares of common stock and sold to the
public in the offering by Electrowatt (see Note 24).
 
24. COMMON STOCK
 
     In September 1996, Calpine completed the initial public offering of
18,045,000 shares of its common stock with $0.001 par value per share (the
"Common Stock Offering"). In the Common Stock Offering, the Company issued and
sold 5,477,820 shares of common stock and Electrowatt sold 12,567,180 shares of
common stock, representing its entire ownership interest in Calpine. As a result
of the Common Stock Offering, Electrowatt no longer owns any interest in
Calpine. The Company received approximately $82.1 million of net proceeds from
the Common Stock Offering. In October 1996, the Company issued an additional
1,793,400 shares of common stock to cover over-allotments of shares in
connection with the Common Stock Offering and received approximately $27.1
million of net proceeds. Approximately $13.0 million of total net proceeds was
used to repay short-term bank borrowings. The remaining net proceeds are for
working capital and general corporate purposes, and for the development and
acquisition of power generation facilities. In connection with the Common Stock
Offering, the Company completed a 5.194-for-1 stock split of the Company's
common stock and converted the Company's outstanding preferred stock into shares
of common stock.
 
25. STOCK-BASED COMPENSATION PROGRAMS
 
  1996 Employee Stock Purchase Plan
 
     The Company adopted 1996 Employee Stock Purchase Plan ("ESPP") in July
1996. Eligible employees may purchase up to 275,000 shares of common stock at
semi-annual intervals through periodic payroll deductions. Shares are purchased
on February 28 and August 31 of each year. On the first purchase date of
February 28, 1997, employees purchased 25,819 shares of common stock at a
weighted average fair value of $13.60 per share. The purchase price is 85% of
the lower of (i) the fair market value of the common stock on the participant's
entry date into the offering period, or (ii) the fair market value on the
semi-annual purchase date.
 
  1996 Stock Incentive Plan
 
     The Company adopted the 1996 Stock Incentive Plan ("SIP") in September
1996; such plan succeeded the Company's previously adopted stock option program.
The Company accounts for this plan under APB Opinion No. 25, under which no
compensation cost has been recognized in 1996. Had compensation cost for
 
                                      F-25
<PAGE>   149
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
this plan been determined consistent with SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net income and earning per share would
have been reduced to the following pro forma amounts (in thousands, except per
share amounts):
 
<TABLE>
<CAPTION>
                                                                       1996        1995
                                                                      -------     ------
        <S>                                          <C>              <C>         <C>
        Net income.................................  As reported      $18,692     $7,378
                                                     Pro forma        $18,145     $7,232
        Primary earnings per share.................  As reported      $  1.27         --
                                                     Pro forma        $  1.24         --
        As adjusted primary earnings per share
          assuming conversion of preferred stock...  As reported           --     $ 0.52
                                                     Pro forma             --     $ 0.51
</TABLE>
 
     Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
 
     The Company may grant options for up to 4,041,858 shares under the SIP. As
of December 31, 1996, the Company had granted options to purchase 2,340,294
shares of common stock. Under the SIP, the option exercise price equals the
stock's fair market value on date of grant. The SIP options generally vest after
four years and expire after 10 years.
 
     A summary of the status of the Company's SIP at December 31, 1996 and
changes during the year then ended is presented in the table and narrative
below:
 
<TABLE>
<CAPTION>
                                                     SHARES OF COMMON STOCK
                                                     -----------------------
                                                     AVAILABLE                   WEIGHTED
                                                        FOR           SIP        AVERAGE
                                                      OPTION        OPTION       EXERCISE
                                                     OR AWARD       SHARES        PRICE
                                                     ---------     ---------     --------
        <S>                                          <C>           <C>           <C>
        Balance, January 1, 1995...................  1,160,782     1,436,141      $ 1.53
          Granted..................................   (444,333)      444,333      $ 4.91
          Forfeited................................     25,963       (25,963)     $ 2.13
                                                     ---------     ---------       -----
        Balance, December 31, 1995.................    742,412     1,854,511      $ 2.34
          Additional shares reserved...............  1,444,935            --          --
          Granted..................................   (547,579)      547,579      $ 8.71
          Exercised................................         --        (5,000)     $ 1.85
          Forfeited................................     56,796       (56,796)     $ 7.90
                                                     ---------     ---------       -----
        Balance, December 31, 1996.................  1,696,564     2,340,294      $ 3.69
                                                     =========     =========       =====
</TABLE>
 
                                      F-26
<PAGE>   150
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
     The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996:
 
<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                               ------------------------------     ------------------------------
                                             WEIGHTED AVERAGE                   WEIGHTED AVERAGE
              EXERCISE          NUMBER          REMAINING          NUMBER           EXERCISE
               PRICES          OUTSTANDING   CONTRACTUAL LIFE     EXERCISABLE        PRICE
        ---------------------  ---------     ----------------     ---------     ----------------
        <S>                    <C>           <C>                  <C>           <C>
        $ 0.50...............    934,920            6.00            934,920          $ 0.50
        $ 1.85...............    174,193            6.25            174,193          $ 1.85
        $ 4.57...............    296,058            7.75            222,043          $ 4.57
        $ 4.91...............    434,290            8.97            104,590          $ 4.91
        $ 8.57...............    490,833           10.00                 --          $ 8.57
        $16.00...............     10,000            9.99             10,000          $16.00
                               ---------                          ---------          ------
                               2,340,294                          1,445,746          $ 1.71
                               =========                          =========          ======
</TABLE>
 
     The estimated average fair value of options granted in 1995 and 1996 is
$1.23 and $3.29 on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions: risk-free interest rates
of 5.4% to 6.2%; expected dividend yields of zero percent; expected lives of 3
years; expected volatility of 0% to 27%.
 
26. RELATED PARTY TRANSACTIONS
 
     In January 1995, the Company and Electrowatt entered into a management
services agreement whereby Electrowatt agreed to provide the Company with
advisory services in connection with the construction, financing, acquisition
and development of power projects, as well as any other advisory services as may
be required by the Company in connection with the operation of the Company.
Pursuant to this agreement, the Company paid $166,000 and $200,000 of such
management expenses in 1996 and 1995, respectively. The management services
agreement terminated September 25, 1996, with completion of the initial public
offering.
 
     During 1996, 1995, and 1994, the Company paid $123,000, $106,000, and
$69,000, respectively, to Electrowatt pursuant to a guarantee fee agreement
whereby Electrowatt agreed to guarantee the payment, when due, of any and all
indebtedness of the Company to Credit Suisse in accordance with the terms and
conditions of the line of credit. Under the guarantee fee agreement, the Company
had agreed to pay to Electrowatt an annual fee equal to 1% of the average
outstanding balance of the Company's indebtedness to Credit Suisse during each
quarter as compensation for all services rendered under the guarantee fee
agreement. The guarantee fee agreement terminated in September 1996.
 
     At December 31, 1996, the Company had approximately $1.2 million in
accounts receivable from Electrowatt (see Note 12) related to reimbursement of
costs for the sale of Electrowatt's common stock in Calpine. As a result of
Electrowatt's sale of Calpine common shares, Electrowatt no longer owns any
interest in Calpine.
 
                                      F-27
<PAGE>   151
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
27. SIGNIFICANT CUSTOMERS
 
     The Company's electricity and steam sales revenue is primarily from two
sources -- PG&E and SMUD. Revenues earned from these sources for the years ended
December 31, 1996, 1995 and 1994 were as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                        1996         1995        1994
                                                      --------     --------     -------
        <S>                                           <C>          <C>          <C>
        PG&E........................................  $183,531     $112,522     $77,010
        SMUD........................................    14,609       12,345       9,296
        Other.......................................     1,324          173         804
                                                      --------     --------     -------
                                                       199,464      125,040      87,110
        Deferred revenues recognized (see Note 3)...        --        2,759       3,185
                                                      --------     --------     -------
        Total electricity and steam sales...........  $199,464     $127,799     $90,295
                                                      ========     ========     =======
</TABLE>
 
     PG&E, the Company's primary customer, is also affected by industry
restructuring and deregulation (see Note 28 regarding Regulation and CPUC
Restructuring).
 
28. COMMITMENTS AND CONTINGENCIES
 
     Capital Projects -- The Company has 1997 commitments for capital
expenditures totaling $4.0 million related to various projects at its geothermal
facilities. In March 1996, the Company entered into an energy development
agreement with Phillips Petroleum Company to develop, construct, own and operate
a 240 megawatt gas-fired cogeneration facility at Phillips Houston Chemical
Complex in Pasadena, Texas. The Company commenced construction in February 1997,
with commercial operation scheduled to begin in October 1998. The Company has
1997 commitments of $97.2 million related to this project.
 
     Royalties and Leases -- The Company is committed under several geothermal
leases and right-of-way, easement and surface agreements. The geothermal leases
generally provide for royalties based on production revenue with reductions for
property taxes paid. The right-of-way, easement and surface agreements are based
on flat rates and are not material. Under the terms of certain geothermal
leases, royalties accrue at rates ranging from 7% to 12.5% of steam and effluent
revenue. Certain properties also have net profits and overriding royalty
interests ranging from approximately 1.45% to 28%, which are in addition to the
land royalties. Most lease agreements contain clauses providing for minimum
lease payments to lessors if production temporarily ceases or if production
falls below a specified level.
 
     The Company also has working interest agreements with third parties
providing for the sharing of approximately 25% to 30% of drilling and other well
costs, various percentages of other operating costs and 25% to 30% of revenues
on specified wells.
 
     Expenses under these agreements for the years ended December 31, 1996, 1995
and 1994 are (in thousands):
 
<TABLE>
<CAPTION>
                                                         1996        1995        1994
                                                        -------     -------     -------
        <S>                                             <C>         <C>         <C>
        Production royalties..........................  $10,793     $10,574     $11,153
        Lease payments................................  $   246     $   225     $   252
</TABLE>
 
     Natural Gas Purchases -- The Company enters into long-term gas purchase
contracts with third parties to supply gas to its gas-fired cogeneration
projects. Such contracts generally have terms of 1 to 24 months, and existing
contracts expire though July 31, 1997, continuing month to month thereafter
unless either party terminates the agreement upon sixty days written notice. On
January 31, 1997, the Company purchased MNI which supplies gas to the Greenleaf
Power Plants (see Note 5).
 
                                      F-28
<PAGE>   152
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
     Watsonville Operating Lease -- The Company is committed under an operating
lease (through December 2009) for a 28.5 megawatt natural gas-fired cogeneration
power plant located in Watsonville, California (see Note 6). Under the terms of
the lease, basic and contingent rents are payable each month during the period
from July through December. As of December 31, 1996, future basic rent payments
are $2.9 million for each year from 1997 to 2001, and $24.4 million thereafter
through December 2009. Contingent rent payments are based on the net of revenues
less all operating expenses, fees, reserve requirements, basic rent and
supplemental rent payments. Of the remaining balance, 60% is payable to the
lessor and 40% is payable to the Company.
 
     Office and Equipment Leases -- The Company leases its corporate office,
Houston office, Portland office, Santa Rosa office facilities and certain office
equipment under noncancellable operating leases expiring through 2001. Future
minimum lease payments under these leases are (in thousands):
 
<TABLE>
            <S>                                                           <C>
            1997........................................................  $1,138
            1998........................................................   1,125
            1999........................................................     977
            2000........................................................     936
            2001........................................................     367
            Thereafter..................................................      --
                                                                          ------
            Total future minimum lease commitments......................  $4,543
                                                                          ======
</TABLE>
 
     Lease payments are subject to adjustment for the Company's pro rata portion
of annual increases or decreases in building operating costs. In 1996, 1995 and
1994, rent expense for noncancellable operating leases amounted to $1,036,000,
$733,000 and $663,000, respectively.
 
     Regulation and CPUC Restructuring -- Electricity and steam sales agreements
with PG&E are regulated by the CPUC. In December 1995, the CPUC proposed the
transition of the electric generation market to a competitive market beginning
January 1, 1998, with all consumers participating by 2003. Since the proposed
restructure results in widespread impact on the market structure and requires
participation and oversight of the Federal Energy Regulatory Commission
("FERC"), the CPUC has sought to build a California consensus involving the
legislature, the Governor, public and municipal utilities and customers. The
consensus has resulted in filings with FERC which should permit both the CPUC
and FERC to collectively proceed with implementation of the new competitive
market structure. On September 23, 1996 state legislation was passed, AB 1890
(the "Bill"), which codified much of the CPUC decision and directed the CPUC to
proceed with implementation of restructure no later than January 1, 1998. The
Bill accelerated the transition period to a fully competitive market from five
years to four years with all consumers participating by the year 2002. The Bill
provided for an electricity rate freeze for the period of transition and
mandated through issuance of rate reduction bonds a 10% rate reduction for small
commercial and residential customers effective January 1, 1998. The proposed
restructuring provides for phased-in customer choice (direct access),
development of a non-discriminatory market structure, full recovery of utility
stranded costs, sanctity of existing contracts, and continuation of existing
public policy programs including funds for enhancement of in-state renewable
energy technologies during the transition period. The Company cannot predict the
final form or timing of the proposed restructuring and the impact, if any, that
such restructuring would have on the Company's existing business or results of
operations. The Company believes that any such restructuring would not have a
material effect on its power sales agreements and, accordingly, believes that
its existing business and results of operations would not be materially
adversely affected, although there can be no assurance in this regard.
 
     A domestic electricity generating project must be a QF under FERC
regulations in order to take advantage of certain rate and regulatory incentives
provided by the Public Utility Regulatory Policies Act of
 
                                      F-29
<PAGE>   153
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
1978, as amended ("PURPA"). PURPA exempts owners of QFs from the Public Utility
Holding Company Act of 1935, as amended ("PUHCA"), and exempts QFs from most
provisions of the Federal Power Act (the "FPA") and state laws concerning rate
or financial regulation. PURPA also requires that electric utilities purchase
electricity generated by QFs at a price based on the utility's "avoided cost,"
and that the utility sell back-up power to the QF on a non-discriminatory basis.
If one of the projects in which the Company has an interest should lose its
status as a QF, the project would no longer be entitled to the exemptions from
PUHCA and the FPA. This could trigger certain rights of termination under the
PSA, could subject the project to rate regulation as a public utility under the
FPA and state laws and could result in the Company inadvertently becoming a
public utility holding company. The Company believes that each of the
electricity generating projects in which the Company owns an interest currently
meets the requirements under PURPA necessary for QF status.
 
     Litigation -- The Company, together with over 100 other parties, was named
as a defendant in an action brought in August 1993 by the bankruptcy trustee for
Bonneville Pacific Corporation ("Bonneville"), captioned Roger G. Segal, as the
Chapter 11 Trustee for Bonneville Pacific Corporation v. Portland General
Corporation, et al., in the United States District Court for the District of
Utah (the "Court"). In December 1996, the trustee and the Company entered into a
settlement agreement relating to this matter. The trustee has agreed to waive
all claims against the Company and to dismiss the trustee's litigation against
the Company in exchange for a payment of $767,500 by the Company.
 
     The Company is involved in various other claims and legal actions arising
out of the normal course of business. Management does not expect that the
outcome of these cases will have a material adverse effect on the Company's
financial position or results of operations.
 
29. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
 
     The Company's quarterly operating results have fluctuated in the past and
may continue to do so in the future as a result of a number of factors,
including, but not limited to, the timing and size of acquisitions, the
completion of development projects, the timing and amount of curtailment, and
variations in levels of production. Furthermore, the majority of capacity
payments under certain of the Company's power sales agreements are received
during the months of May through October.
 
     In the first quarter of 1996, the Company issued $50.0 million of preferred
stock to Electrowatt (see Note 23).
 
     In the second quarter of 1996, the Company entered into an operating lease
for the King City Power Plant (see Note 9) and issued $180.0 million of 10 1/2%
Senior Notes Due 2006 (see Note 20).
 
     In the third quarter of 1996, the Company acquired the Gilroy Power Plant
(see Note 10) and charged to earnings a $3.7 million uncollectible amount
associated with the attempt to acquire the O'Brien companies (see Note 13). The
Company also incurred an employee bonus expense of $1.4 million related to the
initial public offering of common stock in September 1996, and recorded a $1.8
million loss related to its electricity trading operations. In addition, the
Company decreased its deferred income taxes by $769,000 to reflect the change in
California's state income tax rate from 9.3% to 8.84% effective January 1, 1997.
 
     In the fourth quarter of 1996, the Company recorded a $1.4 million net gain
related to the settlement of the Coso project, offset by a $767,500 expense
related to the settlement of certain litigation (see Note 28). In addition, the
Company revised its prior years' tax estimates by $700,000.
 
                                      F-30
<PAGE>   154
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
 
     The Company's common stock has been traded on the New York Stock Exchange
beginning September 19, 1996. There were approximately 39 common stockholders of
record at December 31, 1996. No dividends have been paid to date.
 
<TABLE>
<CAPTION>
                                                                    QUARTER ENDED
                                                -----------------------------------------------------
                                                DECEMBER 31     SEPTEMBER 30     JUNE 30     MARCH 31
                                                -----------     ------------     -------     --------
                                                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                             <C>             <C>              <C>         <C>
1996
Total revenue.................................    $61,663         $ 70,897       $50,321     $31,673
Income from operations........................    $14,303         $ 29,097       $16,203     $ 7,188
Net income....................................    $ 3,537         $ 10,732       $ 4,717     $  (294) 
Earnings per common share.....................    $  0.17         $   0.76       $  0.35     $ (0.03) 
Common stock price per share
  High........................................    $ 20.00         $  16.38            --          --
  Low.........................................    $ 16.00         $  16.00            --          --
1995
Total revenue.................................    $39,570         $ 42,176       $28,342     $22,010
Income from operations........................    $11,473         $ 16,446       $ 8,195     $ 6,572
Net income....................................    $ 2,115         $  4,965       $   239     $    59
As adjusted earnings per common share assuming
  conversion of preferred stock (see Note
  2)..........................................    $  0.15         $   0.35       $  0.02          --
</TABLE>
 
                                      F-31
<PAGE>   155
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                    SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
                                 (IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                       SEPTEMBER 30,   DECEMBER 31,
                                                                           1997            1996
                                                                       -------------   ------------
                                                                        (UNAUDITED)
<S>                                                                    <C>             <C>
Current assets:
  Cash and cash equivalents..........................................   $   198,500     $  100,010
  Accounts receivable from related parties...........................         1,931          2,826
  Accounts receivable from others....................................        50,236         39,962
  Notes receivable from related parties, current portion.............        15,564             --
  Collateral securities, current portion.............................         6,046          5,470
  Prepaid operating lease............................................        13,652         12,668
  Other current assets...............................................         7,684         10,251
                                                                          ---------      ---------
          Total current assets.......................................       293,663        171,187
Property, plant and equipment, net...................................       710,599        650,053
Investments in power projects........................................        74,224         13,937
Collateral securities, net of current portion........................        86,283         89,806
Notes receivable from related parties, net of current portion........       134,189         18,182
Notes receivable from Coperlasa......................................        16,353         17,961
Restricted cash......................................................        18,195         55,219
Other assets.........................................................        34,461         13,870
                                                                          ---------      ---------
          Total assets...............................................   $ 1,367,967     $1,030,215
                                                                          =========      =========
                LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of non-recourse project financing..................   $   123,095     $   30,627
  Notes payable and short-term borrowings............................            --          6,865
  Accounts payable...................................................        19,104         18,363
  Accrued payroll and related expenses...............................         4,178          3,912
  Accrued interest payable...........................................        16,254          7,332
  Other accrued expenses.............................................         8,295          7,870
                                                                          ---------      ---------
          Total current liabilities..................................       170,926         74,969
Non-recourse project financing, net of current portion...............       186,403        278,640
Senior Notes.........................................................       560,043        285,000
Deferred income taxes, net...........................................       139,651        100,385
Deferred lease incentive.............................................        75,844         78,521
Other liabilities....................................................         5,549          9,573
                                                                          ---------      ---------
          Total liabilities..........................................     1,138,416        827,088
                                                                          ---------      ---------
Stockholders' equity
  Common stock.......................................................            20             20
  Additional paid-in capital.........................................       167,329        165,412
  Retained earnings..................................................        62,202         37,695
                                                                          ---------      ---------
          Total stockholders' equity.................................       229,551        203,127
                                                                          ---------      ---------
          Total liabilities and stockholders' equity.................   $ 1,367,967     $1,030,215
                                                                          =========      =========
</TABLE>
 
  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.
 
                                      F-32
<PAGE>   156
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
        FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED        NINE MONTHS ENDED
                                                       SEPTEMBER 30,            SEPTEMBER 30,
                                                    -------------------     ---------------------
                                                     1997        1996         1997         1996
                                                    -------     -------     --------     --------
<S>                                                 <C>         <C>         <C>          <C>
Revenue:
  Electricity and steam sales.....................  $79,441     $68,281     $175,767     $140,311
  Service contract revenue........................    3,342         172        6,871        5,606
  Income from unconsolidated investments in power
     projects.....................................    3,313       1,158        7,477        2,871
  Interest income on loans to power projects......    6,809       1,286        9,765        4,103
                                                    -------     -------      -------      -------
          Total revenue...........................   92,905      70,897      199,880      152,891
                                                    -------     -------      -------      -------
Cost of revenue:
  Plant operating expenses, depreciation,
     operating lease expense and production
     royalties....................................   40,435      34,384      104,711       81,219
  Service contract expenses.......................    2,704       1,469        6,223        5,953
                                                    -------     -------      -------      -------
          Total cost of revenue...................   43,139      35,853      110,934       87,172
                                                    -------     -------      -------      -------
Gross profit......................................   49,766      35,044       88,946       65,719
Project development expenses......................    1,764       1,044        5,711        2,454
General and administrative expenses...............    4,618       4,903       13,202       10,777
                                                    -------     -------      -------      -------
          Income from operations..................   43,384      29,097       70,033       52,488
Other expense (income):
  Interest expense................................   17,219      12,434       43,364       31,099
  Other income, net...............................   (3,896)      1,149      (11,789)      (1,628)
                                                    -------     -------      -------      -------
          Income before provision for income
            taxes.................................   30,061      15,514       38,458       23,017
Provision for income taxes........................   10,914       4,782       13,951        7,862
                                                    -------     -------      -------      -------
          Net income..............................  $19,147     $10,732     $ 24,507     $ 15,155
                                                    =======     =======      =======      =======
Primary earnings per share:
  Weighted average shares outstanding.............   21,056      14,070       20,635       12,695
                                                    =======     =======      =======      =======
  Primary earnings per share......................  $  0.91     $  0.76     $   1.19     $   1.19
                                                    =======     =======      =======      =======
Fully diluted earnings per share:
  Weighted average shares outstanding.............   21,086      14,303       21,023       13,227
                                                    =======     =======      =======      =======
  Fully diluted earnings per share................  $  0.91     $  0.75     $   1.17     $   1.15
                                                    =======     =======      =======      =======
</TABLE>
 
  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.
 
                                      F-33
<PAGE>   157
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
                                 (IN THOUSANDS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                          NINE MONTHS ENDED
                                                                            SEPTEMBER 30,
                                                                       -----------------------
                                                                         1997          1996
                                                                       ---------     ---------
<S>                                                                    <C>           <C>
Net cash provided by operating activities............................  $  66,429     $  25,694
Cash flows from investing activities:
  Acquisition of property, plant and equipment.......................    (89,281)      (13,189)
  Acquisition of Texas Cogeneration Company, net of cash.............   (192,348)           --
  Repayment of notes receivable......................................     21,137            --
  Investment in King City, net of cash on hand.......................         --        (5,408)
  Investment in King City collateral securities, net.................         --       (97,901)
  Investment in Gilroy, net of cash on hand..........................         --      (138,073)
  Advances to Coperlasa..............................................         --       (14,238)
  Acquisition of Calpine Gas Company.................................     (7,621)           --
  Investments in power projects and capitalized costs................     (3,172)       (3,504)
  Maturities of collateral securities................................      5,350         2,900
  Decrease in restricted cash........................................     37,024           245
  Other, net.........................................................         67          (152)
                                                                       ---------     ---------
          Net cash used in investing activities......................   (228,844)     (269,320)
                                                                       ---------     ---------
Cash flows from financing activities:
  Proceeds from issuance of Senior Notes Due 2006....................         --       180,000
  Proceeds from issuance of Senior Notes Due 2007....................    275,000            --
  Borrowings from line of credit.....................................     14,300        59,922
  Repayments of line of credit.......................................    (14,300)      (79,773)
  Borrowings from bank...............................................    125,000        45,000
  Repayments to bank.................................................    (11,031)      (46,177)
  Repayments of notes payable........................................     (7,131)           --
  Borrowings of non-recourse project financing.......................      4,950       116,000
  Repayments of non-recourse project financing.......................   (118,209)      (77,754)
  Proceeds from issuance of preferred stock..........................         --        50,000
  Proceeds from issuance of common stock.............................      1,111        82,141
  Financing costs....................................................     (9,542)       (8,066)
  Other, net.........................................................        807            --
                                                                       ---------     ---------
     Net cash provided by financing activities.......................    260,955       321,293
                                                                       ---------     ---------
Net increase in cash and cash equivalents............................     98,540        77,667
Cash and cash equivalents, beginning of period.......................    100,010        21,810
                                                                       ---------     ---------
Cash and cash equivalents, end of period.............................  $ 198,550     $  99,477
                                                                       =========     =========
Supplementary information -- cash paid during the period for:
  Interest...........................................................  $  36,314     $  28,170
  Income taxes.......................................................  $   1,185     $     955
</TABLE>
 
  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.
 
                                      F-34
<PAGE>   158
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
                               SEPTEMBER 30, 1997
 
1. ORGANIZATION AND OPERATION OF THE COMPANY
 
     Calpine Corporation ("Calpine"), a Delaware corporation, and subsidiaries
(collectively, the "Company") are engaged in the development, acquisition,
ownership and operation of power generation facilities and the sale of
electricity and steam in the United States and selected international markets.
The Company has interests in and operates natural gas-fired cogeneration
facilities, geothermal steam fields and geothermal power generation facilities.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Basis of Interim Presentation -- The accompanying interim condensed
consolidated financial statements of the Company have been prepared by the
Company, without audit by independent public accountants, pursuant to the rules
and regulations of the Securities and Exchange Commission. In the opinion of
management, the condensed consolidated financial statements include 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
have been condensed or omitted from these statements pursuant to such rules and
regulations and, accordingly, should be read in conjunction with the audited
consolidated financial statements of the Company included in the Company's
annual report on Form 10-K for the year ended December 31, 1996. The results for
interim periods are not necessarily indicative of the results for the entire
year.
 
     Earnings Per Share -- Earnings per share is calculated using the weighted
average number of common shares and common equivalent shares, unless
antidilutive, using the treasury stock method for outstanding stock options. For
1996, net income per share also gives effect to common equivalent shares from
convertible preferred shares from the original date of issuance that
automatically converted to common shares upon completion of the Company's
initial public offering in September 1996 (using the if-converted method).
 
     In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share, which simplifies the standards for computing earnings per share
previously found in Accounting Principles Board Opinion ("APBO") No. 15. SFAS
No. 128 replaces the presentation of primary earnings per share with a
presentation of basic earnings per share, which excludes dilution. SFAS No. 128
also requires dual presentation of basic and diluted earnings per share on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation. Diluted earnings per share is computed similarly
to fully diluted earnings per share pursuant to APBO No. 15. SFAS No. 128 must
be adopted for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. SFAS No.
128 requires restatement of all prior-period earnings per share data presented.
For the three and nine months ended September 30, 1997, basic and diluted
earnings per share would not be materially different than the earnings per share
presented in the accompanying condensed consolidated statement of operations.
 
     Capitalized interest -- The Company capitalizes interest on projects during
the construction period. For the three and nine months ended September 30, 1997,
the Company capitalized $1.3 million and $2.6 million, respectively, of interest
in connection with the construction of power plants. No interest was capitalized
in 1996.
 
     Derivative Financial Instruments -- The Company engages in activities to
manage risks associated with changes in interest rates. The Company has entered
into swaps to reduce exposure to interest rate fluctuations in connection with
certain debt commitments. The instruments' cash flows mirror those of the
underlying exposures. Unrealized gains and losses relating to the instruments
are being deferred over the lives of the contracts. The premiums paid on the
instruments, as measured at inception, are being amortized over their respective
lives as components of interest expense. Any gains or losses realized upon the
early termination of
 
                                      F-35
<PAGE>   159
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1997
 
these instruments are deferred and recognized in income over the remaining life
of the underlying exposure. At Septembers 30, 1997, the Company and $137.2
million of interest rate swaps on non-recourse project financing.
 
     The Company, through its wholly owned subsidiary Calpine Power Services
Company ("CPSC"), markets power and energy services to utilities, wholesalers,
and end users. CPSC provides these services by entering into contracts to
purchase or supply electricity at specified delivery points and specified future
dates. In some cases, CPSC utilizes option agreements to manage it exposure to
market fluctuations. At September 30, 1997 CPSC held option contracts for the
purchase and sale of up to 50 megawatts for the period from June 1, 1998 to
September 30, 1998.
 
     Reclassifications -- Prior period amounts in the consolidated condensed
financial statements have been reclassified where necessary to conform to the
1997 presentation.
 
3.  ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE
 
     Accounts receivable from related parties as of September 30, 1997 and
December 31, 1996 are comprised of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,     DECEMBER 31,
                                                                 1997              1996
                                                             -------------     ------------
                                                              (UNAUDITED)
        <S>                                                  <C>               <C>
        O.L.S. Energy-Agnews, Inc..........................     $   408           $  687
        Geothermal Energy Partners, Ltd....................         312              350
        Sumas Cogeneration Company, L.P....................         444              590
        Texas Cogeneration Company ("TCC").................         767               --
        Electrowatt Ltd. and subsidiaries..................          --            1,199
                                                               --------          -------
                                                                $ 1,931           $2,826
                                                               ========          =======
</TABLE>
 
     Notes receivable from related parties as of September 30, 1997 and December
31, 1996 are comprised of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,     DECEMBER 31,
                                                                 1997              1996
                                                             -------------     ------------
                                                              (UNAUDITED)
        <S>                                                  <C>               <C>
        Darrel Jones.......................................    $  10,004         $ 18,182
        Cogenron, Inc. (subsidiary of TCC).................       42,378               --
        Clear Lake Cogeneration, L.P. (subsidiary of
          TCC).............................................       97,371               --
                                                                --------          -------
                                                               $ 149,753         $ 18,182
                                                                ========          =======
</TABLE>
 
     Darrel Jones is the sole shareholder of Sumas Energy, Inc., the Company's
partner in Sumas Cogeneration Company, L.P. (see Note 4). See Note 5 for
information regarding TCC.
 
                                      F-36
<PAGE>   160
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1997
 
4. INVESTMENTS IN POWER PROJECTS
 
     The Company has unconsolidated investments in power projects which are
accounted for under the equity method. Unaudited financial information for the
nine months ended September 30, 1997 and 1996 (except Texas Cogeneration
Company, L.P., which was acquired on June 23, 1997) related to these investments
is as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                1997                                         1996
                                         --------------------------------------------------   -----------------------------------
                                            SUMAS       O.L.S.    GEOTHERMAL      TEXAS          SUMAS       O.L.S.    GEOTHERMAL
                                         COGENERATION   ENERGY-     ENERGY     COGENERATION   COGENERATION   ENERGY-     ENERGY
                                           COMPANY,     AGNEWS,   PARTNERS,      COMPANY,       COMPANY,     AGNEWS,   PARTNERS,
                                             L.P.        INC.        LTD.          L.P.           L.P.        INC.        LTD.
                                         ------------   -------   ----------   ------------   ------------   -------   ----------
<S>                                      <C>            <C>       <C>          <C>            <C>            <C>       <C>
Revenue................................    $ 28,839     $10,203    $ 18,290      $ 78,789       $ 31,740     $8,182     $ 16,312
Operating expenses.....................      13,002       7,925       9,425        66,962         19,404      5,942        8,787
                                            -------     -------     -------       -------        -------     ------      -------
Income from operations.................      15,837       2,278       8,865        11,827         12,336      2,240        7,525
Other expenses, net....................       7,329       2,505       2,826         3,123          7,635      2,284        3,582
                                            -------     -------     -------       -------        -------     ------      -------
    Net income (loss)..................    $  8,508     $  (227)   $  6,039      $  8,704       $  4,701     $  (44)    $  3,943
                                            =======     =======     =======       =======        =======     ======      =======
Company's share of net income (loss)...    $  5,423     $   (45)   $    272      $  1,827       $  2,687     $  (13)    $    197
                                            =======     =======     =======       =======        =======     ======      =======
</TABLE>
 
     On September 30, 1997, the partnership agreement governing Sumas
Cogeneration Company, L.P. was amended changing the distribution percentages to
the partners. As provided by the terms of the amendment, the Company increased
its percentage share of the project's cash flow from 50% to approximately 70%
through June 30, 2001. Thereafter, the Company will receive 50% of the project's
cash flow until a 24.5% pre-tax rate of return on its original investment is
achieved, at which time the Company's equity interest in the partnership would
be reduced to 0.1%. In connection with the amended agreement, the Company's
partner in Sumas Cogeneration Company, L.P. paid off a portion of its notes
payable and all outstanding interest on its notes payable to the Company. The
Company recognized $3.5 million of interest income which has previously been
deferred. The Company also committed to provide the partner a $12.5 million line
of credit which expires December 31, 2003.
 
5. TEXAS COGENERATION COMPANY TRANSACTION
 
     On June 23, 1997, Calpine completed the acquisition of a 50% equity
interest in the Texas City cogeneration facility (the "Texas City Power Plant")
and the Clear Lake cogeneration facility (the "Clear Lake Power Plant") for a
total purchase price of $35.4 million, subject to final adjustments. The Company
acquired its 50% interest in these plants through the acquisition of 50% of the
capital stock of Enron Dominion Cogen Corp. ("EDCC") from Enron Power Corp., a
wholly owned subsidiary of Enron Corp. ("Enron"). EDCC was subsequently renamed
Texas Cogeneration Company ("TCC"). The other 50% shareholder interest in TCC is
owned by Dominion Cogen, Inc. In addition to the purchase of 50% of the stock of
TCC, Calpine, through its wholly owned subsidiary, Calpine Finance Company
("CFC"), purchased from the existing lenders the $155.6 million of outstanding
non-recourse project debt of the Texas City Power Plant (approximately $53.0
million) and the Clear Lake Power Plant (approximately $102.6 million). The
acquisition of the capital stock of TCC and the purchase of the outstanding debt
from the existing lenders were financed with approximately $125.0 million of
non-recourse debt provided by The Bank of Nova Scotia, $14.3 million of
borrowings from the revolving credit facility, and $55.8 million of equity
provided by the Company (see Notes 10 and 11 for more information regarding the
revolving line of credit and the $125.0 million of non-recourse debt).
 
     The Company accounts for its investment in TCC under the equity method. The
Texas City and Clear Lake Power Plants are operated by the Company under a one
year contract with automatic renewal provisions.
 
                                      F-37
<PAGE>   161
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1997
 
     Texas City Power Plant -- The Texas City Power Plant is a 450 megawatt
natural gas-fired combined-cycle cogeneration facility located in Texas City,
Texas. The plant commenced commercial operation in June 1987.
 
     Electricity generated by the Texas City Power Plant is sold under two
separate long-term agreements to (i) Texas Utilities Generating Company ("TUEC")
under an original 12-year power sales agreement terminating in June 1999 and
(ii) Union Carbide Company ("UCC") under an original 12-year power sales
agreement terminating in June 1999. Each power sales agreement contains
provisions for capacity and energy payments. The TUEC power sales agreement
provides for a firm capacity payment for 410 megawatts. The UCC power sales
agreement provides for a firm capacity payment for 20 megawatts.
 
     Clear Lake Power Plant -- The Clear Lake Power Plant is a 377 megawatt
natural gas/hydrogen-fired combined-cycle cogeneration facility located in
Pasadena, Texas. The plant commenced commercial operation in December 1984.
 
     Electricity generated by the Clear Lake Power Plant is sold under three
separate long-term agreements to (i) Texas New Mexico Power Company ("TNP")
under an original 20-year power sales agreement terminating in 2004, (ii)
Houston Light & Power Company ("HL&P") under an original 10-year power sales
agreement terminating in 2005, and (iii) Hoescht Celanese Chemical Group
("HCCG") under an original 10-year power sales agreement terminating in 2004.
Each power sales agreement contains provisions for capacity and energy payments.
 
6. GORDONSVILLE AND AUBURNDALE TRANSACTION
 
     On October 9, 1997, Calpine completed the acquisition of a 50% interest in
both the Auburndale cogeneration facility (the "Auburndale Power Plant") and the
Gordonsville cogeneration facility (the "Gordonsville Power Plant") for a total
purchase price of $40.2 million. The Company acquired its interest in these
plants from Norweb Power Services (No. 1) Limited and Northern Hydro Limited,
both wholly owned companies of Norweb plc. The Company financed the acquisition
of the 50% interest in the two power plants utilizing existing cash resources.
 
     The Auburndale Power Plant is a 150 megawatt natural gas-fired
combined-cycle cogeneration facility located outside of Orlando, Florida. The
Auburndale Power Plant commenced commercial operation in July 1994 and sells 131
megawatts of capacity and energy to Florida Power Corporation under three
20-year agreements terminating in December 2013.
 
     The Gordonsville Power Plant is a 240 megawatt natural gas-fired
combined-cycle cogeneration facility located near Gordonsville, Virginia. The
Gordonsville Power Plant commenced commercial operations in June 1994 and sells
capacity and energy to Virginia Power Company under two 30-year power sales
agreements terminating in 2024. In addition, the power sales agreements with
Virginia Power Company provide for fixed capacity payments.
 
     The Gordonsville and Auburndale Power Plants are operated by Edison Mission
Operations & Maintenance Inc. ("EMOM"), an affiliate of Edison Mission Energy.
The operating agreements between EMOM and the two facilities expire in December
2013. EMOM is paid on a cost-plus basis for all direct labor plus reimbursement
of certain costs, an operating fee and an incentive based upon performance.
 
     The Company accounts for its investments in the Auburndale Power Plant and
Gordonsville Power Plant under the equity method because control of these plants
is deemed to be shared with wholly owned subsidiaries of Edison Mission Energy.
 
                                      F-38
<PAGE>   162
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1997
 
7. DIGHTON AND TIVERTON TRANSACTION
 
     On October 10, 1997, Calpine executed agreements with Energy Management,
Inc. ("EMI"), a New England-based power developer, to invest in two merchant
power plants which will sell 434 megawatts of electricity into the deregulated
New England Power Pool and to wholesale and retail customers. The plants, to be
located in Dighton, Massachusetts and Tiverton, Rhode Island, will be developed
by EMI and are slated for start-up in early 1999 and early 2000.
 
     The Company invested $16.0 million in the 169 megawatt gas-fired,
combined-cycle Dighton power plant and will have the right to receive a
preferred payment stream at a rate of approximately 12% on its investment. This
will be accounted for as an equity investment. Construction will begin in the
fourth quarter of 1997 and EMI will operate the plant when it begins operation
in 1999.
 
     The Company has also been granted an exclusive option to purchase an
ownership interest in and to partner with EMI on the 265 megawatt gas-fired
Tiverton project. EMI and the Company will be co-general partners for the
project. EMI will operate the facility and provide management services; the
Company will provide power marketing and fuel management services for the
facility. Over the life of the project, the Company and EMI will each receive
approximately 50% of project cash flows. The Company will initially receive 70%
of project cash flows until it has received cash equal to its initial investment
of approximately $40.0 million.
 
8. CALPINE GAS COMPANY TRANSACTION
 
     On January 31, 1997, the Company acquired the outstanding capital stock of
Montis Niger, Inc., a natural gas production company, and certain gas reserves
from Radnor Power, a wholly-owned subsidiary of LFC Financial Corp., for $7.1
million. In addition, the Company paid $824,000 for certain working capital
items. The Company's allocation of the purchase price is subject to final
adjustments. Montis Niger, subsequently renamed to Calpine Gas Company, owns
proven natural gas reserves and an 80-mile pipeline system which provides gas to
the Company's Greenleaf 1 and 2 Power Plants in northern California. The Company
paid $7.6 million in cash for a portion of the purchase price and working
capital items, and recorded a $600,000 liability for the remainder of the
purchase price due upon completion of certain drilling obligations.
 
9. GAS ENERGY INC. TRANSACTION
 
     On August 25, 1997, Calpine entered into an agreement with The Brooklyn
Union Gas Company ("BU") to acquire 100% of the capital stock of Gas Energy Inc.
("GEI") and Gas Energy Cogeneration Inc. ("GECI") for an aggregate purchase
price of $102.5 million, subject to certain adjustments (collectively referred
to as the "GEI Transaction"). GEI and GECI are both wholly owned subsidiaries of
BU and have (i) a 50% interest in the Kennedy International Airport Power Plant,
(ii) a 50% interest in the Nissequogue Power Plant, (iii) a 45% interest in the
Grumman Power Plant, (iv) an 11.36% interest in the Lockport Power Plant and (v)
a 100% interest in three fuel management companies.
 
     The Kennedy International Airport Power Plant is a 107 megawatt gas-fired
combined-cycle cogeneration facility located in Queens, New York. Steam and
electricity generated by the Kennedy International Airport Power Plan are sold
to John F. Kennedy International Airport under a twenty year agreement
terminating in 2015.
 
     The Stony Brook Power Plant is a 40 megawatt gas-fired cogeneration
facility located at the State University of New York at Stony Brook ("SUNY") on
Long Island, New York. Steam and electricity generated by the Stony Brook Power
Plant are sold to SUNY under a twenty year agreement terminating in 2015, and
excess electricity is sold to Long Island Lighting Company ("LILCo").
 
                                      F-39
<PAGE>   163
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1997
 
     The Grumman Power Plant is a 57 megawatt gas-fired combined cycle
cogeneration facility located in Bethpage, New York. Steam and electricity
generated by the Grumman Power Plant are sold to the Northrop Grumman
Corporation under a fifteen year agreement expiring in 2004, and excess
electricity is sold to LILCo.
 
     The Lockport Power Plant is a 184 megawatt gas-fired combined cycle
cogeneration facility located in Lockport, New York. Steam and electricity
generated by the Lockport Power Plant are sold to a General Motors Plant under a
fifteen year agreement terminating in 2007, and excess electricity is sold to
New York State Electric and Gas.
 
     The Company currently expects to complete these acquisitions during the
fourth quarter of 1997, upon fulfillment of all required conditions. However,
there can be no assurance that this acquisition will be completed in the
anticipated time frame.
 
10. REVOLVING CREDIT FACILITY
 
     At September 30, 1997, the Company had a $50.0 million credit facility
available with a consortium of commercial lending institutions which include The
Bank of Nova Scotia, International Nederlanden U.S. Capital Corporation,
Sumitomo Bank of California and Canadian Imperial Bank of Commerce. At September
30, 1997, the Company had no borrowings and $7.6 million of letters of credit
outstanding under the credit facility. Borrowings bear interest at The Bank of
Nova Scotia's base rate plus an applicable margin or at the London Interbank
Offered Rate ("LIBOR") plus an applicable margin. Interest is paid on the last
day of each interest period for such loans, but not less often than quarterly.
The credit agreement expires in September 1999.
 
11. NON-RECOURSE PROJECT FINANCING
 
     Note Payable to Bank -- On June 23, 1997, the Company entered into a $125.0
million non-recourse financing with The Bank of Nova Scotia, the proceeds of
which were utilized for the acquisition of the 50% interest in TCC and the
purchase from the lenders of $155.6 million of outstanding non-recourse project
debt (see Note 5). The $125.0 million non-recourse financing matures on June 22,
1998. On September 30, 1997, $114.0 million of borrowings were outstanding which
bear interest at The Bank of Nova Scotia's base rate plus an applicable margin
or at LIBOR plus an applicable margin (approximately 7.0% at September 30,
1997). The Company utilized existing swap arrangements to minimize the impact of
potential changes in interest rates on the project debt. The effective interest
rate including the effect of the existing swap arrangement was approximately
8.3% at September 30, 1997.
 
12. SENIOR NOTES DUE 2007
 
     On July 8, 1997, the Company issued $200.0 million aggregate principal
amount of 8 3/4% Senior Notes Due 2007. The net proceeds of $195.0 million were
used as follows: (i) $102.7 million to repay non-recourse project financing
related to Calpine Geysers Company, (ii) $6.4 million to repay a note payable to
Natomas Energy Company related to the purchase of Thermal Power Company, (iii)
$14.3 million to repay borrowings under The Bank of Nova Scotia Revolving Credit
Facility, (iv) $728,000 to repay a note payable to Santa Fe Geothermal, Inc.
which would have matured in December 1997, and (v) approximately $70.9 million
for general corporate purposes. Transaction costs incurred in connection with
the debt offering were recorded as a deferred charge and are amortized over the
ten-year life of the 8 3/4% Senior Notes Due 2007.
 
     On September 10, 1997, the Company issued an additional $75.0 million
aggregate principal amount of 8 3/4% Senior Notes Due 2007. The net proceeds of
$75.8 million were used to finance acquisitions and for general corporate
purposes.
 
                                      F-40
<PAGE>   164
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1997
 
     In May and June 1997, the Company executed five interest rate hedging
transactions related to debt with a notional value of $182.0 million and was
designed to eliminate interest rate risk for the period from May 1997 to July 8,
1997 when $200.0 million of the 8 3/4% Senior Notes Due 2007 were priced. These
interest rate hedging transactions were designated as a hedge of the anticipated
bond offering, and the resulting $3.0 million cost resulting from the hedges is
being amortized over the life of the bonds. The effective interest rate on the
$275.0 million aggregate principal amount after the hedging transactions and the
amortization of deferred costs is 8.9%.
 
     The 8 3/4% Senior Notes Due 2007 will mature on July 15, 2007. The Company
has no sinking fund or mandatory redemption obligations with respect to the
8 3/4% Senior Notes Due 2007. Interest is payable semi-annually on January 15
and July 15 of each year while the 8 3/4% Senior Notes Due 2007 are outstanding,
commencing on January 15, 1998.
 
13. PREFERRED SHARE PURCHASE RIGHTS
 
     On June 5, 1997, the Board of Directors adopted a Stockholders Rights Plan
to strengthen the Board's ability to protect Calpine's stockholders. The Rights
Plan is designed to protect against abusive or coercive takeover tactics that
are not in the best interests of Calpine and its stockholders. To implement the
Rights Plan, the Board of Directors declared a dividend of one preferred share
purchase right (a "Right") for each outstanding share of Common Stock, par value
$0.001 per share, held on record as of June 18, 1997. On September 30, 1997,
there were 19,905,233 Rights outstanding. Each Right initially represents a
contingent right to purchase, under certain circumstances, one one-thousandth of
a share (a "Unit") of Series A Junior Participating Preferred Stock, par value
$0.001 per share (the "Preferred Stock"), of the Company at a price of $80.00
per Unit, subject to adjustment. The Rights become exercisable and trade
independently from Calpine's Common Stock upon the public announcement of the
acquisition by a person or group of 15% or more of the Company's Common Stock,
or ten days after commencement of a tender or exchange offer that would result
in the acquisition of 15% or more of the Company's Common Stock. Each Unit of
Preferred Stock purchased upon exercise of the Rights will be entitled to a
dividend equal to any dividend declared per share of Common Stock and will have
one vote, voting together with the Common Stock. In the event of liquidation,
each unit of Preferred Stock will be entitled to any payment made per share of
Common Stock.
 
     If Calpine is acquired in a merger or other business combination
transaction after a person or group has acquired 15% or more of the Company's
Common Stock, each Right will entitle its holder to purchase, at the Right's
exercise price, a number of the acquiring company's common shares having a
market value of twice such exercise price. In addition, if a person or group
acquires 15% or more of Calpine's Common Stock, each Right will entitle its
holder (other than the acquiring person or group) to purchase, at the Right's
exercise price, a number of fractional shares of Calpine's Preferred Stock or
shares of Common Stock having a market value of twice such exercise price.
 
     The Rights expire June 18, 2007 unless redeemed earlier by Calpine's Board
of Directors. The rights can be redeemed by the Board at a price of $0.01 per
Right at any time before the Rights become exercisable, and thereafter only in
limited circumstances.
 
14. CONTINGENCIES
 
     CPUC Restructuring -- Electricity and steam sales agreements with PG&E are
regulated by the California Public Utilities Commission ("CPUC"). In December
1995, the CPUC proposed the transition of the electric generation market to a
competitive market beginning January 1, 1998, with all consumers participating
by 2003. Since the proposed restructure would result in widespread impact on the
market structure and require participation and oversight of the Federal Energy
Regulatory Commission ("FERC"),
 
                                      F-41
<PAGE>   165
 
                      CALPINE CORPORATION AND SUBSIDIARIES
 
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1997
 
the CPUC sought to build a California consensus involving the legislature, the
Governor, public and municipal utilities and customers. The consensus resulted
in filings with the FERC which permit both the CPUC and FERC to collectively
proceed with implementation of the new competitive market structure.
 
     The proposed restructure provided for phased-in customer choice (direct
access), development of a non-discriminatory market structure, full recovery of
utility stranded costs over a five-year transition period, sanctity of existing
contracts, and continuation of existing public policy programs including funds
for enhancement of in-state renewable energy technologies during the transition
period. On September 23, 1996, state legislation was passed. AB 1890 (the
"Bill"), which codified much of the CPUC restructure decision and directed the
CPUC to proceed with implementation no later than January 1, 1998. The Bill
accelerated the transition period to a fully competitive market from five years
to four years with all consumers participating by the year 2002. The Bill
provided for an electricity rate freeze for the period of transition and
mandated through issuance of rate reduction bonds a 10% rate reduction for small
commercial and residential customers effective January 1, 1998. In May 1997, the
CPUC ruled customer phase-in was not required and all utility customers would be
able to choose their electricity supplier beginning January 1, 1998. In October
1997, the FERC conditionally approved the CPUC and investor-owned utility (IOU)
filings for going forward on January 1, 1998 with implementation of the
Independent Systems Operator (ISO) for operation of the IOU-owned statewide
transmission grid system and the Power Exchange (PX) to provide an energy price
auction. Existing investor-owned utilities will continue as regulated utility
distribution companies and provide electricity distribution services for energy
service providers. The Company believes that restructuring will not have
material effect on its existing power sales agreements and, accordingly,
believes that its existing business and results of operations will not be
materially adversely affected, although there can be no assurance in this
regard.
 
     Litigation -- The Company is involved in various claims and legal actions
arising out of the normal course of business. Management believes that these
matters will not have a material impact on the financial position or results of
operations of the Company, although there can be no assurance in this regard.
 
                                      F-42
<PAGE>   166
 
                          INDEPENDENT AUDITOR'S REPORT
 
To the Partners
Sumas Cogeneration Company, L.P. and Subsidiary
 
     We have audited the accompanying consolidated balance sheet of Sumas
Cogeneration Company, L.P. and Subsidiary as of December 31, 1996 and 1995, and
the related consolidated statements of income, changes in partners' equity, and
cash flows for each of the three years ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sumas
Cogeneration Company, L.P. and Subsidiary as of December 31, 1996 and 1995, and
the results of their operations and cash flows for each of the three years ended
December 31, 1996, in conformity with generally accepted accounting principles.
 
                                                  MOSS ADAMS LLP
 
Everett, Washington
January 24, 1997
 
                                      F-43
<PAGE>   167
 
                        SUMAS COGENERATION COMPANY, L.P.
                                 AND SUBSIDIARY
 
                           CONSOLIDATED BALANCE SHEET
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                  -----------------------------
                                                                      1996             1995
                                                                  ------------     ------------
<S>                                                               <C>              <C>
Current assets
  Cash and cash equivalents.....................................  $    317,196     $    199,169
  Current portion of restricted cash and cash equivalents.......     5,787,121        2,937,884
  Accounts receivable...........................................     4,605,135        3,090,213
  Prepaid expenses..............................................       220,130          222,828
                                                                  ------------     ------------
          Total current assets..................................    10,929,582        6,450,094
Restricted cash and cash equivalents, net of current portion....    15,666,647        8,017,758
Property, plant and equipment, at cost, net.....................    91,737,933       95,589,737
Other assets....................................................    10,938,732       12,744,480
                                                                  ------------     ------------
          Total assets..........................................  $129,272,894     $122,802,069
                                                                  ============     ============
 
                               LIABILITIES AND PARTNERS' EQUITY
Current liabilities
  Accounts payable and accrued liabilities......................  $  2,988,207     $  2,051,178
  Related party distributions and payables
     Calpine Corporation payable................................       476,390            4,864
     National Energy Systems Company payable....................         1,490            1,861
     Whatcom Cogeneration Partners, L.P. distribution...........     3,517,491               --
  Current portion of long-term debt.............................     3,600,000        2,000,000
                                                                  ------------     ------------
          Total current liabilities.............................    10,583,578        4,057,903
Related party payable -- Calpine Corporation, net of current
  portion.......................................................            --          908,679
Long-term debt, net of current portion..........................   113,400,003      117,000,003
Future removal and site restoration costs.......................       679,600          502,600
Deferred income taxes...........................................       988,400          907,800
Commitments.....................................................            --               --
Partners' equity (deficit)......................................     3,621,313         (574,916)
                                                                  ------------     ------------
          Total liabilities and partners' equity................  $129,272,894     $122,802,069
                                                                  ============     ============
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-44
<PAGE>   168
 
                        SUMAS COGENERATION COMPANY, L.P.
                                 AND SUBSIDIARY
 
                        CONSOLIDATED STATEMENT OF INCOME
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                   ----------------------------------------------
                                                       1996             1995             1994
                                                   ------------     ------------     ------------
<S>                                                <C>              <C>              <C>
Revenues
  Power sales....................................  $ 43,488,465     $ 30,603,018     $ 29,206,469
  Natural gas sales, net.........................       434,611          893,690        2,832,668
  Other..........................................       169,146           29,146           20,490
                                                   ------------     ------------     ------------
          Total revenues.........................    44,092,222       31,525,854       32,059,627
                                                   ------------     ------------     ------------
Costs and expenses
  Operating and production costs.................    16,852,253       18,493,245       19,032,754
  Depletion, depreciation and amortization.......     5,702,310        6,965,496        6,715,156
  General and administrative.....................     2,481,470        1,400,129        1,412,326
                                                   ------------     ------------     ------------
          Total costs and expenses...............    25,036,033       26,858,870       27,160,236
                                                   ------------     ------------     ------------
Income from operations...........................    19,056,189        4,666,984        4,899,391
                                                   ------------     ------------     ------------
Other income (expense)
  Interest income................................       406,537          490,071          436,741
  Interest expense...............................   (10,678,618)     (11,006,056)     (10,172,959)
  Other expense..................................      (133,958)         (60,664)        (359,000)
                                                   ------------     ------------     ------------
          Total other expense....................   (10,406,039)     (10,576,649)     (10,095,218)
                                                   ------------     ------------     ------------
Income (loss) before provision for income
  taxes..........................................     8,650,150       (5,909,665)      (5,195,827)
Provision for income taxes.......................      (155,951)        (188,387)        (581,190)
                                                   ------------     ------------     ------------
          Net income (loss)......................  $  8,494,199     $ (6,098,052)    $ (5,777,017)
                                                   ============     ============     ============
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-45
<PAGE>   169
 
                        SUMAS COGENERATION COMPANY, L.P.
                                 AND SUBSIDIARY
 
             CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<S>                                                                               <C>
Partners' Equity, December 31, 1993.............................................  $11,300,153
Net loss........................................................................   (5,777,017)
                                                                                  -----------
Partners' Equity, December 31, 1994.............................................    5,523,136
Net loss........................................................................   (6,098,052)
                                                                                  -----------
Partners' Deficit, December 31, 1995............................................     (574,916)
Net income......................................................................    8,494,199
Distributions to partners.......................................................   (4,297,970)
                                                                                  -----------
Partners' Equity, December 31, 1996.............................................  $ 3,621,313
                                                                                  ===========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-46
<PAGE>   170
 
                        SUMAS COGENERATION COMPANY, L.P.
                                 AND SUBSIDIARY
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                         ----------------------------------------
                                                             1996          1995          1994
                                                         ------------   -----------   -----------
<S>                                                      <C>            <C>           <C>
Cash flows from operating activities
  Net income (loss)....................................  $  8,494,199   $(6,098,052)  $(5,777,017)
  Adjustments to reconcile net income (loss) to net
     cash from operating activities
     Depletion, depreciation and amortization..........     6,571,522     6,965,496     6,715,156
     Deferred income taxes.............................        80,600       134,000       532,400
     Change in operating assets and liabilities
       Accounts receivable.............................    (1,514,922)    1,017,993    (1,254,639)
       Prepaid expenses................................         2,698         9,497       (30,342)
       Accounts payable and accrued liabilities........     1,114,029    (1,407,621)    1,081,431
       Related party distributions and payables........      (437,524)      425,479       132,296
                                                         ------------   -----------   -----------
          Net cash from operating activities...........    14,310,602     1,046,792     1,399,285
                                                         ------------   -----------   -----------
Cash flows from investing activities
  Decrease (increase) in restricted cash and cash
     equivalents.......................................   (10,498,126)    2,908,466     2,922,819
  Acquisition of property, plant and equipment.........      (913,970)   (3,710,025)   (3,690,399)
  Other assets.........................................            --            --      (167,483)
                                                         ------------   -----------   -----------
          Net cash from investing activities...........   (11,412,096)     (801,559)     (935,063)
                                                         ------------   -----------   -----------
Cash flows from financing activities
  Repayment of long-term debt..........................    (2,000,000)     (400,000)     (400,025)
  Distributions to partners............................      (780,479)           --            --
                                                         ------------   -----------   -----------
          Net cash from financing activities...........    (2,780,479)     (400,000)     (400,025)
                                                         ------------   -----------   -----------
Net increase (decrease) in cash and cash equivalents...       118,027      (154,767)       64,197
Cash and cash equivalents, beginning of year...........       199,169       353,936       289,739
                                                         ------------   -----------   -----------
Cash and cash equivalents, end of year.................  $    317,196   $   199,169   $   353,936
                                                         ============   ===========   ===========
Supplementary disclosure of cash flow information
  Cash paid for interest during the year...............  $ 10,678,618   $11,006,056   $10,172,959
                                                         ============   ===========   ===========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-47
<PAGE>   171
 
                        SUMAS COGENERATION COMPANY, L.P.
                                 AND SUBSIDIARY
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1996, 1995 AND 1994
 
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     (a) General -- Sumas Cogeneration Company, L.P. (the Partnership) is a
Delaware limited partnership formed on August 28, 1991 between Sumas Energy,
Inc. (SEI), the general partner which currently holds a 50% interest in the
profits and losses of the Partnership, and Whatcom Cogeneration Partners, L.P.
(Whatcom), the sole limited partner which holds the remaining 50% Partnership
interest. The Partnership agreement specifies that certain preferential
distributions are paid to SEI and Whatcom. Whatcom is owned through affiliated
companies by Calpine Corporation (Calpine). The Partnership has a wholly-owned
Canadian subsidiary, ENCO Gas, Ltd. (ENCO), which is incorporated in New
Brunswick, Canada. The consolidated financial statements include the accounts of
the Partnership and ENCO (collectively, the Company). All intercompany profits,
transactions and balances have been eliminated in consolidation.
 
     The Partnership owns and operates an electrical generation facility (the
Generation Facility) in Sumas, Washington. The Generation Facility is a natural
gas-fired combined cycle electrical generation plant which has a nameplate
capacity of approximately 125 megawatts. Commercial operation of the Generation
Facility commenced in April 1993. The Generation Facility includes a lumber dry
kiln facility and a 3.5 mile private natural gas pipeline.
 
     ENCO has acquired and is operating and developing a portfolio of proven
natural gas reserves in British Columbia and Alberta, Canada, which provide a
dedicated fuel supply for the Generation Facility (collectively, the Project).
ENCO produces and supplies natural gas to the Generation Facility with
incidental off-sales to third parties. The Generation Facility also receives a
portion of its fuel under contracts with third parties.
 
     The Partnership produces and sells its entire electrical output to Puget
Sound Power & Light Company (Puget) under a 20-year electricity sales contract.
Under the electricity sales contract, the Partnership is required to be
certified as a qualifying cogeneration facility as established by the Public
Utility Regulatory Policy Act of 1978, as amended, and as administered by the
Federal Energy Regulatory Commission.
 
     The Generation Facility produced and sold megawatt hours of electricity to
Puget as follows:
 
<TABLE>
<CAPTION>
                                                               MEGAWATT
                     YEAR ENDED DECEMBER 31,                    HOURS         REVENUE
        --------------------------------------------------    ----------    ------------
        <S>                                                   <C>           <C>
        1996..............................................     1,031,900     $43,488,000
        1995..............................................     1,026,000     $30,603,000
        1994..............................................     1,000,400     $29,206,000
</TABLE>
 
     The Partnership leases a kiln facility and sells steam under a 20-year
agreement for the purchase and sale of steam and lease of the kiln (Note 6) to
Socco, Inc. (Socco), a custom lumber drying operation owned by an affiliate of
the Partnership. Steam use requirements under the agreement with Socco were
established to maintain the qualifying cogeneration facility status of the
Generation Facility.
 
     (b) The Partnership -- SEI assigned all its rights, title, and interest in
the Project, including the Puget contract, to the Partnership in exchange for
its Partnership interest. SEI and Whatcom are both currently entitled to a 50%
interest in the profits and losses of the Partnership, after the payment of
certain preferential distributions to Whatcom of approximately $2,756,000 and
$6,239,000 at December 31, 1996 and 1995, respectively, and to SEI of
approximately $536,000 and $441,000 at December 31, 1996 and 1995, respectively.
A portion of these preferential distributions compound at 20% per annum. After
Whatcom has received cumulative distributions representing a fixed
rate-of-return of 24.5% on its equity investment, exclusive of the preferential
distributions referred to above, SEI's share of operating distributions will
increase to 88.67% and Whatcom's share of operating distributions will decrease
to 11.33%.
 
                                      F-48
<PAGE>   172
 
                        SUMAS COGENERATION COMPANY, L.P.
                                 AND SUBSIDIARY
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1996, 1995 AND 1994
 
     (c) Distributions -- Distributions of operating cash flows are permitted
quarterly after required deposits are made and minimum cash balances are met,
and are subject to certain other restrictions. For the year ended December 31,
1996, distributions totaling $4,297,970 were paid or accrued. As of January 31,
1997, the accrued balance of $3,517,491 of distributions were paid. No
distributions were paid or accrued for the years ended December 31, 1995 and
1994.
 
     (d) Revenue Recognition -- Revenue from the sale of electricity is
recognized based on kilowatt hours generated and delivered to Puget at
contractual rates. Revenue from the sale of natural gas is recognized based on
volumes delivered to customers at contractual delivery points and rates. The
costs associated with the generation of electricity and the delivery of gas,
including operating and maintenance costs, gas transportation and royalties, are
recognized in the same period in which the related revenue is earned and
recorded.
 
     (e) Gas Acquisition and Development Costs -- ENCO follows the full cost
method of accounting for gas acquisition and development expenditures, wherein
all costs related to the development of gas reserves in Canada are initially
capitalized. Costs capitalized include land acquisition costs, geological and
geophysical expenditures, rentals on undeveloped properties, cost of drilling
productive and nonproductive wells, and well equipment. Gains or losses are not
recognized upon disposition or abandonment of natural gas properties unless a
disposition or abandonment would significantly alter the relationship between
capitalized costs and proven reserves.
 
     All capitalized costs of gas properties, including the estimated future
costs to develop proven reserves, are depleted using the unit-of-production
method based on estimated proven gas reserves as determined by independent
engineers. ENCO has not assigned any value to its investment in unproven gas
properties and, accordingly, no costs have been excluded from capitalized costs
subject to depletion.
 
     Costs subject to depletion under the full cost method include estimated
future costs of dismantlement and abandonments of $3,718,000 in 1996, $3,748,000
in 1995 and $3,630,000 in 1994. This includes the cost of production equipment
removal and environmental cleanup based upon current regulations and economic
circumstances. The provisions for future removal and site restoration costs of
$177,000 in 1996, $193,000 in 1995 and $169,000 in 1994 are included in
depletion expense.
 
     Capitalized costs are subject to a ceiling test which limits such costs to
the aggregate of the net present value of the estimated future cash flows from
the related proven gas reserves. The ceiling test calculation is made by
estimating the future net cash flows, based on current economic operating
conditions, plus the lower of cost or fair market value of unproven reserves,
and discounting those cash flows at an annual rate of 10%.
 
     (f) Joint Venture Accounting -- Substantially all of ENCO's natural gas
production activities are conducted jointly with others and, accordingly, these
consolidated financial statements reflect only ENCO's proportionate interest in
such activities.
 
     (g) Foreign Exchange Gains and Losses -- Foreign exchange gains and losses
as a result of translating Canadian dollar transactions and Canadian dollar
denominated cash, accounts receivable and accounts payable transactions are
recognized in the statement of income.
 
     (h) Cash and Cash Equivalents -- For purposes of the statement of cash
flows, cash and cash equivalents consist of cash and short-term investments in
highly liquid instruments such as certificates of deposit, money market accounts
and U.S. treasury bills with an original maturity of three months or less,
excluding restricted cash and cash equivalents.
 
     (i) Concentration of Credit Risk -- Financial instruments, which
potentially subject the Company to concentrations of credit risk, consist
primarily of cash and short-term investments in highly liquid instruments such
as certificates of deposit, money market accounts and U.S. treasury bills with
maturities of three months
 
                                      F-49
<PAGE>   173
 
                        SUMAS COGENERATION COMPANY, L.P.
                                 AND SUBSIDIARY
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1996, 1995 AND 1994
 
or less, and accounts receivable. The Company's cash and cash equivalents are
primarily held with two financial institutions. Accounts receivable are
primarily due from Puget.
 
     (j) Depreciation -- The Company provides for depreciation of property,
plant and equipment using the straight-line method over estimated useful lives
which range from 7 to 40 years for plant and equipment and 3 to 7 years for
furniture and fixtures.
 
     (k) Amortization of Other Assets -- The Company provides for amortization
of other assets using the straight-line method as follows:
 
<TABLE>
            <S>                                                       <C>
            Organization, start-up and development costs............  5-30 years
            Financing costs.........................................  15 years
            Gas contract costs......................................  20 years
</TABLE>
 
     (l) Income Taxes -- Profits or losses of the Partnership are passed
directly to the partners for income tax purposes.
 
     ENCO is subject to Canadian income taxes and accounts for income taxes on
the liability method. The liability method recognizes the amount of tax payable
at the date of the consolidated financial statements, as a result of all events
that have been recognized in the consolidated financial statements, as measured
by currently enacted tax laws and rates. Deferred income taxes are provided for
temporary differences in recognition of revenues and expenses for financial and
income tax reporting purposes.
 
     (m) Use of Estimates -- The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
 
NOTE 2 -- PROPERTY, PLANT AND EQUIPMENT
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                          -----------------------------
                                                              1996             1995
                                                          ------------     ------------
        <S>                                               <C>              <C>
        Land and land improvements....................    $    381,071     $    381,071
        Plant and equipment...........................      84,152,257       84,061,359
        Acquisition of gas properties, including            25,838,035       25,030,165
          development thereon.........................
        Furniture and fixtures........................         211,116          195,914
                                                          ------------     ------------
                                                           110,582,479      109,668,509
        Less accumulated depreciation and depletion...      18,844,546       14,078,772
                                                          ------------     ------------
                                                          $ 91,737,933     $ 95,589,737
                                                          ============     ============
</TABLE>
 
     Depreciation expense was $3,159,774 in 1996, $3,316,748 in 1995 and
$3,069,446 in 1994. Depletion expense was $1,606,000 in 1996, $1,843,000 in 1995
and $1,671,000 in 1994.
 
                                      F-50
<PAGE>   174
 
                        SUMAS COGENERATION COMPANY, L.P.
                                 AND SUBSIDIARY
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1996, 1995 AND 1994
 
NOTE 3 -- OTHER ASSETS
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            ---------------------------
                                                               1996            1995
                                                            -----------     -----------
        <S>                                                 <C>             <C>
        Organization, start-up and development costs......  $ 4,844,015     $ 6,165,574
        Financing costs...................................    3,909,886       4,254,719
        Gas contract costs................................    2,184,831       2,324,187
                                                            -----------     -----------
                                                            $10,938,732     $12,744,480
                                                            ===========     ===========
</TABLE>
 
NOTE 4 -- LONG-TERM DEBT
 
     The Partnership and ENCO have loan agreements with The Prudential Insurance
Company of America (Prudential) and Credit Suisse (collectively, the Lenders).
Through September 1996, Credit Suisse was an affiliate of Whatcom. At December
31, 1996 and 1995, amounts outstanding under the term loan agreements, by
entity, were as follows:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                          -----------------------------
                                                              1996             1995
                                                          ------------     ------------
        <S>                                               <C>              <C>
        Sumas Cogeneration Company, L.P.................  $ 92,781,003     $ 94,367,003
        ENCO Gas, Ltd...................................    24,219,000       24,633,000
                                                          ------------     ------------
                                                           117,000,003      119,000,003
        Less current portion............................     3,600,000        2,000,000
                                                          ------------     ------------
                                                          $113,400,003     $117,000,003
                                                          ============     ============
</TABLE>
 
     Scheduled annual principal payments under the loan agreements as of
December 31, 1996 are as follows:
 
<TABLE>
<CAPTION>
                           YEAR ENDING DECEMBER 31,                         AMOUNT
        ---------------------------------------------------------------  -------------
        <S>                                                              <C>
        1997...........................................................     $3,600,000
        1998...........................................................      4,200,000
        1999...........................................................      5,400,000
        2000...........................................................      7,200,000
        2001...........................................................     10,800,000
        Thereafter.....................................................     85,800,003
                                                                          ------------
                                                                          $117,000,003
                                                                          ============
</TABLE>
 
     The Partnership's loan is comprised of a fixed rate loan in the original
amount of $55,510,000 and a variable rate loan in the original amount of
$39,650,000. Interest is payable quarterly on the fixed rate loan at a rate of
10.35%. Interest on the variable rate loan is payable quarterly at either the
London Interbank Offered Rate (LIBOR), certificate of deposit rate or Credit
Suisse's base rate, plus an applicable margin which ranges from 2.25% to .875%
as stated in the loan agreement. During the year ended December 31, 1996,
interest rates on the variable rate loan ranged from 6.94% to 7.38%. The loans
mature in May 2008.
 
     ENCO's loan is comprised of a fixed rate loan in the original amount of
$14,490,000 and a variable rate loan in the original amount of $10,350,000.
Interest is payable quarterly on the fixed rate loan at a rate of 9.99%.
Interest on the variable rate loan is payable quarterly at either the LIBOR,
certificate of deposit rate or Credit Suisse's base rate, plus an applicable
margin as stated in the loan agreement. During the year ended December 31, 1996,
interest rates on the variable rate loan ranged from 6.94% to 7.38%. The loans
mature in May 2008.
 
                                      F-51
<PAGE>   175
 
                        SUMAS COGENERATION COMPANY, L.P.
                                 AND SUBSIDIARY
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1996, 1995 AND 1994
 
     The Partnership pays Prudential an agency fee of $50,000 per year, adjusted
annually by an inflation index, until the loans mature. The Partnership pays
Credit Suisse an agency fee of $40,000 per year, adjusted annually by an
inflation index, until the loans mature. The loans are collateralized by
substantially all the Company's assets and interests in the Project.
Additionally, the Company's rights under all contractual agreements are assigned
as collateral. The Partnership and ENCO loans are cross-collateralized and
contain cross-default provisions.
 
     Under the terms of the loan agreements and the deposit and disbursement
agreements with the Lenders, the Company is required to establish and fund
certain accounts held by Credit Suisse and Royal Trust as security agents. The
accounts require specified minimum deposits and funding levels to meet current
and future operating, maintenance and capital costs, and to provide certain
other reserves for payment of principal, interest and other contingencies. These
accounts are presented as restricted cash and cash equivalents and include cash,
certificates of deposit, money market accounts and U.S. treasury bills, all with
maturities of 3 months or less. The current portion of restricted cash and cash
equivalents is based on the amount of current liabilities for obligations which
may be funded from the restricted accounts. The balance of restricted cash and
cash equivalents has been classified as a non-current asset.
 
NOTE 5 -- INCOME TAXES
 
     The provision for income taxes represents Canadian taxes which consist of
the following:
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                     ----------------------------------
                                                       1996         1995         1994
                                                     --------     --------     --------
        <S>                                          <C>          <C>          <C>
        Current:
          Federal large corporation tax............  $ 41,340     $ 34,625     $ 31,314
          British Columbia capital taxes...........    34,011       19,762       17,476
                                                     ---------    ---------    ---------
                                                       75,351       54,387       48,790
        Deferred...................................    79,744      135,400      178,400
                                                     ---------    ---------    ---------
                                                      155,095      189,787      227,190
        Utilization of loss carryforwards for
          Canadian income tax purposes.............        --       47,700      259,000
        Reduction of (increase in) Canadian loss
          carryforwards due to foreign exchange and
          other adjustments........................       856      (49,100)      95,000
                                                     ---------    ---------    ---------
                                                     $155,951     $188,387     $581,190
                                                     =========    =========    =========
</TABLE>
 
     The principal sources of temporary differences resulting in deferred tax
assets and liabilities are as follows:
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                              -------------------------
                                                                 1996           1995
                                                              ----------     ----------
        <S>                                                   <C>            <C>
        Deferred tax asset Canadian net operating loss
          carryforwards.....................................  $ (919,400)    $ (840,900)
        Deferred tax liabilities Acquisition and development
          costs of gas deducted for tax purposes in excess
          of amounts deducted for financial reporting
          purposes..........................................   1,907,800      1,748,700
                                                              ----------     ----------
                  Net deferred tax liability................  $  988,400     $  907,800
                                                              ==========     ==========
</TABLE>
 
                                      F-52
<PAGE>   176
 
                        SUMAS COGENERATION COMPANY, L.P.
                                 AND SUBSIDIARY
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1996, 1995 AND 1994
 
     The provision for income taxes differs from the Canadian statutory rate
principally due to the following:
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                     ----------------------------------
                                                       1996         1995         1994
                                                     --------     --------     --------
        <S>                                          <C>          <C>          <C>
        Canadian statutory rate....................     44.62%       44.62%       44.34%
        Income taxes based on statutory rate.......  $(45,824)    $(33,852)    $ 82,909
        Capital taxes, net of deductible portion...    60,175       47,028       36,678
        Non-deductible provincial royalties, net of
          resource allowance.......................   123,464       95,671       39,836
        Depletion on gas properties with no tax
          basis....................................    36,488       44,641       38,420
        Foreign exchange adjustments...............    16,362       14,860       29,347
        Other......................................   (35,570)      21,439           --
                                                     --------     --------     --------
                                                     $155,095     $189,787     $227,190
                                                     ========     ========     ========
</TABLE>
 
     As of December 31, 1996, ENCO has non-capital loss carryforwards of
approximately $2,061,000, which may be applied against taxable income of future
periods which expire as follows:
 
<TABLE>
                <S>                                                <C>
                1999.............................................  $1,619,000
                2000.............................................  $  260,000
                2003.............................................  $  182,000
</TABLE>
 
NOTE 6 -- RELATED PARTY TRANSACTIONS AND COMMITMENTS
 
     (a) Administrative Services -- As managing partner of the Partnership, SEI
receives a fee of $250,000 per year through December 1995 and $300,000 per year
for periods after December 1995. The fee is subject to annual adjustment based
upon an inflation index. Approximately $311,000 in 1996, $258,000 in 1995 and
$253,000 in 1994 was paid to SEI under this agreement.
 
     (b) Operating and Maintenance Services -- The Partnership has an operating
and maintenance agreement with a related party to operate, repair and maintain
the Project. For these services, the Partnership pays a fixed fee of $1,140,000
per year adjustable based on the Consumer Price Index, an annual base fee of
$150,000 per year, also adjustable based on the Consumer Price Index, and
certain other reimbursable expenses as defined in the agreement. In addition,
the agreement provides for an annual performance bonus of up to $400,000,
adjustable based on the Consumer Price Index, based on the achievement of
certain annual performance levels. Payment of the performance bonus is
subordinated to the payment of operating expenses, debt service and required
deposits, and minimum balances under the loan agreements, and deposit and
disbursement agreements. This agreement expires on the date Whatcom receives its
24.5% cumulative return or the tenth anniversary of the Project completion date,
subject to renewal terms. Approximately $2,014,000 in 1996, $2,031,000 in 1995
and $1,946,000 in 1994 was earned under this agreement.
 
     (c) Thermal Energy and Kiln Lease -- The Partnership has a 20-year thermal
energy and kiln lease agreement with Socco. Under this agreement, Socco leases
the premises and the kiln and purchases certain amounts of thermal energy
delivered to dry lumber. Income recorded from Socco was approximately $9,000 in
1996, $19,000 in 1995 and $61,000 in 1994.
 
     (d) Consulting Services -- ENCO has an agreement with National Energy
Systems Company (NESCO), an affiliate of SEI, to provide consulting services for
$8,000 per month, adjustable based upon an inflation index. The agreement
automatically renews for one-year periods unless written notice of termination
is served by either party. Approximately $107,000 in 1996, $100,000 in 1995 and
$101,000 in 1994 was paid under this agreement.
 
                                      F-53
<PAGE>   177
 
                        SUMAS COGENERATION COMPANY, L.P.
                                 AND SUBSIDIARY
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1996, 1995 AND 1994
 
     (e) Fuel Supply and Purchase Agreements -- The Partnership has a fixed
price natural gas sale and purchase agreement with ENCO. The agreement requires
ENCO to deliver up to a maximum daily contract quantity of 12,000 MMBtu's of
natural gas per day which may be increased to 24,000 MMBtu's per day in
accordance with the agreement. Partnership payments to ENCO under the agreement
are eliminated in consolidation. The agreement expires on the twentieth
anniversary of the date of commercial operation.
 
     The Partnership has gas supply agreements with Westcoast Gas Services, Inc.
(WGSI) to provide the Partnership with quantities of firm gas. Commencing April
1, 1993, WGSI must provide the Partnership with quantities of gas ranging from
10,000 MMBtu's per day up to 12,900 MMBtu's per day at a firm price, as provided
under the agreements. Deliveries under the agreement are expected to terminate
on October 31, 1997.
 
     The Partnership and ENCO have a gas management agreement with WGSI. WGSI is
paid a gas management fee for each MMBtu of gas delivered. The gas management
fee is adjusted annually based on the British Columbia Consumer Price Index. The
gas management agreement expires October 31, 2008 unless terminated earlier as
provided for in the agreement.
 
     ENCO is committed to the utilization of pipeline capacity on the Westcoast
Energy Inc. System. These firm capacity commitments are predominantly under
one-year renewable contracts. Firm capacity has been accepted at an annual cost
of approximately $3,526,000 in 1996, $2,569,000 in 1995 and $2,776,000 in 1994.
 
     As collateral for the obligations of the Company under the gas supply and
gas management agreements with WGSI, the Partnership secured an irrevocable
standby letter of credit with Credit Suisse in favor of WGSI. In January 1996,
the face amount of the letter of credit was reduced, in accordance with its
terms, from $2,500,000 to $500,000. Accordingly, the required balance in the
cash collateral account supporting the letter of credit was reduced from
$2,500,000 to $500,000. As of December 31, 1996, the letter of credit had a face
amount of $500,000 and the Partnership had a restricted cash deposit of
$500,000. As of December 31, 1995, the letter of credit had a face amount of
$2,500,000 and the Partnership had a restricted cash deposit of $2,500,000.
 
     (f) Utility Services -- The Partnership entered into an agreement for
utility services with the City of Sumas, Washington. The City of Sumas has
agreed to provide a guaranteed annual supply of water at its wholesale rate
charged to external association customers. Should the Partnership fail to
purchase the daily average minimum of 550 gallons per minute from the City of
Sumas during the first 10 years of commercial operation, except for
uncontrollable forces or reasonable and necessary shutdowns, the Partnership
shall make up the lost revenue to the City of Sumas in accordance with the
agreement.
 
     The Partnership entered into an agreement for waste water disposal with the
City of Bellingham, Washington. The City of Bellingham has agreed to accept up
to 70,000 gallons of waste water daily at a rate of one cent per gallon. The
agreement expires on December 31, 1998.
 
     The Partnership has received a permit for waste water disposal from the
Washington State Department of Ecology which expires June 30, 2000.
 
     (g) Lease Commitments -- In December 1990, the Partnership entered into a
23.5-year land lease which may be renewed for five consecutive five-year
periods. Rental expense was approximately $56,600 in 1996 and $48,400 in 1995
and 1994.
 
     In April 1992, ENCO signed an operating lease for office space which
expires in March 1997. Monthly rental expense is approximately $1,700. Rental
expense was approximately $20,400 in 1996, $17,700 in 1995 and $17,000 in 1994.
 
                                      F-54
<PAGE>   178
 
                        SUMAS COGENERATION COMPANY, L.P.
                                 AND SUBSIDIARY
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                        DECEMBER 31, 1996, 1995 AND 1994
 
     Future minimum land and office lease commitments as of December 31, 1996
are as follows:
 
<TABLE>
<CAPTION>
                            YEAR ENDING DECEMBER 31,                         AMOUNT
        -----------------------------------------------------------------  -----------
        <S>                                                                <C>
        1997.............................................................  $    51,000
        1998.............................................................       49,300
        1999.............................................................       49,300
        2000.............................................................       52,500
        2001.............................................................       55,700
        Thereafter.......................................................      812,600
                                                                           ------------
                                                                           $ 1,070,400
                                                                           ============
</TABLE>
 
     (h) Partner Loan -- In March 1994, the sole shareholder of SEI borrowed
$10,000,000 from Calpine. The loan bears interest at 16.25%, compounded
quarterly, and is collateralized by a subordinated assignment in SEI's interest
in the Partnership and a subordinated pledge of SEI's stock. The loan requires
payments of interest and principal to be made from 50% of SEI's cash
distributions from the Partnership, less amounts due to Whatcom under a previous
note. On March 15, 2004, all unpaid principal and interest on the loan is due.
 
NOTE 7 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
 
     The carrying amount of all cash and cash equivalents reported in the
consolidated balance sheet is estimated by the Company to approximate their fair
value.
 
     The Company is not able to estimate the fair value of its long-term debt
with a carrying amount of $117,000,003 and $119,000,003 at December 31, 1996 and
1995, respectively. There is no ability to assess current market interest rates
of similar borrowing arrangements for similar projects because the terms of each
such financing arrangement is the result of substantial negotiations among
several parties.
 
                                      F-55
<PAGE>   179
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the General Partner of
  BAF Energy, A California Limited Partnership:
 
     We have audited the accompanying balance sheets of BAF Energy, A California
Limited Partnership, as of October 31, 1995 and 1994, and the related statements
of income, partners' equity and cash flows for each of the three years ended
October 31, 1995, 1994 and 1993. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BAF Energy, A California
Limited Partnership, as of October 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years ended October 31,
1995, 1994 and 1993 in conformity with generally accepted accounting principles.
 
     As explained in Note 1 to the financial statements, effective November 1,
1994, the Company changed its method of accounting for investments.
 
     As discussed in Note 8 to the financial statements, subsequent to October
31, 1995, the Partnership signed a letter agreement with a third party to lease
substantially all of its property, plant and equipment and assign all related
contracts to a third party.
 
                                          ARTHUR ANDERSEN LLP
 
San Francisco, California
December 6, 1995
 
                                      F-56
<PAGE>   180
 
                                  BAF ENERGY,
                        A CALIFORNIA LIMITED PARTNERSHIP
 
                                 BALANCE SHEETS
                           OCTOBER 31, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                                      1995             1994
                                                                  ------------     ------------
<S>                                                               <C>              <C>
ASSETS
Current assets:
  Cash and cash equivalents.....................................  $  3,757,921     $  5,363,057
  Available for sale securities.................................     1,919,184               --
  Restricted available-for-sale securities......................     7,241,305       12,332,244
  Accounts receivable -- trade..................................    10,916,919        5,277,413
  Supplies inventory............................................     2,153,129        2,060,935
  Prepaid insurance.............................................       288,383          251,375
                                                                  ------------     ------------
          Total current assets..................................    26,276,841       25,285,024
                                                                  ------------     ------------
Property, plant and equipment...................................   100,258,434      100,210,960
  Accumulated depreciation and amortization.....................   (24,387,912)     (20,854,389)
                                                                  ------------     ------------
                                                                    75,870,522       79,356,571
                                                                  ------------     ------------
          Total assets..........................................  $102,147,363     $104,641,595
                                                                  ============     ============
 
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
  Accounts payable..............................................  $  1,598,177     $  2,824,110
  Interest payable..............................................     1,309,566        1,396,495
  Payable to affiliate..........................................       166,569          615,881
  Current portion of long-term liabilities......................     5,444,386        5,283,785
                                                                  ------------     ------------
          Total current liabilities.............................     8,518,698       10,120,271
                                                                  ------------     ------------
Long-term liabilities...........................................    66,804,704       71,157,714
                                                                  ------------     ------------
Commitments and contingencies (Note 6)
Partners' equity:
  Contributed equity............................................     9,901,600        9,901,600
  Undistributed earnings........................................    16,922,361       13,462,010
                                                                  ------------     ------------
          Total partners' equity................................    26,823,961       23,363,610
                                                                  ------------     ------------
          Total liabilities and partners' equity................  $102,147,363     $104,641,595
                                                                  ============     ============
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-57
<PAGE>   181
 
                                  BAF ENERGY,
                        A CALIFORNIA LIMITED PARTNERSHIP
 
                              STATEMENTS OF INCOME
              FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
 
<TABLE>
<CAPTION>
                                                         1995            1994            1993
                                                      -----------     -----------     -----------
<S>                                                   <C>             <C>             <C>
Operating Revenues..................................  $43,835,619     $47,955,622     $49,738,504
Operating Expenses:
  Fuel..............................................    9,193,490      14,079,684      16,449,118
  Depreciation and amortization.....................    3,578,572       3,575,442       3,576,710
  Labor, supplies and other.........................    6,614,543       6,959,891       6,343,755
                                                      -----------     -----------     -----------
          Total operating expenses..................   19,386,605      24,615,017      26,369,583
                                                      -----------     -----------     -----------
          Operating income..........................   24,449,014      23,340,605      23,368,921
                                                      -----------     -----------     -----------
Other Income and Expense:
  Interest income and other.........................      955,299         477,666         448,961
  General and administrative........................     (773,610)       (784,401)       (653,373)
  Interest expense..................................   (8,165,273)     (8,654,453)     (9,091,695)
                                                      -----------     -----------     -----------
          Total other income and expense............   (7,983,584)     (8,961,188)     (9,296,107)
                                                      -----------     -----------     -----------
Partnership Income..................................  $16,465,430     $14,379,417     $14,072,814
                                                      ===========     ===========     ===========
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-58
<PAGE>   182
 
                                  BAF ENERGY,
                        A CALIFORNIA LIMITED PARTNERSHIP
 
                         STATEMENTS OF PARTNERS' EQUITY
              FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
 
<TABLE>
<CAPTION>
                                      GENERAL     LIMITED                     UNREALIZED       TOTAL
                                     PARTNERS'   PARTNERS'    UNDISTRIBUTED    LOSSES ON     PARTNERS'
                                      EQUITY       EQUITY       EARNINGS      SECURITIES       EQUITY
                                     ---------   ----------   -------------   -----------   ------------
<S>                                  <C>         <C>          <C>             <C>           <C>
Balance, October 31, 1992..........    $ 100     $9,901,500   $  13,509,779   $        --   $ 23,411,379
  Net income.......................       --             --      14,072,814            --     14,072,814
  Cash distributions...............       --             --     (15,000,000)           --    (15,000,000)
                                        ----     ----------    ------------       -------   ------------
Balance, October 31, 1993..........      100      9,901,500      12,582,593            --     22,484,193
  Net income.......................       --             --      14,379,417            --     14,379,417
  Cash distributions...............       --             --     (13,500,000)           --    (13,500,000)
                                        ----     ----------    ------------       -------   ------------
Balance, October 31, 1994..........      100      9,901,500      13,462,010            --     23,363,610
  Net income.......................       --             --      16,465,430            --     16,465,430
  Cash distributions...............       --             --     (13,000,000)           --    (13,000,000)
  Change in unrealized losses on
     available-for-sale
     securities....................       --             --              --        (5,079)        (5,079)
                                        ----     ----------    ------------       -------   ------------
Balance, October 31, 1995..........    $ 100     $9,901,500   $  16,927,440   $    (5,079)  $ 26,823,961
                                        ====     ==========    ============       =======   ============
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-59
<PAGE>   183
 
                                  BAF ENERGY,
                        A CALIFORNIA LIMITED PARTNERSHIP
 
                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
 
<TABLE>
<CAPTION>
                                                       1995             1994             1993
                                                   ------------     ------------     ------------
<S>                                                <C>              <C>              <C>
Cash flows from operating activities:
  Partnership income.............................  $ 16,465,430     $ 14,379,417     $ 14,072,814
  Adjustments to reconcile partnership income to
     net cash provided from operating
     activities --
       Depreciation and amortization.............     3,578,572        3,575,442        3,576,710
       Realized (gains) losses on sales of
          available-for-sale securities, net.....          (465)          10,189          (22,701)
       Change in operating assets &
          liabilities --
          Accounts receivable -- trade...........    (5,639,506)       7,560,768       (6,403,581)
          Supplies inventory.....................       (92,194)        (301,309)         (11,406)
          Prepaid insurance......................       (37,008)         (69,663)           4,270
          Accounts payable.......................    (1,225,933)      (1,375,739)       1,516,130
          Interest payable.......................       (86,929)         (77,740)         (69,540)
          Payable to affiliate...................      (449,312)         463,194       (1,130,695)
          Other, net.............................       (45,049)              --               --
                                                     ----------       ----------       ----------
            Net cash provided by operating
               activities........................    12,467,606       24,164,559       11,532,001
                                                     ----------       ----------       ----------
Cash flows from investing activities:
  Purchases of available-for-sale securities.....   (34,628,300)     (25,334,642)     (16,319,709)
  Proceeds from sales and maturities of
     available-for-sale securities...............    37,795,441       20,232,824       20,074,603
  Additions to property, plant and equipment,
     net.........................................       (47,474)         (21,066)        (131,924)
                                                     ----------       ----------       ----------
            Net cash provided by (used in)
               investing activities..............     3,119,667       (5,122,884)       3,622,970
                                                     ----------       ----------       ----------
Cash flows from financing activities:
  Reductions of long-term liabilities, net.......    (4,192,409)      (3,587,576)      (3,250,397)
  Cash distributions to partners.................   (13,000,000)     (13,500,000)     (15,000,000)
                                                     ----------       ----------       ----------
            Net cash used in financing
               activities........................   (17,192,409)     (17,087,576)     (18,250,397)
                                                     ----------       ----------       ----------
Net (decrease) increase in cash and cash
  equivalents....................................    (1,605,136)       1,954,099       (3,095,426)
Cash and cash equivalents, beginning of year.....     5,363,057        3,408,958        6,504,384
                                                     ----------       ----------       ----------
Cash and cash equivalents, end of year...........  $  3,757,921     $  5,363,057     $  3,408,958
                                                     ==========       ==========       ==========
Supplemental disclosure of noncash investing and
  financing activities
  Unrealized holding losses, net, on
     available-for-sale securities, recorded as
     additions to undistributed earnings.........  $     (5,079)    $         --     $         --
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-60
<PAGE>   184
 
                                  BAF ENERGY,
                        A CALIFORNIA LIMITED PARTNERSHIP
 
                         NOTES TO FINANCIAL STATEMENTS
 
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
  Organization
 
     Basic American, Inc. (BAI) formed BAF Energy, A California Limited
Partnership (BAF Energy or the Partnership) on March 25, 1986, for the purpose
of developing, constructing and operating a cogeneration facility. The term of
the Partnership is through December 2020 unless terminated earlier in accordance
with the Partnership Agreement. The facility produces and sells electricity and
steam. On December 6, 1995, the Partnership signed a letter agreement with a
third party to lease substantially all of the Partnership's property, plant and
equipment and to assign all related contracts. The third party lessee will
operate the cogeneration facility through April, 2019 (see Note 8).
 
     BAF Energy, Inc. (BEI) is the general partner of the Partnership and has an
ownership interest of 1 percent. BEI is a wholly owned subsidiary of Basic
Vegetable Products, Inc. (BVP). BVP is a wholly owned subsidiary of BAI. As of
October 31, 1995, BAI also owned approximately 51 percent of the Limited
Partnership units of BAF Energy then outstanding.
 
     Distributions and profit and loss are allocated 99 percent to the limited
partners, based on their proportionate share of limited partnership units, and 1
percent to the general partner.
 
  Reclassifications
 
     Certain reclassifications have been made to the 1994 and 1993 financial
statements to be consistent with the current year presentation.
 
  Cash and Cash Equivalents
 
     For purposes of reporting cash flows, cash and cash equivalents include
cash on deposit with banks, money market funds, and commercial paper. Cash paid
for interest during the years ended October 31, 1995, 1994 and 1993 was
$8,252,202, $8,732,052 and $9,161,241, respectively.
 
  Available-for-Sale Securities
 
     Effective November 1, 1994, the Partnership adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). The Partnership has classified its investments as
available-for-sale securities and as restricted available-for-sale securities
and has recorded all securities holdings at fair value. Unrealized gains and
losses are reported as a separate component of partners' equity until realized.
 
     Premiums and discounts are amortized over the life of the related security
as an adjustment to interest income using the effective interest method.
Interest income is recognized when earned. Realized gains and losses on
securities transactions are included in net income and are derived using the
specific identification method for determining the cost of securities sold.
 
     Prior to the November 1, 1994 adoption of SFAS 115, the Partnership's
short-term investments were included in cash and short-term investments and were
valued at the lower of aggregate cost or market. Such securities have been
reclassified as available-for-sale securities to conform with SFAS 115
presentation requirements.
 
     The effect of adopting SFAS 115 was to recognize net unrealized holding
losses of $32,599 as a decrease in partners' equity as of November 1, 1994. At
October 31, 1995, net unrealized holding losses were $5,079.
 
     Restricted securities are required under the term loans described in Note
4.
 
                                      F-61
<PAGE>   185
 
                                  BAF ENERGY,
                        A CALIFORNIA LIMITED PARTNERSHIP
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
  Property, Plant and Equipment
 
     Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization of property, plant
and equipment are computed on a straight-line method principally over the
following estimated useful lives:
 
<TABLE>
<CAPTION>
                                                                               YEARS
                                                                              --------
        <S>                                                                   <C>
        Buildings and improvements..........................................     30
        Machinery and equipment.............................................  5 to 30
</TABLE>
 
  Major Maintenance Accruals
 
     The Partnership accrues for the estimated future costs of major overhauls
and equipment replacement based upon engineering studies.
 
  Income Taxes
 
     Federal and state income tax regulations provide that no income taxes are
levied on a partnership. Instead, each partners' share of partnership profit or
loss is reported on his or her separate income tax return. Accordingly, no
partnership income taxes are provided for in the accompanying financial
statements.
 
(2) AVAILABLE-FOR-SALE SECURITIES
 
     As of October 31, 1995, the amortized cost and estimated fair values of the
Partnership's investments in tax-exempt municipal securities are summarized as
follows:
 
<TABLE>
<CAPTION>
                                                                RESTRICTED
                                                 AVAILABLE-     AVAILABLE-
                                                  FOR-SALE       FOR-SALE
                                                 SECURITIES     SECURITIES       TOTAL
                                                 ----------     ----------     ----------
        <S>                                      <C>            <C>            <C>
        Amortized cost.........................  $1,919,184     $7,246,384     $9,165,568
        Gross unrealized losses................          --         (5,079)        (5,079)
                                                 ----------     ----------     ----------
        Estimated fair value...................  $1,919,184     $7,241,305     $9,160,489
                                                 ==========     ==========     ==========
</TABLE>
 
     The amortized cost and estimated fair value of tax-exempt municipal
securities by contractual maturity are shown below.
 
<TABLE>
<CAPTION>
                                                              AMORTIZED      ESTIMATED
               DUE IN FISCAL YEAR ENDING OCTOBER 31,             COST        FAIR VALUE
        ----------------------------------------------------  ----------     ----------
        <S>                                                   <C>            <C>
        1996................................................  $2,137,292     $2,134,000
        1997-2000...........................................   7,028,276      7,026,489
                                                              ----------     ----------
                  Total.....................................  $9,165,568     $9,160,489
                                                              ==========     ==========
</TABLE>
 
     Proceeds from sales of investments for the year ended October 31, 1995 are
as follow:
 
<TABLE>
        <S>                                                               <C>
        Gross proceeds..................................................  $26,099,037
        Gross gains.....................................................  $     4,404
        Gross losses....................................................  $     3,939
</TABLE>
 
                                      F-62
<PAGE>   186
 
                                  BAF ENERGY,
                        A CALIFORNIA LIMITED PARTNERSHIP
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
(3) PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment and accumulated depreciation and amortization
consist of:
 
<TABLE>
<CAPTION>
                                                                  1995             1994
                                                              ------------     ------------
    <S>                                                       <C>              <C>
    Cost
      Buildings and improvements............................  $  1,410,873     $  1,313,304
      Machinery and equipment...............................    98,847,561       98,897,656
                                                              ------------     ------------
                                                               100,258,434      100,210,960
    Accumulated depreciation and amortization...............   (24,387,912)     (20,854,389)
                                                              ------------     ------------
                                                              $ 75,870,522     $ 79,356,571
                                                              ============     ============
</TABLE>
 
     On December 6, 1995, the Partnership signed a letter agreement with a third
party to lease substantially all of the Partnership's property, plant and
equipment (see Note 8).
 
(4) LONG-TERM LIABILITIES
 
     Long-term liabilities are summarized as follows:
 
<TABLE>
<CAPTION>
                                                                   1995            1994
                                                                -----------     -----------
    <S>                                                         <C>             <C>
    Term loan at 10.88%, due in equal installments through
      March 2004, non-recourse to the Partnership, secured by
      the facility and associated contracts...................  $60,514,066     $64,678,085
    Term loan at 15.65%, due in equal installments through
      March 2004, with recourse to BEI, secured by the
      facility and associated contracts.......................    8,137,159       8,575,025
    Major maintenance accruals................................    3,597,865       3,188,389
                                                                -----------     -----------
                                                                 72,249,090      76,441,499
    Less -- Current maturities................................    5,444,386       5,283,785
                                                                -----------     -----------
                                                                $66,804,704     $71,157,714
                                                                ===========     ===========
</TABLE>
 
  Annual Maturities,
 
     Annual maturities of long-term liabilities at October 31, 1995 are
summarized as follows:
 
<TABLE>
<CAPTION>
                            YEAR ENDING OCTOBER 31,                         AMOUNT
        ----------------------------------------------------------------  -----------
        <S>                                                               <C>
        1996............................................................  $ 5,444,386
        1997............................................................    6,121,107
        1998............................................................    6,716,700
        1999............................................................    7,224,887
        2000............................................................   10,541,918
        Thereafter......................................................   36,200,092
                                                                          -----------
                                                                          $72,249,090
                                                                          ===========
</TABLE>
 
(5) RELATED PARTY TRANSACTIONS
 
     The Partnership Agreement requires that the Partnership pay BEI a monthly
administrative fee. This fee amounted to $146,596, $139,613 and $132,966 for the
years ended October 31, 1995, 1994 and 1993, respectively.
 
                                      F-63
<PAGE>   187
 
                                  BAF ENERGY,
                        A CALIFORNIA LIMITED PARTNERSHIP
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Partnership has entered into a ground lease with a remaining term of 23
years with BAI for the land on which the facility is located. The lease includes
options to extend the lease term up to an additional 30 years. Rent was
$146,572, $139,593 and $132,946 for the years ended October 31, 1995, 1994 and
1993, respectively. Rents will escalate at the rate of 5% each year. In fiscal
1996, this lease will be assigned to a third party lessee pursuant to a letter
agreement discussed at Note 8.
 
     The Partnership negotiated a steam sales contract with a remaining term of
23 years with Basic Vegetable Products, LP (BVP, LP). The General Partner of
BVP, LP is BVP. Under the contract, the Partnership supplies steam to BVP, LP's
King City, California food processing plant. Revenues recorded under the
contract totaled $669,341, $840,959 and $1,068,141 in 1995, 1994 and 1993,
respectively. In fiscal 1996, this contract will also be assigned (see Note 8).
 
(6) COMMITMENTS AND CONTINGENCIES
 
  Facilities
 
     The Partnership executed an Operations and Maintenance (O & M) Agreement
with Bechtel North American Power Corporation (Bechtel) in which Bechtel is
required to operate and maintain the facility for a term of five years from May
1989. The Partnership reimburses Bechtel for all costs incurred in the
performance of the service. O & M expenses paid totaled $3,665,168, $3,884,943
and $4,556,321 in 1995, 1994 and 1993, respectively, including a payment of base
fees of $275,000, $387,456 and $500,000 per year, respectively, and a payment of
earned fees of $380,000, $306,803 and $902,430 per year, respectively. The
agreement also provided for a "high performance" bonus fee dependent on meeting
certain performance standards. In April 1994, the O & M Agreement was
renegotiated and extended through October 1998. The renegotiated terms include
payment of base fees of $275,000 and elimination of the high performance bonus
fee. The bonus paid in 1994 and 1995 totaled $3,107 and $175,327, respectively.
In connection with the anticipated transaction described at Note 8, the
Partnership will sever its O & M Agreement with Bechtel. The severance payment
will be made with funds directly contributed by the third party lessee.
 
  Financing
 
     Calcorp Group, Inc. (CGI), a limited partner, has a put option to sell its
23 percent investment in the Partnership back to the Partnership at fair market
value in certain circumstances. The put is subject to a subordination agreement
with the Partnership's lenders. CGI has entered into a technical support
agreement with the Partnership, wherein CGI is reimbursed for services rendered
based upon time and expenses incurred.
 
(7) REVENUE RECOGNITION
 
     BEI has an exclusive Power Purchase Agreement with Pacific Gas and Electric
(PG&E) under which PG&E pays capacity payments, as defined in the agreement, and
purchases all available energy, except for amounts sold to BVP, LP (see Note 5).
The Partnership receives substantially all of its capacity payments from PG&E
during May through October, and receives payment for energy sales to PG&E during
May through January. In fiscal 1996, this agreement will be assigned to a third
party lessee pursuant to a letter agreement discussed at Note 8.
 
(8) SIGNIFICANT LEASE TRANSACTION
 
     On December 6, 1995, BAF Energy signed a letter agreement with a third
party to enter into a 23-year lease of the cogeneration property, plant and
equipment and to assign all related contracts. Under the terms of the lease, the
lessee will assume all rights and responsibilities related to the ground lease
(see Note 5), the BVP, LP steam sales contract (see Note 5), and the PG&E Power
Purchase Agreement (see Note 7). BAF Energy expects to sign the lease in early
1996.
 
                                      F-64
<PAGE>   188
 
                                  BAF ENERGY,
                        A CALIFORNIA LIMITED PARTNERSHIP
 
                            CONDENSED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                  JANUARY 31,      OCTOBER 31,
                                                                     1996             1995
                                                                  -----------     -------------
                                                                  (UNAUDITED)
<S>                                                               <C>             <C>
ASSETS
Current Assets:
  Cash and cash equivalents.....................................  $ 2,211,511     $   3,757,921
  Available for sale securities.................................           --         1,919,184
  Restricted available-for-sale securities......................   10,953,152         7,241,305
  Accounts receivable -- trade..................................    2,703,251        10,916,919
  Supplies inventory............................................    2,128,361         2,153,129
  Prepaid insurance.............................................      144,633           288,383
                                                                  ------------     ------------
          Total current assets..................................   18,140,908        26,276,841
                                                                  ------------     ------------
Property, Plant and Equipment...................................  100,258,434       100,258,434
  Accumulated depreciation and amortization.....................  (25,280,413)      (24,387,912)
                                                                  ------------     ------------
                                                                   74,978,021        75,870,522
                                                                  ------------     ------------
                                                                  $93,118,929     $ 102,147,363
                                                                  ============     ============
 
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities:
  Accounts payable..............................................  $   811,919     $   1,598,177
  Interest payable..............................................    3,273,915         1,309,566
  Payable to affiliate..........................................       38,428           166,569
  Current portion of long-term liabilities......................    5,546,361         5,444,386
                                                                  ------------     ------------
          Total current liabilities.............................    9,670,623         8,518,698
                                                                  ------------     ------------
Long-Term Liabilities...........................................   66,702,729        66,804,704
                                                                  ------------     ------------
Commitments and Contingencies...................................           --                --
Partners' Equity:
  Contributed equity............................................    9,901,600         9,901,600
  Undistributed earnings........................................    6,843,977        16,922,361
                                                                  ------------     ------------
          Total partners' equity................................   16,745,577        26,823,961
                                                                  ------------     ------------
                                                                  $93,118,929     $ 102,147,363
                                                                  ============     ============
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-65
<PAGE>   189
 
                                  BAF ENERGY,
                        A CALIFORNIA LIMITED PARTNERSHIP
 
                         CONDENSED STATEMENTS OF INCOME
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED
                                                                            JANUARY 31,
                                                                    ---------------------------
                                                                       1996            1995
                                                                    -----------     -----------
<S>                                                                 <C>             <C>
OPERATING REVENUES................................................  $ 4,957,368     $ 7,941,577
OPERATING EXPENSES:
  Fuel............................................................    1,479,116       3,408,912
  Depreciation and amortization...................................      892,500       1,072,028
  Labor, supplies and other.......................................    1,066,580       1,431,321
                                                                    -----------     -----------
          Total operating expenses................................    3,438,196       5,912,261
                                                                    -----------     -----------
            Operating income......................................    1,519,172       2,029,316
                                                                    -----------     -----------
OTHER INCOME AND EXPENSE:
  Interest income and other.......................................      154,073         130,313
  General and administrative......................................     (290,763)       (201,340)
  Interest expense................................................   (1,965,945)     (2,094,761)
                                                                    -----------     -----------
          Total other income and expense..........................   (2,102,635)     (2,165,788)
                                                                    -----------     -----------
PARTNERSHIP LOSS..................................................  $  (583,463)    $  (136,472)
                                                                    ===========     ===========
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-66
<PAGE>   190
 
                                  BAF ENERGY,
                        A CALIFORNIA LIMITED PARTNERSHIP
 
                       CONDENSED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                       THREE MONTHS ENDED
                                                                           JANUARY 31,
                                                                  -----------------------------
                                                                      1996             1995
                                                                  ------------     ------------
<S>                                                               <C>              <C>
Net Cash Provided by Operating Activities.......................  $  9,779,417     $  2,298,789
                                                                  ------------     ------------
Cash Flows from Investing Activities:
  Purchases of available-for-sale securities....................   (25,170,795)     (12,290,102)
  Proceeds from sales and redemptions of available-for-sale
     securities.................................................    23,344,968       12,841,335
  Additions to property, plant and equipment, net...............            --          (20,189)
                                                                  ------------     ------------
          Net cash (used in) provided by investing activities...    (1,825,827)         531,044
                                                                  ------------     ------------
Cash Flows From Financing Activities:
  Increase in long-term liabilities, net........................            --          307,110
  Cash distributions to partners................................    (9,500,000)      (8,500,000)
                                                                  ------------     ------------
          Net cash used in financing activities.................    (9,500,000)      (8,192,890)
                                                                  ------------     ------------
Net Decrease in Cash and Cash Equivalents.......................    (1,546,410)      (5,363,057)
Cash and Cash Equivalents, beginning of period..................     3,757,921        5,363,057
                                                                  ------------     ------------
Cash and Cash Equivalents, end of period........................  $  2,211,511     $         --
                                                                  ============     ============
Supplementary Information:
  Unrealized holding gains/losses, net, on available-for-sale
     securities, recorded as additions to undistributed
     earnings...................................................  $      5,079     $         --
  Cash paid during the period for interest......................  $         --     $         --
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-67
<PAGE>   191
 
                                  BAF ENERGY,
                        A CALIFORNIA LIMITED PARTNERSHIP
 
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                                JANUARY 31, 1996
                                  (UNAUDITED)
 
(1) GENERAL
 
  Organization
 
     BAF Energy, A California Limited Partnership (BAF Energy or the
Partnership) was founded in 1986 and is engaged in the development, construction
and operation of a cogeneration facility. The term of the Partnership is through
December 2020 unless terminated earlier in accordance with the Partnership
Agreement. The facility produces and sells electricity and steam.
 
     BAF Energy, Inc. (BEI) is the general partner of the Partnership and has an
ownership interest of 1 percent. BEI is a wholly owned subsidiary of Basic
Vegetable Products, Inc. (BVP). BVP is a wholly owned subsidiary of Basic
American, Inc. (BAI). As of January 31, 1996, BAI also owned approximately 51
percent of the limited partnership units of BAF Energy then outstanding.
 
     Distributions and profit and loss are allocated 99 percent to the limited
partners, based on their proportionate share of limited partnership units, and 1
percent to the general partner.
 
  Basis of Interim Presentation
 
     The accompanying interim condensed financial statements of the Partnership
have been prepared by the Partnership, without audit by independent public
accountants, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the condensed consolidated
financial statements include all normal recurring adjustments necessary to
present fairly the information required to be set forth therein. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted from these statements pursuant to such rules and
regulations and, accordingly, should be read in conjunction with the audited
financial statements of the Partnership for the year ended October 31, 1995.
Consistent with the operating schedule of the cogeneration facility, the
Partnership receives a majority of its operating revenue between May and
September. Therefore, the results of operations for the three months ended
January 31, 1996 and 1995 are not indicative of the results for the entire year.
 
(2) RELATED PARTY TRANSACTIONS
 
     The Partnership Agreement requires that the Partnership pay BEI a monthly
administrative fee. This fee amounted to $37,558 and $35,770 for the quarters
ended January 31, 1996 and 1995, respectively.
 
     The Partnership has entered into a ground lease with BAI for the land on
which the facility is located. Rent was $37,554 and $35,764 for the quarters
ended January 31, 1996 and 1995, respectively.
 
     The Partnership negotiated a steam sales contract with Basic Vegetable
Products, LP (BVP, LP). The General Partner of BVP, LP is BVP. Under the
contract, the Partnership supplies steam to BVP, LP's food processing plant.
Revenues recorded under the contract totaled $38,333 and $55,788 for the
quarters ended January 31, 1996 and 1995, respectively.
 
(3) PARTNERS' EQUITY:
 
     The Partnership made distributions of $9,500,000 and $8,500,000 for the
quarters ended January 31, 1996 and 1995, respectively.
 
                                      F-68
<PAGE>   192
 
                                  BAF ENERGY,
                        A CALIFORNIA LIMITED PARTNERSHIP
 
             NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
                                JANUARY 31, 1996
                                  (UNAUDITED)
 
(4) SIGNIFICANT LEASE TRANSACTION:
 
     In April 1996, the Partnership signed an agreement with a third party to
enter into a 23-year lease of the cogeneration property, plant and equipment and
to assign all related contracts. Under the terms of the lease, the lessee will
assume all rights and responsibilities related to the ground lease with BAI (see
Note 2), the BVP, LP steam sales contract (see Note 2) and a Pacific Gas &
Electric (PG&E) Power Purchase Agreement. The ground lease has a remaining term
of 23 years with BAI for the land on which the facility is located. This lease
includes options to extend the lease term up to an additional 30 years. The BVP,
LP steam sales contract has a remaining term of 23 years. The PG&E Power
Purchase Agreement states that PG&E pays capacity payments, as defined in the
agreement, and purchases all available energy, except for amounts sold to BVP,
LP.
 
                                      F-69
<PAGE>   193
 
                         REPORT OF INDEPENDENT AUDITORS
 
The Shareholder
Gilroy Energy Company
 
     We have audited the accompanying balance sheets of Gilroy Energy Company
(the Company), a wholly owned subsidiary of Gilroy Foods, Inc. which in turn is
a wholly owned subsidiary of McCormick & Company, Inc., as of November 30, 1995
and 1994 and the related statements of income, shareholder's equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
 
     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gilroy Energy Company at
November 30, 1995 and 1994 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
 
                                          ERNST & YOUNG LLP
 
Baltimore, Maryland
July 18, 1996
 
                                      F-70
<PAGE>   194
 
                             GILROY ENERGY COMPANY
                          (A WHOLLY OWNED SUBSIDIARY)
 
                                 BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                                NOVEMBER 30,
                                                              MAY 31,       ---------------------
                                                               1996           1995         1994
                                                            -----------     --------     --------
                                                            (UNAUDITED)
<S>                                                         <C>             <C>          <C>
Current assets:
  Accounts receivable.....................................   $   4,428      $  1,615     $  1,503
  Prepaid expenses........................................         462           725          776
                                                              --------      --------     --------
          Total current assets............................       4,890         2,340        2,279
Property and equipment, at cost:
  Buildings...............................................       2,720         2,720        2,720
  Machinery and equipment.................................      93,421        93,349       93,098
  Furniture and fixtures..................................          64            64           62
  Software................................................          65            65           58
                                                              --------      --------     --------
                                                                96,270        96,198       95,938
Less accumulated depreciation and amortization............      39,202        36,712       31,701
                                                              --------      --------     --------
                                                                57,068        59,486       64,237
Due from parent and affiliates............................      64,780        69,422       61,522
                                                              --------      --------     --------
Total assets..............................................   $ 126,738      $131,248     $128,038
                                                              ========      ========     ========
 
                                           LIABILITIES
Current liabilities:
  Bank overdraft..........................................          --      $     58     $    618
  Accounts payable........................................   $   1,653         2,678        1,767
  Accrued interest........................................       3,093         3,238        3,363
  Other liabilities.......................................         336           993          241
  Current portion of long-term debt.......................       2,848         2,468        2,152
                                                              --------      --------     --------
          Total current liabilities.......................       7,930         9,435        8,141
Long-term debt, due after one year........................      50,120        52,968       55,436
Other liabilities.........................................         399            49        1,083
                                                              --------      --------     --------
                                                                50,519        53,017       56,519
Shareholder's equity:
  Common stock, no par value:
     Authorized shares -- 10,000
     Issued and outstanding shares -- 1,000...............          10            10           10
  Additional paid-in capital..............................      16,946        16,946       16,946
  Retained earnings.......................................      51,333        51,840       46,422
                                                              --------      --------     --------
          Total shareholder's equity......................      68,289        68,796       63,378
                                                              --------      --------     --------
Total liabilities and shareholder's equity................   $ 126,738      $131,248     $128,038
                                                              ========      ========     ========
</TABLE>
 
                            See accompanying notes.
 
                                      F-71
<PAGE>   195
 
                             GILROY ENERGY COMPANY
                          (A WHOLLY OWNED SUBSIDIARY)
 
                              STATEMENTS OF INCOME
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                         SIX MONTHS ENDED         YEARS ENDED
                                                             MAY 31,             NOVEMBER 30,
                                                         ----------------     -------------------
                                                          1996     1995        1995        1994
                                                         ------   -------     -------     -------
                                                           (UNAUDITED)
<S>                                                      <C>      <C>         <C>         <C>
Net revenues:
  Electricity revenue................................    $9,306   $11,158     $35,132     $40,037
  Steam revenue from Gilroy Foods, Inc...............       185       260       1,089       1,367
                                                         ------   -------     -------     -------
                                                          9,491    11,418      36,221      41,404
Cost of sales........................................     6,525     8,125      18,825      23,766
                                                         ------   -------     -------     -------
Gross margin.........................................     2,966     3,293      17,396      17,638
Operating expenses;
  Selling, general and administrative................       720       946       1,888       1,885
                                                         ------   -------     -------     -------
Operating income.....................................     2,246     2,347      15,508      15,753
Interest expense.....................................     3,093     3,237       6,477       6,731
                                                         ------   -------     -------     -------
(Loss) Income before income taxes....................      (847)     (890)      9,031       9,022
Provision for income tax (benefit) expense...........      (340)     (356)      3,613       3,622
                                                         ------   -------     -------     -------
Net (loss) income....................................    $ (507)  $  (534)    $ 5,418     $ 5,400
                                                         ======   =======     =======     =======
</TABLE>
 
                            See accompanying notes.
 
                                      F-72
<PAGE>   196
 
                             GILROY ENERGY COMPANY
                          (A WHOLLY OWNED SUBSIDIARY)
 
                       STATEMENT OF SHAREHOLDER'S EQUITY
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                             COMMON STOCK        ADDITIONAL                      TOTAL
                                           -----------------      PAID-IN       RETAINED     SHAREHOLDER'S
                                           SHARES     AMOUNT      CAPITAL       EARNINGS        EQUITY
                                           ------     ------     ----------     --------     -------------
<S>                                        <C>        <C>        <C>            <C>          <C>
Balance at November 30, 1993.............  1,000       $ 10       $ 16,946      $ 41,022        $57,978
Net income...............................     --         --             --         5,400          5,400
                                           ------     ------     ----------     --------     -------------
Balance at November 30, 1994.............  1,000         10         16,946        46,422         63,378
Net income...............................     --         --             --         5,418          5,418
                                           ------     ------     ----------     --------     -------------
Balance at November 30, 1995.............  1,000         10         16,946        51,840         68,796
Net (loss) (unaudited)...................     --         --             --          (507)          (507)
                                           ------     ------     ----------     --------     -------------
Balance at May 31, 1996
  (unaudited)............................  1,000       $ 10       $ 16,946      $ 51,333        $68,289
                                           =====      ======       =======       =======     ==========
</TABLE>
 
                            See accompanying notes.
 
                                      F-73
<PAGE>   197
 
                             GILROY ENERGY COMPANY
                          (A WHOLLY OWNED SUBSIDIARY)
 
                            STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                       SIX MONTHS ENDED           YEARS ENDED
                                                            MAY 31,              NOVEMBER 30,
                                                      -------------------     -------------------
                                                       1996        1995        1995        1994
                                                      -------     -------     -------     -------
                                                          (UNAUDITED)
<S>                                                   <C>         <C>         <C>         <C>
OPERATING ACTIVITIES:
  Net income (loss).................................  $  (507)    $  (534)    $ 5,418     $ 5,400
  Adjustments to reconcile net (loss) income to net
     cash (used in) provided by operating
     activities:
     Depreciation and amortization..................    2,490       2,482       5,011       4,880
     Changes in operating assets and liabilities:
       Accounts receivable..........................   (2,813)     (3,577)       (113)         51
       Prepaid expenses.............................      263         325          52          49
       Accounts payable.............................   (1,025)       (360)        912      (1,221)
       Accrued expenses and other liabilities.......     (452)       (644)       (408)        364
                                                      -------     -------     -------     -------
Net cash (used in) provided by operating
  activities........................................   (2,044)     (2,308)     10,872       9,523
                                                      -------     -------     -------     -------
INVESTING ACTIVITIES:
Due from parent and affiliates......................    4,642       5,071      (7,900)     (4,610)
Purchase of property and equipment..................      (72)       (117)       (260)     (3,376)
                                                      -------     -------     -------     -------
Net cash provided by (used in) investing
  activities........................................    4,570       4,954      (8,160)     (7,986)
                                                      -------     -------     -------     -------
FINANCING ACTIVITIES:
Principal payments on long-term debt................   (2,468)     (2,152)     (2,152)     (2,152)
                                                      -------     -------     -------     -------
Net cash (used in) financing activities.............   (2,468)     (2,152)     (2,152)     (2,152)
                                                      -------     -------     -------     -------
Net decrease (increase) in bank overdraft...........       58         494         560        (615)
Bank overdraft at beginning of period...............      (58)       (618)       (618)         (3)
                                                      -------     -------     -------     -------
Bank overdraft at end of period.....................  $    --     $  (124)    $   (58)    $  (618)
                                                      =======     =======     =======     =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.......................................  $ 3,238     $ 3,359     $ 6,602     $ 6,602
</TABLE>
 
                            See accompanying notes.
 
                                      F-74
<PAGE>   198
 
                             GILROY ENERGY COMPANY
                          (A WHOLLY OWNED SUBSIDIARY)
 
                         NOTES TO FINANCIAL STATEMENTS
                             (DOLLARS IN THOUSANDS)
 
1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Organization
 
     Gilroy Energy Company (the Company) was incorporated in the State of
California in July 1984. The Company is a wholly owned subsidiary of Gilroy
Foods, Inc. which in turn is a wholly owned subsidiary of McCormick & Company,
Inc. (McCormick). The Company runs a cogeneration facility in Gilroy, California
which uses natural gas and steam turbine engines to generate steam for sale to
Gilroy Foods, Inc. and electricity for sale to Pacific Gas and Electric Company.
 
     Sales to Pacific Gas and Electric Company represented approximately 97% of
total revenues for each of the years ended November 30, 1995 and 1994 and 98%
for the six months ended May 31, 1996 and 1995.
 
     Approximately 80% of the Company's net revenues are recognized during the
months of May through October of each year. As such, the results of operations
for the six month periods ended May 31, 1996 and 1995 are not indicative of the
results of operations that may be realized for the full year.
 
  Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
  Bank Overdrafts
 
     The Company maintains a zero balance bank account. Amounts sufficient to
cover checks presented to the bank are deposited into the account by McCormick &
Company, Inc. The bank overdrafts represent checks that have been written but
have not cleared the bank as of the balance sheet date.
 
  Property and Equipment
 
     Property and equipment are recorded at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets, ranging from five to forty years.
 
     In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of " (FAS 121). FAS 121 requires
recognition of impairment of long-lived assets in the event that the net book
value of such assets exceeds the future undiscounted cash flows attributable to
such assets. The Company will be required to adopt FAS 121 in its 1997 fiscal
year. Management does not believe that the initial adoption of FAS 121 will have
a significant impact on the Company.
 
  Repairs and Maintenance
 
     The cogeneration plant requires a periodic shutdown for major overhauls of
its primary components every several years. The Company's policy is to accrue
the anticipated cost of these overhauls during the operating periods prior to
the scheduled overhaul dates. The amounts and period of accruals for overhaul
costs are revised annually based on management's estimate of time remaining
before the next scheduled overhaul and the estimated cost of the overhaul.
 
     Repairs and maintenance expenditures that are not a part of major overhauls
or do not extend the useful life of the related equipment are charged to expense
when incurred.
 
                                      F-75
<PAGE>   199
 
                             GILROY ENERGY COMPANY
                          (A WHOLLY OWNED SUBSIDIARY)
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
  Due from Parent and Affiliates
 
     The due from parent and affiliates included in the balance sheet represents
a net balance as the result of various transactions between the Company and
Gilroy Foods, Inc. and McCormick & Company, Inc. There are no terms of
settlement, or interest charges associated with the account balance. The balance
is primarily the result of the Company's participation in McCormick's central
cash management program, wherein all the Company's cash receipts are remitted to
McCormick and all cash disbursements are funded by McCormick. Other transactions
include steam sales to Gilroy Foods, Inc., the Company's estimated income tax
payable or receivable resulting from the current and prior years estimated
provisions, and miscellaneous other administrative expenses incurred by Gilroy
Foods, Inc. or McCormick & Company, Inc. on behalf of the Company.
 
     An analysis of transactions in the due from parent and affiliates balance
for the six months ended May 31, 1996 and 1995 (unaudited) and each of the two
years in the period ended November 30, 1995 follows:
 
<TABLE>
<CAPTION>
                                                       SIX MONTHS ENDED           YEARS ENDED
                                                            MAY 31,              NOVEMBER 30,
                                                      -------------------     -------------------
                                                       1996        1995        1995        1994
                                                      -------     -------     -------     -------
                                                          (UNAUDITED)
<S>                                                   <C>         <C>         <C>         <C>
Balance in due from parent and affiliates at
  beginning of period...............................  $69,422     $61,522     $61,522     $56,912
Net cash remitted (from) to Gilroy Foods, Inc. or
  McCormick.........................................   (4,616)     (5,578)     10,671       7,729
Net intercompany sales..............................      196         275       1,146       1,438
Net intercompany purchases for cost of sales........     (532)         (3)       (218)         (6)
Net intercompany purchases for selling, general and
  administrative expenses...........................      (30)       (121)        (87)       (929)
Benefit (provision) for income taxes................      340         356      (3,612)     (3,622)
                                                      -------     -------     -------     -------
Balance in due from parent and affiliated at end of
  period............................................  $64,780     $56,451     $69,422     $61,522
                                                      =======     =======     =======     =======
Average balance during the period...................  $66,384     $58,373     $61,811     $56,828
                                                      =======     =======     =======     =======
</TABLE>
 
     Gilroy Foods, Inc. provides certain administrative services to the Company
including the services of the President of Gilroy Energy Company, Inc.,
accounting, and other administrative services. It is the policy of Gilroy Foods,
Inc. to charge these expenses and all other central operating costs on the basis
of direct usage. In the opinion of management, no other costs of Gilroy Foods,
Inc. should be allocated to the Company.
 
     McCormick provides various administrative services to the Company including
legal assistance and treasury services. McCormick does not charge the Company
for these services. In the opinion of management, the cost of the services
rendered by McCormick in these areas during each of the two years ended November
30, 1995 and 1994 and the six months ended May 31, 1996 and 1995 are nominal.
 
  Concentration of Credit Risk
 
     The Company sells electricity to Pacific Gas and Electric Company under a
long-term contract. All accounts receivable at May 31, 1996 (unaudited) and
November 30, 1995 and 1994 are due from this customer. No collateral is required
for accounts receivable. Management believes that no reserves are required for
potential credit losses at May 31, 1996 and November 30, 1995 and 1994.
 
                                      F-76
<PAGE>   200
 
                             GILROY ENERGY COMPANY
                          (A WHOLLY OWNED SUBSIDIARY)
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
  Sources of Supply
 
     The Company purchases natural gas for the operation of the cogeneration
facility under a supply contract with one supplier. The supply contract requires
the Company to purchase substantially all of its natural gas needs from the
supplier at a price based on the market value determined in accordance with the
contract through July 31, 1997. Management believes that in the event that this
supplier is not able to meet its obligations under the contract, alternative
sources of supply for natural gas are readily available at comparable prices.
 
2. LONG-TERM DEBT
 
     The Company's outstanding indebtedness is as follows:
 
<TABLE>
<CAPTION>
                                                                         NOVEMBER 30,
                                                        MAY 31,       -------------------
                                                         1996          1995        1994
                                                      -----------     -------     -------
                                                      (UNAUDITED)
        <S>                                           <C>             <C>         <C>
        Note payable in annual installments through     $52,968       $55,436     $57,588
          2006 with interest at 11.68% per annum....
        Less current portion........................      2,848         2,468       2,152
                                                        -------       -------     -------
                                                        $50,120       $52,968     $55,436
                                                        =======       =======     =======
</TABLE>
 
     The note payable requires the maintenance of a $5,000 maintenance fund and
a $10,000 debt service fund. The note holder has agreed to accept a guarantee of
up to $15,000 by McCormick & Company, Inc. in lieu of establishing these funds.
The terms of the note payable require the Company to comply with certain
nonfinancial covenants. Management believes that the Company was in compliance
with all applicable covenants at November 30, 1995 and 1994. The note payable is
secured by the cogeneration facility.
 
     The note payable agreement provides for the payment of a prepayment penalty
in the event of early retirement. The amount of the prepayment penalty
approximates the present value of the differential between current market
interest rates and the stated rate over the remaining life of the debt as
defined by the agreement.
 
     Aggregate maturities of long-term debt over the next five fiscal years
ending November 30 and thereafter are as follows:
 
<TABLE>
            <S>                                                          <C>
            1996.......................................................  $ 2,468
            1997.......................................................    2,848
            1998.......................................................    3,101
            1999.......................................................    3,481
            2000.......................................................    3,797
            Thereafter.................................................   39,741
                                                                         -------
                                                                         $55,436
                                                                         =======
</TABLE>
 
3. INCOME TAXES
 
     The Company is included in the consolidated federal and state income tax
returns of McCormick. McCormick does not have a formal tax sharing arrangement
with its subsidiaries. The income tax provisions included in the statements of
income has been provided under the liability method assuming that Gilroy Energy
Company had prepared separate income tax returns for the years ended November
30, 1995 and 1994 and the six months ended May 31, 1996 and 1995 (unaudited).
Any income taxes receivable or payable as a
 
                                      F-77
<PAGE>   201
 
                             GILROY ENERGY COMPANY
                          (A WHOLLY OWNED SUBSIDIARY)
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
result of the income tax provisions, including any deferred amounts due or
payable resulting from the current or prior years provisions are included in due
from parent and affiliates.
 
     The (benefit) provision for income taxes is summarized as follows:
 
<TABLE>
<CAPTION>
                                                   SIX MONTHS
                                                      ENDED              YEARS ENDED
                                                     MAY 31,            NOVEMBER 30,
                                                 ---------------     -------------------
                                                 1996      1995       1995        1994
                                                 -----     -----     -------     -------
                                                               (UNAUDITED)
        <S>                                      <C>       <C>       <C>         <C>
        Current:
          Federal..............................  $(288)    $(303)    $ 3,877     $ 4,061
          State................................    (52)      (53)      1,169       1,225
                                                 -----     -----     -------     -------
                                                  (340)     (356)      5,046       5,286
                                                 -----     -----     -------     -------
        Deferred:
          Federal..............................     --        --      (1,095)     (1,278)
          State................................     --        --        (338)       (386)
                                                 -----     -----     -------     -------
                                                    --        --      (1,433)     (1,664)
                                                 -----     -----     -------     -------
                                                 $(340)    $(356)    $ 3,613     $ 3,622
                                                 =====     =====     =======     =======
</TABLE>
 
     The reconciliation between income tax computed at the United States federal
statutory rate and income taxes actually provided follows:
 
<TABLE>
<CAPTION>
                                   SIX MONTHS ENDED MAY 31,            YEARS ENDED NOVEMBER 30,
                                -------------------------------     -------------------------------
                                    1996              1995              1995              1994
                                -------------     -------------     -------------     -------------
                                AMOUNT    %       AMOUNT    %       AMOUNT    %       AMOUNT    %
                                ------   ----     ------   ----     ------   ----     ------   ----
                                          (UNAUDITED)
    <S>                         <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
    Tax at federal rate.......  $ (288)  34.0%    $ (303)  34.0%    $3,071   34.0%     3,067   34.0%
    State income taxes, net of
      federal benefit.........     (52)   6.1%       (53)   6.0%       542    6.0%       555    6.1%
                                ------            ------            ------
    Actual income taxes
      (benefit) provided......  $ (340)  40.1%    $ (356)  40.0%    $3,613   40.0%    $3,622   40.1%
                                ======            ======            ======
</TABLE>
 
     The temporary differences that give rise to significant portions of the
deferred tax assets and liabilities that have been netted in due from parent and
affiliates consist of the following:
 
<TABLE>
<CAPTION>
                                                                      NOVEMBER 30,
                                                                   -------------------
                                                                    1995        1994
                                                                   -------     -------
        <S>                                                        <C>         <C>
        Temporary differences resulting in deferred tax assets:
          Repairs and maintenance expenditures...................  $   986     $ 1,082
                                                                   -------     -------
        Temporary differences resulting in deferred tax
          liabilities:
          Depreciation...........................................   50,897      54,587
          Prepaid expenses.......................................      810         758
          Other..................................................      357         357
                                                                   -------     -------
                                                                    52,064      55,702
                                                                   -------     -------
                                                                   $51,078     $54,620
                                                                   =======     =======
</TABLE>
 
     No valuation allowance is provided for deferred tax assets.
 
                                      F-78
<PAGE>   202
 
                             GILROY ENERGY COMPANY
                          (A WHOLLY OWNED SUBSIDIARY)
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
4. RELATED PARTY TRANSACTIONS
 
     The Company sells substantially all of the steam, which is a byproduct of
the cogeneration process to Gilroy Foods, Inc. During the years ended November
30, 1995 and 1994, the amount of revenue recognized by the Company from steam
sales to Gilroy Foods, Inc. was $1,089 and $1,367, respectively. During the six
months ended May 31, 1996 and 1995, the amount of revenue recognized by the
Company from steam sales to Gilroy Foods, Inc. was $185 and $261, respectively.
 
     Gilroy Foods, Inc. provides certain accounting and administrative services
to Gilroy Energy Company, Inc. A portion of the cost of these services is billed
directly to Gilroy Energy Company, Inc.
 
     The Company leases the land where the cogeneration facility is located
under an operating lease with Gilroy Foods, Inc. The lease agreement runs
through 2018 and provides for minimum annual rental payments with provisions for
the escalation of costs every three years based on the average increase in the
Consumer Price Index. The future minimum lease payments under this lease,
excluding any future increases, are as follows:
 
<TABLE>
<S>                                                                                     <C>
1996..................................................................................  $ 40
1997..................................................................................    40
1998..................................................................................    40
1999..................................................................................    40
2000..................................................................................    40
2001 through 2018.....................................................................   715
                                                                                        ----
                                                                                        $915
                                                                                        ====
</TABLE>
 
     Rent expense recognized under this lease was $38 and $37 in the years ended
November 30, 1995 and 1994, respectively, and $20 and $19 in the six months
ended May 31, 1996 and 1995, respectively.
 
5. COMMITMENTS AND CONTINGENCIES
 
     The Company has an agreement with the Pacific Gas and Electric Company
(PG&E) to sell all electricity generated by the cogeneration facility to PG&E.
The agreement establishes the methodology used to calculate the purchase price
of the electricity, establishes the operating hours of the cogeneration
facility, and provides for the payment to the Company of additional capacity
payments if certain operating targets as defined are achieved. The current
provisions of this agreement extend through December 31, 1998. Subsequent to
December 31, 1998 and continuing through the expiration of the base agreement on
December 31, 2017, the pricing and operating provisions of the agreement will be
established by negotiation between PG&E and Gilroy Energy Company.
 
     The Company has an agreement with Gilroy Foods, Inc. whereby Gilroy Foods,
Inc. has agreed to purchase substantially all of the steam produced by the
Company. The terms of the agreement, which extends through 2017, provide for the
establishment of the purchase price for steam based on the current cost of
alternative sources of energy available to Gilroy Foods, Inc.
 
     The Company has an operating and maintenance agreement with an outside
party for the daily operation and maintenance of the cogeneration facility. This
agreement, which extends through November 1996, provides for all operating and
routine maintenance of the cogeneration facility at direct costs plus a minimum
annual fee of $100,000. The contract also provides for the payment of bonuses,
as defined, if certain operating targets are met.
 
                                      F-79
<PAGE>   203
 
                             GILROY ENERGY COMPANY
                          (A WHOLLY OWNED SUBSIDIARY)
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
6. FAIR VALUE
 
     The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
 
     Accounts receivable, due from parent and affiliates, bank overdrafts,
current portion of long-term debt, accounts payable, and accrued
liabilities -- The amounts reported in the balance sheet approximate fair value.
 
     Long-term debt. The fair value of long-term debt, based on a discounted
cash flow analysis using current interest rates for debt with similar
characteristics and maturities is as follows:
 
<TABLE>
<CAPTION>
                                                          1995    NOVEMBER 30,     1994
                                                  ---------------------------------------------
                                                   FAIR       CARRYING      FAIR       CARRYING
                                                   VALUE       VALUE        VALUE       VALUE
                                                  -------     --------     -------     --------
    <S>                                           <C>         <C>          <C>         <C>
    Long-term debt............................    $68,100     $ 52,968     $63,000     $ 55,436
</TABLE>
 
7. SUBSEQUENT EVENT
 
     In May 1996, McCormick & Company, Inc. announced its intention to sell the
assets and liabilities, excluding the due from parent and affiliates, the
current portion of long-term debt and the long-term debt of the Company to
Calpine Corporation. At the time of the closing of the sale, McCormick &
Company, Inc. will assume the due from parent and affiliates and will be
required to retire the current portion of the long-term debt and the long-term
debt. In addition to all remaining assets and liabilities of Gilroy Energy
Company, Calpine Corporation will assume all rights and obligations under the
following agreements to which Gilroy Energy Company is currently a party:
 
     -  Long-term contract to sell electricity to Pacific Gas and Electric
Company.
 
     -  Natural gas supply contract through July 31, 1997.
 
     -  Lease for the land with Gilroy Foods, Inc. upon which the cogeneration
facility is located.
 
     -  Steam sale contract with Gilroy Foods, Inc.
 
     Upon closing of the sale, the management contract with the current operator
of the cogeneration facility will be terminated by McCormick & Company, Inc.
 
     It is currently anticipated that the closing date for the sale of the
applicable assets and liabilities of Gilroy Energy Company to Calpine
Corporation will take place in the third quarter of 1996.
 
                                      F-80
<PAGE>   204
 
                                      LOGO
<PAGE>   205
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 20.  INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Section 145 of the General Corporation Law of the state of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceedings, whether civil, criminal,
administrative or investigative (other than action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests, and, for criminal proceedings,
had no reasonable cause to believe his conduct was illegal. A Delaware
corporation may indemnify officers and directors in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation in the performance of his duty. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses which
such officer or director actually and reasonably incurred.
 
     In accordance with Delaware Law, the certificate of incorporation of the
Company contains a provision to limit the personal liability of the directors of
the Registrant for violations of their fiduciary duty. This provision eliminates
each director's liability to the Registrant or its stockholders for monetary
damages except (i) for any breach of the director's duty of loyalty to the
Registrant or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit. The effect of this provision is to eliminate the personal liability of
directors for monetary damages for actions involving a breach of their fiduciary
duty of care, including any such actions involving gross negligence.
 
     Article Ten of the Bylaws of the Registrant provides for indemnification of
the officers and directors of the Registrant to the fullest extent permitted by
applicable law.
 
     The Company has entered into indemnification agreements with its directors
and officers. These agreements provide substantially broader indemnity rights
than those provided under the Delaware Law and the Company's Bylaws. The
indemnification agreements are not intended to deny or otherwise limit third-
party or derivative suits against the Company or its directors or officers, but
if a director or officer were entitled to indemnity or contribution under the
indemnification agreement, the financial burden of a third-party suit would be
borne by the Company, and the Company would not benefit from derivative
recoveries against the director or officer. Such recoveries would accrue to the
benefit of the Company but would be offset by the Company's obligations to the
director or officer under the indemnification agreement.
 
ITEM 21.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
EXHIBITS
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                        DESCRIPTION
- -------   ------------------------------------------------------------------------------------
<S>       <C>
 4.1      Indenture dated as of February 17, 1994 between the Company and Shawmut Bank of
          Connecticut, National Association, as Trustee, including form of Notes.(a)
 4.2      Indenture dated as of May 16, 1996 between the Company and Fleet National Bank, as
          Trustee, including form of Notes.(b)
</TABLE>
 
                                      II-1
<PAGE>   206
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                        DESCRIPTION
- -------   ------------------------------------------------------------------------------------
<S>       <C>
 4.3      Indenture dated as of July 8, 1997 between the Company and The Bank of New York, as
          Trustee, including form of Senior Notes.(c)
 4.4      Registration Rights Agreement dated as of July 1, 1997 between the Company and
          Credit Suisse First Boston Corporation, Morgan Stanley & Co. Incorporated, Salomon
          Brothers Inc., Scotia Capital Markets (USA) Inc., BancAmerica Securities, Inc. and
          CIBC Wood Gundy Securities Corp.(c)
 4.5*     Supplemental Indenture dated as of September 10, 1997 between the Company and The
          Bank of New York, as Trustee, including form of Senior Notes.
 4.6*     Registration Rights Agreement dated as of September 5, 1997 between the Company and
          Credit Suisse First Boston Corporation.
 5.1*     Opinion of Brobeck, Phleger & Harrison LLP.
23.1*     Consent of Brobeck, Phleger & Harrison LLP (contained in the opinion filed as
          Exhibit 5.1).
23.2*     Independent Public Accountants' Consent of Arthur Andersen LLP.
23.3*     Independent Public Accountants' Consent of Moss Adams LLP.
23.4*     Independent Accountants' Consent of Ernst & Young LLP.
24*       Power of Attorney (contained on the signature page of this Prospectus).
25*       Form T-1 Statement of Eligibility of The Bank of New York.
99.1*     Form of Letter of Transmittal.
99.2*     Form of Notice of Guaranteed Delivery.
</TABLE>
 
- ---------------
*   Filed herewith.
 
(a)  Incorporated by reference to Registrant's Registration Statement on Form
     S-1 (Registration Statement No. 33-73160).
 
(b)  Incorporated by reference to Registrant's Current Report on Form 8-K dated
     August 29, 1996 and filed on September 13, 1996.
 
(c)  Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
     dated June 30, 1997 and filed on August 14, 1997.
 
FINANCIAL STATEMENT SCHEDULES
 
     Schedule I -- Condensed Financial Information of Registrant
 
     Schedule II -- Valuation and Qualifying Accounts and Reserves
 
     Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or the notes thereto.
 
ITEM 22.  UNDERTAKINGS
 
     (a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such
 
                                      II-2
<PAGE>   207
 
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
 
     (b) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
 
     (c) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (b) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement, relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
 
     (d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
 
     (e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment, all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
 
     (f) The undersigned registrant hereby undertakes to file an application for
the purpose of determining eligibility of the Trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Act.
 
                                      II-3
<PAGE>   208
 
                                   SIGNATURES
 
     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN JOSE,
CALIFORNIA, ON THE 26TH DAY OF NOVEMBER, 1997.
 
                                          CALPINE CORPORATION
 
                                          By: /s/ Peter Cartwright
                                            ------------------------------------
                                                     Peter Cartwright
                                             Chairman of the Board, President
                                               and Chief Executive Officer
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Peter Cartwright and Ann B. Curtis and
each of them his attorneys-in-fact, each with the power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto in all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming that such
attorneys-in-fact and agents or any of them, or his, her or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
 
     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
 
<TABLE>
<CAPTION>
               SIGNATURE                                TITLE                       DATE
- ----------------------------------------   -------------------------------   ------------------
 
<S>                                        <C>                               <C>
          /s/ Peter Cartwright                 Chairman of the Board,         November 26, 1997
- ----------------------------------------             President,
            Peter Cartwright                  Chief Executive Officer,
                                               and Director (Principal
                                                 Executive Officer)
           /s/ Ann B. Curtis                  Senior Vice President and       November 26, 1997
- ----------------------------------------    Director (Principal Financial
             Ann B. Curtis                            Officer)
 
         /s/ Jeffrey E. Garten                        Director                November 26, 1997
- ----------------------------------------
           Jeffrey E. Garten
 
          /s/ Susan C. Schwab                         Director                November 26, 1997
- ----------------------------------------
            Susan C. Schwab
 
        /s/ George J. Stathakis                       Director                November 26, 1997
- ----------------------------------------
          George J. Stathakis
</TABLE>
 
                                      II-4
<PAGE>   209
 
<TABLE>
<CAPTION>
               SIGNATURE                                TITLE                       DATE
- ----------------------------------------   -------------------------------   ------------------
 
<S>                                        <C>                               <C>
 
           /s/ John O. Wilson                         Director                November 26, 1997
- ----------------------------------------
             John O. Wilson
 
         /s/ V. Orville Wright                        Director                November 26, 1997
- ----------------------------------------
           V. Orville Wright
 
           /s/ Gloria S. Gee                    Controller (Principal         November 26, 1997
- ----------------------------------------         Accounting Officer)
             Gloria S. Gee
</TABLE>
 
                                      II-5
<PAGE>   210
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
     We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Calpine Corporation and subsidiaries
included in this Registration Statement and have issued our report thereon dated
March 7, 1997. Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedules listed in the index
of financial statement schedules are the responsibility of the Company's
management and are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
 
                                          Arthur Andersen LLP
 
San Jose, California
March 7, 1997
 
                                       S-1
<PAGE>   211
 
                              CALPINE CORPORATION
 
                                   SCHEDULE I
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                 BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                        1996           1995
                                                                    ------------   ------------
<S>                                                                 <C>            <C>
Current assets:
  Cash and cash equivalents.......................................  $ 33,150,134   $ (1,970,526)
  Accounts receivable.............................................     5,023,945      1,348,969
  Accounts receivable from affiliates.............................     4,534,048      4,955,625
  Acquisition project receivables.................................       791,206      8,805,186
  Other current assets............................................       811,816        270,806
                                                                    ------------   ------------
     Total current assets.........................................    44,311,149     13,410,060
 
Property, plant and equipment, net................................     5,711,074        724,359
Investments in power projects.....................................   141,816,204     82,610,719
Notes receivable from related parties.............................    18,182,372     19,390,952
Deferred charges..................................................     8,325,857      3,390,677
Other assets......................................................       121,358        197,144
                                                                    ------------   ------------
     Total assets.................................................  $520,698,327   $168,047,540
                                                                     ===========    ===========
 
                             LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable................................................  $    503,598   $  2,667,808
  Accrued payroll and related expenses............................     3,477,246      2,582,194
  Accrued interest payable........................................     6,461,875      4,051,785
  Other accrued expenses..........................................     5,385,747      2,704,257
                                                                    ------------   ------------
     Total current liabilities....................................    15,828,466     12,006,044
 
Long-term line of credit..........................................            --     14,000,000
Senior Notes......................................................   285,000,000    105,000,000
Deferred income taxes.............................................    12,306,612      7,877,537
Deferred revenue..................................................     4,436,348      3,937,175
                                                                    ------------   ------------
     Total liabilities............................................   317,571,426    142,820,756
                                                                     ===========    ===========
Stockholders' equity:
  Common stock, $0.01 par value...................................        19,843         20,000
  Additional paid-in capital......................................   165,412,455      6,204,000
  Retained earnings...............................................    37,694,603     19,002,784
                                                                    ------------   ------------
     Total stockholders' equity...................................   203,126,901     25,226,784
                                                                    ------------   ------------
     Total liabilities and stockholders' equity...................  $520,698,327   $168,047,540
                                                                     ===========    ===========
</TABLE>
 
    The accompanying notes are an integral part of these condensed financial
                                  statements.
 
                                       S-2
<PAGE>   212
 
                              CALPINE CORPORATION
 
                                   SCHEDULE I
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                             1996          1995          1994
                                                         ------------   -----------   -----------
<S>                                                      <C>            <C>           <C>
Revenue:
  Service contract revenue from related parties........  $ 36,581,736   $28,733,399   $22,929,897
  Income from unconsolidated investments in power
     projects..........................................    66,625,486    32,397,392    23,711,895
                                                         ------------   -----------   -----------
     Total revenue.....................................   103,207,222    61,130,791    46,641,792
Cost of revenue:
  Service contract expenses............................    34,953,440    27,433,069    19,161,445
                                                         ------------   -----------   -----------
Gross profit...........................................    68,253,782    33,697,722    27,480,347
Project development expenses...........................     3,866,828     3,087,316     2,822,459
General and administrative expenses....................    13,650,881     8,081,458     6,867,520
                                                         ------------   -----------   -----------
     Income from operations............................    50,736,073    22,528,948    17,790,368
Other (income) expense:
  Interest expense.....................................    23,036,232    10,479,144     9,207,381
  Other income, net....................................       (56,420)     (377,276)   (1,290,739)
                                                         ------------   -----------   -----------
     Income before provision for income taxes..........    27,756,261    12,427,080     9,873,726
Provision for income taxes.............................     9,064,445     5,049,568     3,853,115
                                                         ------------   -----------   -----------
     Net income........................................  $ 18,691,816   $ 7,377,512   $ 6,020,611
                                                         ============   ===========   ===========
Primary earnings per share
  Weighted average number of shares outstanding........    14,679,984            --            --
                                                         ============   ===========   ===========
  Earnings per share...................................  $       1.27            --            --
                                                         ============   ===========   ===========
As adjusted primary earnings per share, assuming
  Weighted average number of shares outstanding........            --    14,150,837            --
                                                         ============   ===========   ===========
  Earnings per share...................................            --   $      0.52            --
                                                         ============   ===========   ===========
</TABLE>
 
    The accompanying notes are an integral part of these condensed financial
                                  statements.
 
                                       S-3
<PAGE>   213
 
                              CALPINE CORPORATION
 
                                   SCHEDULE I
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                      1996              1995             1994
                                                  -------------     ------------     ------------
<S>                                               <C>               <C>              <C>
Net cash used in operating activities.........    $(281,904,648)    $ (8,874,945)    $(44,753,732)
                                                  -------------     ------------     ------------
Cash flows from investing activities:
  Acquisition of property, plant and
     equipment................................       (5,320,508)        (367,711)        (299,961)
  Investments in power projects...............               --       (1,262,000)        (175,352)
  Decrease (increase) in notes receivable,
     net......................................        2,750,000      (10,336,640)       3,294,727
  Other, net..................................           75,786         (122,244)          97,838
                                                  -------------     ------------     ------------
          Net cash provided by (used in)
            investing activities..............       (2,494,722)     (12,088,595)       2,917,252
                                                  -------------     ------------     ------------
Cash flows from financing activities:
  Payment of dividends........................               --         (800,000)        (800,000)
  Borrowings under line of credit.............       46,861,000       14,000,000               --
  Repayment of borrowings under line of
     credit...................................      (60,861,000)              --      (52,595,000)
  Proceeds from Senior Notes Due 2004.........               --               --      105,000,000
  Proceeds from Senior Notes Due 2006.........      180,000,000               --               --
  Proceeds from issuance of preferred stock...       50,000,000               --               --
  Proceeds from issuance of common stock......      109,208,298               --               --
  Costs associated with future financing......       (5,688,268)         279,012       (3,419,003)
  Repayment of note payable to shareholder....               --               --       (1,200,000)
                                                  -------------     ------------     ------------
          Net cash provided by financing
            activities........................      319,520,030       13,479,012       46,985,997
                                                  -------------     ------------     ------------
Net increase (decrease) in cash and cash
  equivalents.................................       35,120,660       (7,484,528)       5,149,517
Cash and cash equivalents, beginning of
  period......................................       (1,970,526)       5,514,002          364,485
                                                  -------------     ------------     ------------
Cash and cash equivalents, end of period......    $  33,150,134     $ (1,970,526)    $  5,514,002
                                                  =============     ============     ============
Supplementary information:
  Cash paid during the period for:
     Interest.................................    $  19,762,029     $  9,945,443     $  4,917,773
     Income taxes.............................    $   6,947,000     $  4,293,725     $    683,364
</TABLE>
 
    The accompanying notes are an integral part of these condensed financial
                                  statements.
 
                                       S-4
<PAGE>   214
 
                              CALPINE CORPORATION
 
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                               DECEMBER 31, 1996
 
1. ORGANIZATION AND OPERATION OF CALPINE
 
     Calpine Corporation ("Calpine") is a Delaware corporation engaged in the
development, acquisition, ownership and operation of power generation facilities
in the United States. Calpine has ownership interests in and operates geothermal
steam fields, geothermal power generation facilities, and natural gas-fired
cogeneration facilities through subsidiaries and investees.
 
     In July 1996, Calpine's Board of Directors authorized the reincorporation
of Calpine into Delaware in connection with Calpine's initial public offering.
In addition, the Board of Directors approved a stock split of approximately
5.194-for-1. On September 13, 1996, the reincorporation of Calpine and the stock
split became effective. The accompanying financial statements reflect the
reincorporation and the stock split as if such transactions had been effective
for all periods.
 
     For the purposes of these registrant-only financial statements, Calpine's
wholly-owned subsidiaries are accounted for under the equity method and are
included in investments in power projects in the accompanying balance sheets.
 
2. LINES OF CREDIT AND REVOLVING CREDIT FACILITY
 
     At December 31, 1996, Calpine had a $50.0 million three-year credit
facility available with a consortium of commercial lending institutions which
include The Bank of Nova Scotia, International Nederlanden U.S. Capital
Corporation, Sumitomo Bank of California and Canadian Imperial Bank of Commerce.
As of December 31, 1996, the Company had no borrowings and $5.9 million of
letters of credit outstanding, which reflect $3.0 million to secure performance
with the Pasadena Power Plant and $2.9 million related to operating expenses at
a subsidiary. Borrowings bear interest at The Bank of Nova Scotia's base rate or
at LIBOR plus an applicable margin. Interest is paid on the last day of each
interest period for such loans, but not less often than quarterly, based on the
principal amount outstanding during the period for base rate loans, and on the
last day of each applicable interest period, but not less often than 90 days,
for LIBOR loans. The credit agreement expires in September 1999. The credit
agreement specified that Calpine maintain certain covenants with which Calpine
was in compliance. Commitment fees related to this line of credit are charged
based on 0.50% of committed unused credit.
 
     At December 31, 1995, Calpine had a $50.0 million credit facility with
Credit Suisse (whose parent company owns approximately 44.9% of Electrowatt Ltd.
("Electrowatt"), the former indirect sole owner of Calpine prior to the initial
public offering on September 25, 1996. At December 31, 1995, Calpine had $19.9
million of borrowings outstanding, bearing interest at LIBOR plus 0.5% (6.4% at
December 31, 1995). Interest was payable at either LIBOR or the Credit Suisse
base rate, plus applicable margins in both cases. The credit agreement specified
that Calpine maintain certain covenants with which Calpine was in compliance.
Calpine terminated its Credit Suisse credit facility on September 25, 1996.
 
     At December 31, 1996, Calpine had one loan facility with available
borrowings totaling $1.2 million. There were no borrowings and 900,000 of
letters of credit outstanding as of December 31, 1996. At December 31, 1995,
Calpine had three loan facilities with available borrowings totaling $10.2
million. Borrowings and letters of credit outstanding were $1.2 million and $3.8
million as of December 31, 1995, respectively. Interest is payable at variable
interest rates based on bank base rates, LIBOR or prime plus applicable margins
in all cases (approximately 7.6% at December 31, 1995 on borrowings). The credit
agreements specified that Calpine maintain certain covenants with which Calpine
was in compliance.
 
                                       S-5
<PAGE>   215
 
                              CALPINE CORPORATION
 
              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1996
 
3. NOTE PAYABLE TO ELECTROWATT
 
     On December 31, 1991, Calpine declared a dividend of $1.2 million to its
parent company, Electrowatt Services, Inc. On the same date, Calpine issued a
note payable to Electrowatt Services, Inc. for $1.2 million. Interest was paid
quarterly at a rate of 4.25%, which approximated market. The note was paid on
June 30, 1994, the maturity date.
 
4. SENIOR NOTES
 
     On May 16, 1996, the Company issued $180.0 million aggregate principal
amount of 10 1/2% Senior Notes Due 2006. The net proceeds of $174.9 million were
used to repay $53.7 million of borrowings under the Credit Suisse Credit
Facility, $57.0 million of non-recourse project financing and $45.0 million of
borrowings from The Bank of Nova Scotia. The remaining $19.2 million was
available for general corporate purposes. Transaction costs of $5.1 million
incurred in connection with the public debt offering were recorded as a deferred
charge and are amortized over the ten-year life of the 10 1/2% Senior Notes Due
2006.
 
     The 10 1/2% Senior Notes Due 2006 will mature on May 15, 2006. The Company
has no sinking fund or mandatory redemption obligations with respect to the
10 1/2% Senior Notes Due 2006. Interest is payable semi-annually on May 15 and
November 15. Based on the traded yield to maturity, the approximate fair market
value of the 10 1/2% Senior Notes Due 2006 was $191.7 million as of December 31,
1996.
 
     On February 17, 1994, Calpine completed a $105.0 million public debt
offering of 9 1/4% Senior Notes Due 2004. Transaction costs of $4.1 million
incurred in connection with the public debt offering were recorded as a deferred
charge and are amortized over the ten-year life of the 9 1/4% Senior Notes Due
2004.
 
     The 9 1/4% Senior Notes Due 2004 will mature on February 1, 2004. Calpine
has no sinking fund or mandatory redemption obligations with respect to the
9 1/4% Senior Notes Due 2006. Interest is payable semi-annually on February 1
and August 1. Based on the traded yield to maturity, the approximate fair market
value of the 9 1/4% Senior Notes Due 2004 was $105.7 million as of December 31,
1996.
 
     The Senior Note indentures specify that Calpine maintain certain covenants
with which Calpine was in compliance. Calpine may, under certain circumstances,
be limited in its ability to make restricted payments, as defined, which include
dividends and certain purchases and investments, incur additional indebtedness
and engage in certain transactions.
 
5. COMMITMENTS AND CONTINGENCIES
 
     Capital Projects -- Calpine has 1997 commitments for capital expenditures
totaling $4.0 million related to various projects at its geothermal facilities.
In March 1996, Calpine entered into an energy development agreement with
Phillips Petroleum Company to develop, construct, own and operate a 240 megawatt
gas-fired cogeneration facility at Phillips Houston Chemical Complex in
Pasadena, Texas. The initial permitting process is underway, with construction
of the facility planned to begin in late 1996 and to be completed in 1998.
Calpine has 1997 commitments of $97.2 million related to this project.
 
                                       S-6
<PAGE>   216
 
                              CALPINE CORPORATION
 
              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1996
 
     Office and Equipment Leases -- Calpine leases its corporate office, Houston
office, Portland office, Santa Rosa office facilities and certain office
equipment under noncancellable operating leases expiring through 2001. Future
minimum lease payments under these leases are (in thousands):
 
<TABLE>
            <S>                                                           <C>
            1997........................................................  $1,138
            1998........................................................   1,125
            1999........................................................     977
            2000........................................................     936
            2001........................................................     367
            Thereafter..................................................      --
                                                                          ------
            Total future minimum lease commitments......................  $4,543
                                                                          ======
</TABLE>
 
     Lease payments are subject to adjustment for Calpine's pro rata portion of
annual increases or decreases in building operating costs. In 1996, 1995 and
1994, rent expense for noncancellable operating leases amounted to $1,036,000,
$733,000 and $663,000, respectively.
 
     Regulation and CPUC Restructuring -- Electricity and steam sales agreements
with PG&E are regulated by the California Public Utilities Commission ("CPUC").
In December 1995, the CPUC proposed the transition of the electric generation
market to a competitive market beginning January 1, 1998, with all consumers
participating by 2003. Since the proposed restructure results in widespread
impact on the market structure and requires participation and oversight of the
Federal Energy Regulatory Commission ("FERC"), the CPUC has sought to build a
California consensus involving the legislature, the Governor, public and
municipal utilities and customers. The consensus has resulted in filings with
FERC which should permit both the CPUC and FERC to collectively proceed with
implementation of the new competitive market structure. On September 23, 1996
state legislation was passed, AB 1890 ("the Bill"), which codified much of the
CPUC decision and directed the CPUC to proceed with implementation of
restructure no later than January 1, 1998. The Bill accelerated the transition
period to a fully competitive market from five years to four years with all
consumers participating by year 2002. The Bill provided for an electricity rate
freeze for the period of transition and mandated through issuance of rate
reduction bonds a 10% rate reduction for small commercial and residential
customers effective January 1, 1998. The proposed restructuring provides for
phased-in customer choice (direct access), development of a non-discriminatory
market structure, full recovery of utility stranded costs, sanctity of existing
contracts, and continuation of existing public policy programs including funds
for enhancement of in-state renewable energy technologies during the transition
period. Calpine cannot predict the final form or timing of the proposed
restructuring and the impact, if any, that such restructuring would have on the
Company's existing business or results of operations. Calpine believes that any
such restructuring would not have a material effect on its power sales
agreements and, accordingly, believes that its existing business and results of
operations would not be materially adversely affected, although there can be no
assurance in this regard.
 
     A domestic electricity generating project must be a qualified facility
("QF") under FERC regulations in order to take advantage of certain rate and
regulatory incentives provided by the Public Utility Regulatory Policies Act of
1978, as amended ("PURPA"). PURPA exempts owners of QFs from the Public Utility
Holding Company Act of 1935, as amended ("PUHCA"), and exempts QFs from most
provisions of the Federal Power Act (the "FPA") and state laws concerning rate
or financial regulation. PURPA also requires that electric utilities purchase
electricity generated by QFs at a price based on the utility's "avoided cost",
and that the utility sell back-up power to the QF on a non-discriminatory basis.
If one of the projects in which Calpine has an interest should lose its status
as a QF, the project would no longer be entitled to the exemptions from PUHCA
and the FPA. This could trigger certain rights of termination under the PSA,
could subject the project to rate regulation as a public utility under the FPA
and state laws and could result in the Company
 
                                       S-7
<PAGE>   217
 
                              CALPINE CORPORATION
 
              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1996
 
inadvertently becoming a public utility holding company. Calpine believes that
each of the electricity generating projects in which Calpine owns an interest
currently meets the requirements under PURPA necessary for QF status.
 
     Litigation -- Calpine, together with over 100 other parties, was named as a
defendant in an action brought in August 1993 by the bankruptcy trustee for
Bonneville Pacific Corporation ("Bonneville"), captioned Roger G. Segal, as the
Chapter 11 Trustee for Bonneville Pacific Corporation v. Portland General
Corporation, et al., in the United States District Court for the District of
Utah (the "Court"). In December 1996, the trustee and Calpine entered into a
settlement agreement relating to this matter. The trustee has agreed to waive
all claims against Calpine and to dismiss the trustee's litigation against
Calpine in exchange for a payment of $767,500 by Calpine.
 
     Calpine is involved in various other claims and legal actions arising out
of the normal course of business. Management does not expect that the outcome of
these cases will have a material adverse effect on Calpine's financial position
or results of operations.
 
                                       S-8
<PAGE>   218
 
                              CALPINE CORPORATION
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
                                  SCHEDULE II
 
                                 (IN THOUSANDS)
 
                      FOR THE YEAR ENDED DECEMBER 31, 1996
 
<TABLE>
<CAPTION>
                                                                  ADDITIONS
                                              -------------------------------------------------
                                              BALANCE AT   CHARGED TO   CHARGED TO                BALANCE AT
                                              BEGINNING    COSTS AND      OTHER                     END OF
                DESCRIPTION                   OF PERIOD     EXPENSES     ACCOUNTS    DEDUCTIONS     PERIOD
- --------------------------------------------  ----------   ----------   ----------   ----------   ----------
<S>                                           <C>          <C>          <C>          <C>          <C>
Reserve for capitalized costs...............    $1,838       $   --       $   --       $   --       $1,838(1)
Allowance for uncollectible accounts........    $  238           --           --           --       $  238
                                                ======       ======       ======       ======       ======
</TABLE>
 
                      FOR THE YEAR ENDED DECEMBER 31, 1995
 
<TABLE>
<CAPTION>
                                                                  ADDITIONS
                                              -------------------------------------------------
                                              BALANCE AT   CHARGED TO   CHARGED TO                BALANCE AT
                                              BEGINNING    COSTS AND      OTHER                     END OF
                DESCRIPTION                   OF PERIOD     EXPENSES     ACCOUNTS    DEDUCTIONS     PERIOD
- --------------------------------------------  ----------   ----------   ----------   ----------   ----------
<S>                                           <C>          <C>          <C>          <C>          <C>
Reserve for capitalized costs...............    $1,838       $   --       $   --       $   --       $1,838(1)
Allowance for uncollectible accounts........    $  238           --           --           --       $  238
                                                ======       ======       ======       ======       ======
</TABLE>
 
                      FOR THE YEAR ENDED DECEMBER 31, 1994
 
<TABLE>
<CAPTION>
                                                                  ADDITIONS
                                              -------------------------------------------------
                                              BALANCE AT   CHARGED TO   CHARGED TO                BALANCE AT
                                              BEGINNING    COSTS AND      OTHER                     END OF
                DESCRIPTION                   OF PERIOD     EXPENSES     ACCOUNTS    DEDUCTIONS     PERIOD
- --------------------------------------------  ----------   ----------   ----------   ----------   ----------
<S>                                           <C>          <C>          <C>          <C>          <C>
Reserve for capitalized costs...............    $  800       $1,038       $   --       $   --       $1,838(1)
Allowance for uncollectible accounts........    $   --          238           --           --       $  238
                                                ======       ======       ======       ======       ======
</TABLE>
 
- ---------------
 
(1) Provision for write-off of project development expenses.
 
                                       S-9
<PAGE>   219
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
                                                                                     SEQUENTIALLY
                                                                                       NUMBERED
EXHIBIT NO.                                    EXHIBIT                               PAGE NUMBER
- -----------     ---------------------------------------------------------------------
<S>             <C>                                                                  <C>
   4.1          Indenture dated as of February 17, 1994 between the Company and
                Shawmut Bank of Connecticut, National Association, as Trustee,
                including form of Notes.(a)..........................................
   4.2          Indenture dated as of May 16, 1996 between the Company and Fleet
                National Bank, as Trustee, including form of Notes.(b)...............
   4.3          Indenture dated as of July 8, 1997 between the Company and The Bank
                of New York, as Trustee, including form of Senior Notes.(c)..........
   4.4          Registration Rights Agreement dated as of July 1, 1997 between the
                Company and Credit Suisse First Boston Corporation, Morgan Stanley &
                Co. Incorporated, Salomon Brothers Inc., Scotia Capital Markets (USA)
                Inc., BancAmerica Securities, Inc. and CIBC Wood Gundy Securities
                Corp.(c).............................................................
   4.5*         Supplemental Indenture dated as of September 10, 1997 between the
                Company and The Bank of New York, as Trustee, including form of
                Senior Notes.........................................................
   4.6*         Registration Rights Agreement dated as of September 5, 1997 between
                the Company and Credit Suisse First Boston Corporation...............
   5.1*         Opinion of Brobeck, Phleger & Harrison LLP. .........................
  23.1*         Consent of Brobeck, Phleger & Harrison LLP (contained in the opinion
                filed as Exhibit 5.1)................................................
  23.2*         Independent Public Accountants' Consent of Arthur Andersen LLP. .....
  23.3*         Independent Public Accountants' Consent of Moss Adams LLP. ..........
  23.4*         Independent Accountants' Consent of Ernst & Young LLP. ..............
  24*           Power of Attorney (contained on the signature page of this
                Prospectus). ........................................................
  25*           Form T-1 Statement of Eligibility of The Bank of New York. ..........
  99.1*         Form of Letter of Transmittal. ......................................
  99.2*         Form of Notice of Guaranteed Delivery. ..............................
</TABLE>
 
- ---------------
  *  Filed herewith.
 
(a)  Incorporated by reference to Registrant's Registration Statement on Form
     S-1 (Registration Statement No. 33-73160).
 
(b)  Incorporated by reference to Registrant's Current Report on Form 8-K dated
     August 29, 1996 and filed on September 13, 1996.
 
(c)  Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
     dated June 30, 1997 and filed on August 14, 1997.

<PAGE>   1
                                                                     EXHIBIT 4.5


                           FIRST SUPPLEMENTAL INDENTURE

                          Dated as of September 10, 1997

                                      between

                               CALPINE CORPORATION,

                                     AS ISSUER

                                        and

                               THE BANK OF NEW YORK

                                    AS TRUSTEE

                            Supplementing the Indenture
                             Dated as of July 8, 1997


<PAGE>   2
               FIRST SUPPLEMENTAL INDENTURE, dated as of September 10, 1997 (the
"First Supplemental Indenture"), between Calpine Corporation, a Delaware
corporation (the "Company"), and The Bank of New York, as trustee
(the "Trustee").

               WHEREAS, the Company executed and delivered the Indenture dated
as of July 8, 1997 (the "Indenture"), to the Trustee to provide for the issuance
of $200,000,000 of the Company's 8:% Senior Notes due 2007 (the "Initial
Securities");

               WHEREAS, pursuant to the terms of the Indenture, the Company
desires to supplement and amend the Indenture to issue $75,000,000 additional
securities (the "Additional Securities" and, together with the Initial
Securities, the "Securities") of the Company as contemplated by Section 8.1(h)
of the Indenture;

               WHEREAS, all things necessary to make this First Supplemental
Indenture a valid agreement of the Company and the Trustee in accordance with
its terms and a valid amendment and supplement to the Indenture, have been done.

               NOW THEREFORE, for and in consideration of the premises and
mutual covenants herein contained, the Company and the Trustee agree as follows:


                                     ARTICLE I
                                    DEFINITIONS

               Section I.1  Definition of Terms.

               Unless the context otherwise requires:

                      (a)  a term defined in the Indenture has the same meaning
when used in this First Supplemental Indenture;

                      (b) capitalized terms used herein that are not otherwise
defined herein shall have the meaning assigned to such terms in the Indenture;



                                       2
<PAGE>   3
                      (c)  the singular includes the plural and vice versa;

                      (d)  headings are for convenience of reference only and do
not affect interpretation;

                      (e)  "Offering" means the offering and sale of the Initial
Securities and the offering and sale of Additional Securities.

                      (f)  "Registration Rights Agreement" means the
Registration Rights Agreement dated as of July 1, 1997 and the Registration
Rights Agreement dated as of September 5, 1997.


                                   ARTICLE II
                           AMENDMENTS TO THE INDENTURE

               Section II.1  Issuance of Additional Securities.

               The Indenture is amended to provide for the issuance of
additional 8 3/4% Senior Notes due 2007 of the Company in an aggregate principal
amount of $75,000,000.

               Section II.2  Effectiveness.

               The amendment set forth in Section 2.1 shall not be effective as
to any Security outstanding prior to the date hereof.


                                   ARTICLE III
                                  MISCELLANEOUS

               Section III.1  Form and Dating.



                                       3
<PAGE>   4
               The Additional Securities and the Trustee's certificate of
authentication shall be substantially in the form of Exhibit A annexed hereto,
which is part of this First Supplemental Indenture.

               The terms and provisions contained in the forms of Additional
Securities annexed hereto as Exhibit A and Exhibit B shall constitute, and are
expressly made, a part of this First Supplemental Indenture.

               Section III.2  Execution and Authentication.

               The Trustee shall authenticate (i) Additional Securities for
original issue in an aggregate principal amount of $75,000,000 and (ii) Exchange
Securities for issue only in exchange pursuant to the Additional Securities
Registration Rights Agreement, for a like principal amount of Additional
Securities, in each case, upon a written order of the Company signed by two
Officers.

               Section III.3  Ratification of Indenture.

               The Indenture, as supplemented by this First Supplemental
Indenture, is in all respects ratified and confirmed, and this First
Supplemental Indenture shall be deemed part of the Indenture in the manner and
to the extent herein and therein provided.

               Section III.4  Governing Law.

               This First Supplemental Indenture shall be deemed to be a
contract made under the laws of the State of New York, and for all purposes
shall be construed in accordance with the laws of said State.

               Section III.5  Separability.

               In case any one or more of the provisions contained in this First
Supplemental Indenture shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this First Supplemental Indenture but
this First



                                       4
<PAGE>   5
Supplemental Indenture shall be construed as if such invalid or illegal or 
unenforceable provision had never been contained herein or therein.

               Section III.6  Counterparts.

               This First Supplemental Indenture may be executed in any number
of counterparts each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.

               Section III.7  Effectiveness.

               This First Supplemental Indenture shall be effective and binding
when executed by the Company and the Trustee.

               Section III.8  Trustee Not Responsible for Recitals.

               The recitals herein contained are made by the Company and not by
the Trustee, and the Trustee assumes no responsibility for the correctness
thereof. The Trustee makes no representation as to the validity or sufficiency
of this First Supplemental Indenture.

               Section III.9  Performance by Trustee.

               The Trustee, for itself and its successors accepts the Trust of
the Indenture as amended by this First Supplemental Indenture and agrees to
perform the First Supplemental Indenture and agrees to perform the same, but
only upon the terms and conditions set forth in the Indenture, including the
terms and provisions defining and limiting the liability and responsibility of
the Trustee.



                                       5
<PAGE>   6
               IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed as of the day and year first above
written.

                                    CALPINE CORPORATION



                                    By: /s/ Peter Cartwright
                                       ------------------------------
                                    Name:  Peter Cartwright
                                    Title: Chairman, President and CEO



                                    By: /s/ Ann B. Curtis
                                       ------------------------------
                                    Name:  Ann B. Curtis
                                    Title: Senior Vice President



                                    THE BANK OF NEW YORK
                                    as Trustee



                                    By: /s/ Vivian Georges
                                       ------------------------------
                                    Name:  Vivian Georges
                                    Title: Assistant Vice President


                                       6
<PAGE>   7
                                                                       EXHIBIT A

                               CALPINE CORPORATION
                          8 3/4% Senior Note Due 2007

No. S-1                                          $75,000,000

                                                 CUSIP:   131347AE6
                                                 ISIN:    US131347AE66

        Calpine Corporation, a Delaware corporation, promises to pay to Cede &
Co., or registered assigns, the principal sum of Seventy Five Million Dollars on
July 15, 2007.

                 Interest Payment Dates: January 15 and July 15
                       Record Dates: January 1 and July 1

        Additional provisions of this Security are set forth on the reverse
hereof.


               IN WITNESS WHEREOF, the Company has caused this Security to be
signed manually or by facsimile by its duly authorized officers.

Date:

                                               CALPINE CORPORATION


                                               By
                                                 -----------------------------
                                                 Name:
                                                 Title:


                                               By
                                                 -----------------------------
                                                 Name:
                                                 Title:

TRUSTEE'S CERTIFICATE
  OF AUTHENTICATION:

The Bank of New York, as Trustee, certifies that this is one of the Securities
referred to in the Indenture.


                                      A-1
<PAGE>   8

By: _________________________               Dated: ______________________
      Authorized Signature

- ------------------------------------------------------------------------------
                      (Form of Reverse of Initial Security)


                                      A-2
<PAGE>   9
                               Calpine Corporation
                          8 3/4% Senior Note Due 2007

               1. Interest. Calpine Corporation, a Delaware corporation (such
corporation, and its successors and assigns under the Indenture referred to
below, being herein called the "Company"), promises to pay interest on the
principal amount of this Security at 8 3/4% per annum (subject to adjustment as
provided below). The Company will pay interest semiannually on January 15 and
July 15 of each year. Interest on the Securities will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from July 8, 1997. Interest will be computed on the basis of a 360-day year
consisting of twelve 30-day months.

               If an exchange offer registered under the Securities Act (as
defined in the Indenture) is not consummated, or a registration statement under
the Securities Act with respect to resales of the Securities is not declared
effective by the SEC (as defined in the Indenture), by January 4, 1998, in
accordance with the terms of a Registration Rights Agreement dated September 5,
1997 by and between the Company and Credit Suisse First Boston Corporation (the
"Additional Securities Registration Rights Agreement") interest due per annum on
the Securities shall be permanently increased by one-half of one percent,
commencing as of January 5, 1998. The holder of this Security is entitled to the
benefits of such Additional Securities Registration Rights Agreement.

               2. Method of Payment. The Company will pay interest on the 
Securities (except defaulted interest) to the persons who are registered Holders
of Securities at the close of business on the record date next preceding the
interest payment date even though Securities are canceled after the record date
and on or before the interest payment date. Holders must surrender Securities to
a Paying Agent to collect principal payments. The Company will pay principal and
interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts. However, the Company may pay
principal and interest by check payable in such money. It may mail an interest
check to a Holder's registered address.

               3. Paying Agent, Registrar. Initially, The Bank of New York, a
New York banking corporation (the "Trustee"), will act as Paying Agent and
Registrar. The Company may change any Paying Agent, Registrar or co-registrar
without notice. The Company may act as Paying Agent, Registrar or co-registrar.



                                      A-3
<PAGE>   10
               4. Indenture. The Company issued the Securities under an
Indenture dated as of July 8, 1997, as supplemented by the First Supplemental
Indenture dated as of September 10, 1997 (together the "Indenture") between the
Company and the Trustee. The Securities are unsecured general obligations of
the Company limited to $275,000,000 in aggregate principal amount. The terms of
the Securities include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code Sections
77aaa-77bbbb) (the "TIA"). Capitalized terms used herein but not defined herein
are used as defined in the Indenture. The Securities are subject to all such
terms, and Securityholders are referred to the Indenture and the TIA for a
statement of such terms.

               5. Optional Redemption. Except as set forth in the following para
graph, the Company may not redeem the Securities prior to July 15, 2002. On and
after such date, the Company may redeem the Securities at any time as a whole,
or from time to time in part, at the following redemption prices (expressed in
percentages of principal amount), plus accrued interest to the redemption date,
if redeemed during the 12-month period beginning July 15,
<TABLE>
<CAPTION>

               Year                                       %
               ----                                       --
<S>                                                   <C>      
               2002   . . . . . . . . . .             104.3750%
               2003   . . . . . . . . . .             102.1875%
               2004 and thereafter . .                 100.000%
</TABLE>

               The Company may redeem up to $26,250,000 principal amount of
Securities with the proceeds of one or more Public Equity Offerings following
which there is a Public Market, if at least $48,750,000 principal amount remains
outstanding after each such redemption, in whole or from time to time in part,
at a price (expressed as a percentage of principal amount), plus accrued
interest to the redemption date, of 108.75% if redeemed at any time prior to
July 15, 2000.

               6. Notice of Redemption. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the redemption date to each
Holder of Securities to be redeemed at the address set forth for such Holder on
the register referred to in Section 2.3 of the Indenture. Unless the Company
shall default in payment of the redemption price plus accrued interest, on and
after the redemption date interest ceases to accrue on such Securities or
portions of them called for redemption. Securities in denominations larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000.


                                      A-4
<PAGE>   11

               7. Denominations; Transfer; Exchange. The Securities are in
registered form without coupons in denominations of $1,000 and any integral
multiple thereof. The transfer of Securities may be registered and Securities
may be exchanged as provided in the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not exchange or register the transfer of any
Security or portion of a Security selected for redemption (except, in the case
of a Security to be redeemed in part, the portion thereof not to be redeemed) or
any Securities for a period of 15 days before a selection of Securities to be
redeemed, or 15 days before an interest payment date.

               8. Put Provisions. Upon a Change of Control Triggering Event, any
Holder of Securities will have the right to cause the Company to repurchase all
or any part of the Securities of such Holder at a repurchase price equal to 101%
of the principal amount of the Securities to be repurchased plus accrued
interest to the date of repurchase as provided in, and subject to the terms of,
the Indenture.

               9. Defeasance. Subject to certain conditions, the Company at any
time may terminate some or all of its obligations under the Securities and the
Indenture if the Company deposits with the Trustee money and/or U.S. Government
Obligations for the payment of principal and interest on the Securities to
redemption or maturity, as the case may be.

               10. Persons Deemed Owners. The registered Holder of a Security
may be treated as its owner for all purposes, except that interest (other than
defaulted inter est) will be paid to the person that was the registered Holder
on the relevant record date for such payment of interest.

               11. Amendments and Waivers. Subject to certain exceptions, (i)
the Indenture or the Securities may be amended or supplemented with the consent
of the Holders of a majority in principal amount of the Securities; and (ii) any
existing default may be waived with the consent of the Holders of a majority in
principal amount of the Securities. Without the consent of any Securityholder,
the Indenture or the Securities may be amended or supplemented to cure any
ambiguity, omission, defect or incon sistency, to provide for assumption of
Company obligations to Securityholders or to provide for uncertificated
Securities in addition to or in place of certificated Securities, to provide for
guarantees with respect to, or security for, the Securities, or to comply with
the TIA or to add additional covenants or surrender Company rights, or to make
any change that does not adversely affect the rights of any Securityholder.


                                      A-5
<PAGE>   12
               12. Remedies. If an Event of Default occurs and is continuing,
the Trustee or Holders of at least 25% in principal amount of the Securities may
declare all the Securities to be due and payable immediately. Securityholders
may not enforce the Indenture or the Securities except as provided in the
Indenture. The Trustee may require an indemnity before it enforces the
Indenture or the Securities. Subject to certain limitations, Holders of a
majority in principal amount of the Securities may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Securityholders
notice of any continuing default (except a Default in payment of principal or
interest) if it determines that withholding notice is in their interests. The
Company must furnish an annual compliance certificate to the Trustee.

               13. Trustee Dealings with Company. Subject to the provisions of
the TIA, the Trustee under the Indenture, in its individual or any other
capacity, may make loans to, accept deposits from, and perform services for the
Company or its Affiliates, and may otherwise deal with the Company or its
Affiliates, as if it were not Trustee. The Trustee will initially be The Bank of
New York.

               14. No Recourse Against Others. A director, officer, employee or
stockholder, as such, of the Company shall not have any liability for any
obligations of the Company under the Securities or the Indenture or for any
claim based on, in respect of or by reason of such obligations or their
creation. Each Securityholder by accepting a Security waives and releases all
such liability. The waiver and release are part of the consideration for the
issue of the Securities.

               15. Authentication. This Security shall not be valid until
authenticated by the manual signature of an authorized signatory of the Trustee
or an authenticating agent.

               16. Abbreviations. Customary abbreviations may be used in the

name of a Securityholder or an assignee, such as: TEN COM (= tenants in common),
TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of
survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A 
(= Uniform Gifts to Minors Act).

               Pursuant to a recommendation promulgated by the Committee on
Uniform Security Identification Procedures the Company has caused CUSIP numbers
to be printed on the Securities and has directed the Trustee to use CUSIP
numbers in notices of redemption as a convenience to Securityholders. No
representation is made as to the accuracy of such numbers either as printed on
the Securities or as contained in


                                      A-6
<PAGE>   13
any notice of redemption and reliance may be placed only on the other
identification numbers placed thereon.

               THE COMPANY WILL FURNISH TO ANY SECURITYHOLDER UPON WRITTEN
REQUEST AND WITHOUT CHARGE A COPY OF THE INDENTURE, WHICH HAS IN IT THE TEXT OF
THIS SECURITY IN LARGER TYPE. REQUESTS MAY BE MADE TO: SECRETARY, CALPINE 
CORPORATION, 50 WEST SAN FERNANDO STREET, SAN JOSE, CALIFORNIA 95113.



                                      A-7
<PAGE>   14

                                 ASSIGNMENT FORM

To assign this Security, fill in the form below:
   I or we assign and transfer this Security to

                  (Insert assignee's soc. sec or tax I.D. no.)

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

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

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

              (Print or type assignee's name, address and zip code)

and irrevocably appoint            agent to transfer this Security on the books
of the Company.  The agent may substitute another to act for him.

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


Dated:                                                       Signed:
      ----------                                                    -----------
                                                                    -----------
                    (Sign exactly as your name appears on the
                          other side of this Security)

Signature Guarantee:
                    -----------------------------------------------------------

Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.

                         MANNER OF TRANSFER (Check one)

Transfer to Calpine Corporation                            [ ]
Transfer to Qualified Institutional Buyer                  [ ]
Transfer outside the United States in
  compliance with Rule 904 under
  the Securities Act of 1993                               [ ]


                     OPTION OF HOLDER TO ELECT PURCHASE FORM

       If you wish to elect to have this Security purchased by the Company 
pursuant to Section 3.8 or 3.12 of the Indenture, check this box: [ ]

        If you wish to elect to have only part of this Security purchased by the
Company pursuant to Section 3.8 or 3.12 of the Indenture, state the amount: $



                                      A-8
<PAGE>   15
        *As set forth in the Indenture, any purchase pursuant to Section 3.12 is
subject to proration in the event the offer is oversubscribed.

Dated:                                                       Signed:
      ----------                                                    -----------
                                                                    -----------

                    (Sign exactly as your name appears on the
                          other side of this Security)

Signature Guarantee:
                     --------------------------------

Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.



                                      A-9
<PAGE>   16

                                                                       EXHIBIT B

- -------------------------------------------------------------------------------
                       (Form of Face of Exchange Security)

               [UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"),
TO THE COMPANY (AS DEFINED BELOW) OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE &
CO., OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC
(AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

               TRANSFERS OF THIS SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS SECURITY SHALL BE LIMITED
TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.8
OF THE INDENTURE (AS DEFINED BELOW).(1)

- ----------------------
(1) This legend should only be added if the Security is issued as a Global Note.

                                      B-1
<PAGE>   17
                              CALPINE CORPORATION
                          8 3/4% SENIOR NOTE DUE 2007


No.____________________                         $75,000,000
                                                CUSIP: 131347AE6
                                                ISIN US 131347AE66

        Calpine Corporation, a Delaware corporation, promises to pay to Cede &
Co., or registered assigns, the principal sum of Seventy Five Million Dollars on
July 15, 2007.

                 Interest Payment Dates: January 15 and July 15
                       Record Dates: January 1 and July 1

        Additional provisions of this Security are set forth on the reverse
hereof.

               IN WITNESS WHEREOF, the Company has caused this Security to be
signed manually or by facsimile by its duly authorized officers.

Date:

                                               CALPINE CORPORATION

                                               By
                                                 ------------------------------
                                                 Name:
                                                 Title:

                                               By
                                                 ------------------------------
                                                 Name:
                                                 Title:

TRUSTEE'S CERTIFICATE
  OF AUTHENTICATION:

The Bank of New York, as Trustee, certifies that this is one of the Securities
referred to in the Indenture.



                                      B-2
<PAGE>   18

By: _________________________                  Dated: ____________________
     Authorized Signature


                                      B-3
<PAGE>   19
                       (Form of Back of Exchange Security)

                               CALPINE CORPORATION
                             8 3/4% SENIOR NOTE DUE 2007


               (1) Interest. Calpine Corporation, a California corporation (such
corporation, and its successors and assigns under the Indenture referred to
below, being herein called the "Company"), promises to pay interest on the
principal amount of this Security at 8 3/4(2) per annum. The Company will pay
interest semiannually on January 15 and July 15 of each year. Interest on the
Securities will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from July 8, 1997. Interest will be computed
on the basis of a 360-day year consisting of twelve 30-day months.

               (2) Method of Payment. The Company will pay interest on the
Securities (except defaulted interest) to the persons who are registered Holders
of Securities at the close of business on the record date next preceding the
interest payment date even though Securities are canceled after the record date
and on or before the interest payment date. Holders must surrender Securities to
a Paying Agent to collect principal payments. The Company will pay principal and
interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts. However, the Company may pay
principal and interest by check payable in such money. It may mail an interest
check to a Holder's registered address.

               (3) Paying Agent, Registrar. Initially, The Bank of New York, a
New York banking corporation (the "Trustee"), will act as Paying Agent and
Registrar. The Company may change any Paying Agent, Registrar or co-registrar
without notice. The Company may act as Paying Agent, Registrar or co-registrar.


- --------
(2)  9 1/4% if the exchange offer is not consummated before January 5, 1998.


                                      B-4
<PAGE>   20
               (4) Indenture. The Company issued the Securities under an
Indenture dated as of July 8, 1997, as supplemented by the First Supplemental
Indenture dated as of September 10, 1997 (the "Indenture"), between the Company
and the Trustee. The Securities are unsecured general obligations of the
Company limited to $275,000,000 in aggregate principal amount. The terms of the
Securities include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code Sections
77aaa-77bbbb) (the "TIA"). Capitalized terms used herein but not defined herein
are used as defined in the Indenture. The Securities are subject to all such
terms, and Securityholders are referred to the Indenture and the TIA for a
statement of such terms.

               (5) Optional Redemption. Except as set forth in the following
paragraph, the Company may not redeem the Securities prior to July 15, 2002. On
and after such date, the Company may redeem the Securities at any time as a
whole, or from time to time in part, at the following redemption prices
(expressed in percentages of principal amount), plus accrued interest to the
redemption date, if redeemed during the 12-month period beginning July 15,
<TABLE>
<CAPTION>

               Year                              %
               ----                              --
<S>                                         <C>      
               2002   . . . . . . . . . .   104.3750%
               2003   . . . . . . . . . .   102.1875%
               2004, and thereafter . .       100.00%
</TABLE>

               The Company may redeem up to $26,250,000 principal amount of
Securities with the proceeds of one or more Public Equity Offerings if at least
$48,750,000 principal amount remains outstanding after each such redemption in
whole or from time to time in part, at a price (expressed as a percentage of
principal amount), plus accrued interest to the redemption date, of 108.75% if
redeemed at any time prior to July 15, 2000.

               (6) Notice of Redemption. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the redemption date to each
Holder of Securities to be redeemed at the address set forth for such Holder on
the register referred to in Section 2.3 of the Indenture. Unless the Company
shall default in payment of the redemption price plus accrued interest, on and
after the redemption date interest ceases to accrue on such Securities or
portions of them called for redemption. Securities in denominations larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000.

               (7)  Denominations; Transfer; Exchange.  The Securities are in
registered form without coupons in denominations of $1,000 and any integral 
multiple thereof.  The



                                      B-5
<PAGE>   21
transfer of Securities may be registered and Securities may be exchanged as
provided in the Indenture. The Registrar may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and to pay
any taxes and fees required by law or permitted by the Indenture. The Registrar
need not exchange or register the transfer of any Security or portion of a
Security selected for redemption (except, in the case of a Security to be
redeemed in part, the portion thereof not to be redeemed) or any Securities for
a period of 15 days before a selection of Securities to be redeemed, or 15 days
before an interest payment date.

               (8) Put Provisions. Upon a Change of Control Triggering Event,
any Holder of Securities will have the right to cause the Company to repurchase
all or any part of the Securities of such Holder at a repurchase price equal to
101% of the principal amount of the Securities to be repurchased plus accrued
interest to the date of repurchase as provided in, and subject to the terms of,
the Indenture.

               (9) Defeasance. Subject to certain conditions, the Company at any
time may terminate some or all of its obligations under the Securities and the
Indenture if the Company deposits with the Trustee money and/or U.S. Government
Obligations for the payment of principal and interest on the Securities to
redemption or maturity, as the case may be.

               (10) Persons Deemed Owners. The registered Holder of a Security
may be treated as its owner for all purposes, except that interest (other than
defaulted interest) will be paid to the person that was the registered Holder on
the relevant record date for such payment of interest.

               (11) Amendments and Waivers. Subject to certain exceptions, (i)
the Indenture or the Securities may be amended or supplemented with the consent
of the Holders of a majority in principal amount of the Securities; and (ii) any
existing default may be waived with the consent of the Holders of a majority in
principal amount of the Securities. Without the consent of any Securityholder,
the Indenture or the Securities may be amended or supplemented to cure any
ambiguity, omission, defect or inconsistency, to provide for assumption of
Company obligations to Securityholders or to provide for uncertificated
Securities in addition to or in place of certificated Securities, to provide for
guarantees with respect to, or security for, the Securities, or to comply with
the TIA or to add additional covenants or surrender Company rights, or to make
any change that does not adversely affect the rights of any Securityholder.

               (12) Remedies. If an Event of Default occurs and is continuing,
the Trustee or Holders of at least 25% in principal amount of the Securities may
declare all the



                                      B-6
<PAGE>   22
Securities to be due and payable immediately. Securityholders may not enforce
the Indenture or the Securities except as provided in the Indenture. The Trustee
may require an indemnity before it enforces the Indenture or the Securities.
Subject to certain limitations, Holders of a majority in principal amount of
the Securities may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Securityholders notice of any continuing default
(except a Default in payment of principal or interest) if it determines that
withholding notice is in their interests. The Company must furnish an annual
compliance certificate to the Trustee.

               (13) Trustee Dealings with Company. Subject to the provisions of
the TIA, the Trustee under the Indenture, in its individual or any other
capacity, may make loans to, accept deposits from, and perform services for the
Company or its Affiliates, and may otherwise deal with the Company or its
Affiliates, as if it were not Trustee. The Trustee will initially be The Bank of
New York.

               (14) No Recourse Against Others. A director, officer, employee or
stockholder, as such, of the Company shall not have any liability for any
obligations of the Company under the Securities or the Indenture or for any
claim based on, in respect of or by reason of such obligations or their
creation. Each Securityholder by accepting a Security waives and releases all
such liability. The waiver and release are part of the consideration for the
issue of the Securities.

               (15) Authentication. This Security shall not be valid until
authenticated by the manual signature of an authorized signatory of the Trustee
or an authenticating agent.

               (16) Abbreviations. Customary abbreviations may be used in the
name of a Securityholder or an assignee, such as: TEN COM (= tenants in common),
TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of
survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A 
(= Uniform Gifts to Minors Act).

               Pursuant to a recommendation promulgated by the Committee on
Uniform Security Identification Procedures the Company has caused CUSIP numbers
to be printed on the Securities and has directed the Trustee to use CUSIP
numbers in notices of redemption as a convenience to Securityholders. No
representation is made as to the accuracy of such numbers either as printed on
the Securities or as contained in any notice of redemption and reliance may be
placed only on the other identification numbers placed thereon.



                                      B-7
<PAGE>   23
               THE COMPANY WILL FURNISH TO ANY SECURITYHOLDER UPON WRITTEN
REQUEST AND WITHOUT CHARGE A COPY OF THE INDENTURE, WHICH HAS IN IT THE TEXT OF
THIS SECURITY IN LARGER TYPE. REQUESTS MAY BE MADE TO: SECRETARY, CALPINE
CORPORATION, 50 WEST SAN FERNANDO STREET, SAN JOSE, CALIFORNIA 95113.



                                      B-8
<PAGE>   24
                                      ASSIGNMENT FORM

To assign this Security, fill in the form below:
   I or we assign and transfer this Security to


                  (Insert assignee's soc. sec or tax I.D. no.)

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

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

- -------------------------------------------------------------------------------
              (Print or type assignee's name, address and zip code)

and irrevocably appoint            agent to transfer this Security on the books
of the Company.  The agent may substitute another to act for him.



Dated:                                                       Signed:
      ----------------                                              -----------
                                                                    -----------
                    (Sign exactly as your name appears on the
                          other side of this Security)

Signature Guarantee:
                    -----------------------------------------------------------

Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.

- -------------------------------------------------------------------------------
                     OPTION OF HOLDER TO ELECT PURCHASE FORM

        If you wish to elect to have this Security purchased by the Company
pursuant to Section 3.8 or 3.12 of the Indenture, check this box: [ ]

        If you wish to elect to have only part of this Security purchased by the
Company pursuant to Section 3.8 or 3.12 of the Indenture, state the amount: $


                                      B-9
<PAGE>   25
        *As set forth in the Indenture, any purchase pursuant to Section 3.12 is
subject to proration in the event the offer is oversubscribed.

Dated:                                                       Signed:
      ----------------                                              -----------
                                                                    -----------

                    (Sign exactly as your name appears on the
                          other side of this Security)

Signature Guarantee:
                    -----------------------------------------------------------

Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.



                                      B-10
<PAGE>   26
                                                                       EXHIBIT C

                       Form of Certificate to be Delivered
                           In Connection with Transfer
                              Pursuant to Rule 144A

The Bank of New York, as Depositary
101 Barclay Street, Floor 21 West
New York, NY  10286
Attention:  Corporate Trust Trustee Administration

        Re:    Calpine Corporation (the "Company")
               8 3/4% Senior Notes due 2007 (the "Securities")

Dear Sirs:

               In connection with our proposed sale of $________ aggregate
principal amount of the Securities, we confirm that such sale has been effected
pursuant to and in accordance with a transaction meeting the requirements of
Rule 144A under the Securities Act of 1933, as amended (the "Act"). We hereby
certify that we are and the transferee is a "qualified institutional buyer" (as
defined in Rule 144A under the Act) and that we are acting for our own account
or for the account of one or more qualified institutional buyers, and,
accordingly, we agree (or if we were acting for the account of one or more
qualified institutional buyers, each such qualified institutional buyer has
confirmed to us that it agrees) that we or the transferee will not offer, sell,
pledge or otherwise transfer the Notes except (A) to a Person who we reasonably
believe (or the transferee and anyone acting on its behalf reasonably believes)
is a qualified institutional buyer in a transaction meeting the requirements of
Rule 144A, or (B) pursuant to the exemption from registration under the Act
provided by Rule 144 (if available), in each case in accordance with any
applicable securities laws of the states of the United States.

               If we are a broker-dealer, we further certify that we are acting
for the account of our customer and that our customer has confirmed the accuracy
of the representations contained herein that are applicable to it (including the
representations with respect to beneficial ownership).

               This certificate and the statements contained herein are made for
the benefit of the Company and the Initial Purchasers. Terms used in this
certificate and not otherwise defined in the Indenture have the meanings set
forth in Regulation S under the Securities Act.

Dated:                  [Insert Name of Transferor]


                                      C-1
<PAGE>   27

                                            By:
                                               --------------------------------
                                               Name:
                                               Title:



                                      C-2
<PAGE>   28
                                                                       EXHIBIT D

                       Form of Certificate to Be Delivered
                          in Connection with Transfers
                            Pursuant to Regulation S

                                                              -----------, ----

The Bank of New York
101 Barclay Street
New York, New York 10026
Attention:  Corporate Trust Department

Calpine Corporation
50 West San Fernando Street
San Jose, California  95113
Attention:  Corporate Secretary

        Re:    Calpine Corporation (the "Company")
               8 3/4% Senior Notes Due 2007 (the "Securities")

Dear Sirs:

               In connection with our proposed sale of $___________ aggregate
principal amount of the Securities, we confirm that such sale has been effected
pursuant to and in accordance with Regulation S under the Securities Act of
1933, as amended, and, accordingly, we represent that:

               (1) the offer of the Securities was not made to a person in the
        United States;

               (2) at the time the buy order was originated, the transferee was
        outside the United States or we and any person acting on our behalf
        reasonably believed that the transferee was outside the United States;

               (3) no directed selling efforts have been made by us in the
        United States in contravention of the requirements of Rule 903(b) or
        Rule 904(b) of Regulation S, as applicable; and

               (4) the transaction is not part of a plan or scheme to evade the
        registration requirements of the U.S. Securities Act of 1933.


                                      D-1
<PAGE>   29
You and the Company are entitled to rely upon this letter and are irrevocably
authorized to produce this letter or a copy hereof to any interested party in
any administrative or legal proceedings or official inquiry with respect to the
matters covered hereby. Terms used in this certificate have the meanings set
forth in Regulation S.

                                                   Very truly yours,

                                                   [Name of Transferor]



                                                   By:_______________________
                                                       Authorized Signature

                                      D-2

<PAGE>   1
                                                                     EXHIBIT 4.6


                          REGISTRATION RIGHTS AGREEMENT


                          Dated as of September 5, 1997


                                 by and between


                               CALPINE CORPORATION


                                       and


                     CREDIT SUISSE FIRST BOSTON CORPORATION




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


                            8 3/4% Senior Notes Due 2007



<PAGE>   2
                          REGISTRATION RIGHTS AGREEMENT


               This Registration Rights Agreement (the "Agreement") is made and
entered into as of September 5, 1997, by and among Calpine Corporation, a
Delaware corporation (the "Company"), and Credit Suisse First Boston Corporation
(the "Purchaser").

               This Agreement is made pursuant to the Purchase Agreement, dated
of even date herewith (the "Purchase Agreement"), between the Company and the
Purchaser, which provides for the sale by the Company to the Pur chaser of an
additional aggregate of $75,000,000 principal amount of the Company's 8 3/4%
Senior Notes Due 2007 (the "Senior Notes") to be issued under an Indenture dated
July 8, 1997, to be supplemented by the First Supplemental Indenture to be dated
as of September 10, 1997. In order to induce the Purchaser to enter into the
Purchase Agreement, the Company has agreed to pro vide the registration rights
set forth in this Agreement. The execution of this Agreement is a condition to
the Closing under the Purchase Agreement.

                      The parties hereby agree as follows:

1.       Definitions

               Capitalized terms used herein without definition shall have
their respective meanings set forth in the Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:

                             Advice:  See Section 4(o).

               Closing Date:  September 10, 1997, or such other date as may be
agreed upon for the sale and pur chase of the Senior Notes pursuant to the
Purchase Agreement.

<PAGE>   3
               Company:  Calpine Corporation, a Delaware corporation.

               Exchange Act: The Securities Exchange Act of 1934, as amended,
and the rules and regulations of the SEC promulgated thereunder.

               Exchange Offer: The exchange offer by the Company of Exchange
Notes for Registrable Securities pursuant to Section 3(d) hereof.

               Exchange Offer Registration: A registration under the Securities
Act effected pursuant to Section 3(d) hereof.

               Exchange Offer Registration Statement: An exchange offer
registration statement on Form S-4 or Form S-1 (or, if applicable, on another
appropriate form) and all amendments and supplements to such registration
statement, in each case including the Prospectus contained therein, all exhibits
thereto and all material incorporated by reference or deemed to be incorporated
by reference therein.

               Exchange Notes: Securities issued by the Company under an
indenture containing terms identical to the Senior Notes (except that such
Exchange Notes (i) shall have been issued in an Exchange Offer and (ii) shall
have an interest rate of 8 3/4% per annum (93% per annum if such Exchange Offer
is not consummated by January 4, 1998), without provision for adjustment as
provided in paragraph 1 on the reverse of the Senior Notes), to be offered to
holders of Senior Notes in exchange for Senior Notes pursuant to the Exchange
Offer.

               Indenture: The Indenture, dated as of July 8, 1997, to be
supplemented by the First Supplemental Inden-

                                       2
<PAGE>   4
ture to be dated as of September 10, 1997, betweenthe Company and The Bank of 
New York, as Trustee, pursuant to which the Senior Notes are being issued, as 
amended or supplemented from time to time in accordance with the terms thereof.

               Prospectus: The prospectus included in any Registration Statement
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A), as amended or supplemented by any
prospectus supplement, with respect to the terms of the offering of any portion
of the Registrable Securities covered by such Registration Statement or of the
Exchange Notes, as the case may be, and all other amendments and supplements to
the Prospectus, including post-effective amendments and all material
incorporated by reference or deemed to be incorporated by reference in such
Prospectus.

               Registrable Securities: All Senior Notes which are Restricted
Securities.

               Registration Expenses:  See Section 5 hereof.

               Registration Statement: Any registration statement of the Company
which covers any of the Exchange Notes or Registrable Securities pursuant to
the provisions of this Agreement, including the Prospectus, amendments and
supplements to such registration statement, including post-effective
amendments, all exhibits, and all material incorporated by reference or deemed
to be incorporated by reference in such registration statement.

               Restricted Securities: Any and all Senior Notes upon original
issuance thereof and at all times subsequent thereto until, as to any Senior
Note, (i) the 

                                       3
<PAGE>   5
sale of such Senior Note has been effectively registered under the Securities
Act and such Senior Note has been disposed of in accordance with the
Registration Statement relating thereto or (ii) it is distributed to the public
pursuant to Rule 144(k) (or any similar provision then in force, but not Rule
144A) under the Securities Act or (iii) an Exchange Offer Registration has been
declared effective and such Senior Note has been exchanged for an Exchange Note
by a person who is not then deemed to be an Underwriter as defined in Section
2(11) of the Securities Act.

               SEC:  The Securities and Exchange Commission.

               Securities Act: The Securities Act of 1933, as amended, and the
rules and regulations promulgated by the SEC thereunder.

               Shelf Registration: See Section 3 hereof.

               Special Counsel: Skadden, Arps, Slate, Meagher & Flom LLP,
special counsel to the Purchaser or such other special counsel as may be
designated by the holders of a majority in aggregate principal amount of
Registrable Securities outstanding.

               TIA: The Trust Indenture Act of 1939, as amended.

2.       Securities Subject to this Agreement; Holders

                    (a) The securities entitled to the benefits of this
Agreement are the Registrable Securities.

                    (b) A Person is deemed to be a holder of Registrable
Securities whenever such Person beneficially owns Registrable Securities;
provided, that only Registrable Securities of holders who are registered
holders 


                                       4
<PAGE>   6
of Registrable Securities shall be counted for purposes of calculating any
proportion of holders of Registrable Securities entitled to take action or give
notice pursuant to this Agreement.

3.       Shelf Registrations; Exchange Offers

                    (a) Shelf Registrations. As promptly as practicable and in
no event later than December 1, 1997, the Company shall prepare and file with
the SEC a Registration Statement under the Securities Act for an offering to be
made on a continuous basis pursuant to Rule 415 (or any similar rule that may be
adopted by the SEC) under the Securities Act covering all the Registrable
Securities (the "Shelf Registration").

                    (b) The Shelf Registration shall be on Form S-1 or another
appropriate form permitting registration of such Registrable Securities for
resale by such holders in the manner or manners designated by them.

                    (c) The Company shall use its best efforts to cause the
Shelf Registration to become effective under the Securities Act in accordance
with Section 3(a) hereof and shall keep the Shelf Registration continuously
effective for a period of two years from the Closing Date or such shorter period
which will terminate when all Registrable Securities covered by the Shelf
Registration are no longer Restricted Securities. The Company shall also
supplement or make amendments to any Shelf Registration if required by the
rules, regulations or instructions applicable to the registration form used by
the Company or if required by the Securities Act or if reasonably requested by
holders of a majority of the principal amount of the Registrable Securities then
outstanding covered by the Shelf Registration.

                                       5
<PAGE>   7
                    (d) Exchange Offer. Notwithstanding the provisions of
Section 3(a), at the option of the Company, to the extent any applicable law or
applicable interpretation of the staff of the SEC would permit holders
thereafter to resell Exchange Notes without restriction, the Company may, in
lieu of complying with Section 3(a), cause to be filed an Exchange Offer
Registration Statement covering the offer by the Company to the holders of
Senior Notes to exchange all of the Registrable Securities for Exchange Notes,
to have such Exchange Offer Registration Statement declared effective by the SEC
not later than January 4, 1998 and to have such Registration Statement remain
effective until the closing of the Exchange Offer. The Company shall commence
the Exchange Offer promptly after the Exchange Offer Registration Statement has
been declared effective by the SEC by mailing the related exchange offer
Prospectus and accompanying documents to each holder of Senior Notes stating, in
addition to such other disclosures required by applicable law:

                             (i)    that the Exchange Offer is being made 
        pursuant to this Agreement and that all Registrable Securities validly
        tendered will be accepted for exchange;

                             (ii)    the date of acceptance for exchange (which
        shall be a period of at least 60 days from the date such notice is
        mailed) (the "Exchange Date");

                             (iii)  that any Registrable Security not tendered
        will remain outstanding and continue to accrue interest but, except as
        set forth in the last paragraph of this Section 3(d), will not retain
        any rights under this Agreement;

                                       6
<PAGE>   8
                             (iv)  that holders of Senior Notes electing to have
        a Registrable Security exchanged pursuant to the Exchange Offer will be
        required to surrender such Registrable Security, together with the
        enclosed letters of transmittal, to the institution and at the address
        (located in the Borough of Manhattan, The City of New York) specified in
        the notice prior to the close of business on the last Exchange Date; and

                             (v)  that holders of Senior Notes will be entitled
        to withdraw their election not later than the close of business on the
        last Ex change Date, by sending to the institution and at the address
        (located in the Borough of Manhattan, The City of New York) specified in
        the notice a telegram, telex, facsimile transmission or letter setting
        forth the name of such holder, the principal amount of Registrable
        Securities delivered for exchange and a statement that such holder is
        with drawing its election to have such Senior Notes exchanged.

               As soon as practicable after the Exchange Date, the Company
shall:

                             (i)  accept for exchange Registrable Securities or
        portions thereof tendered and not validly withdrawn pursuant to the
        Exchange Offer; and

                             (ii)  deliver, or cause to be delivered, to the 
        Trustee for cancellation all Registrable Securities or portions thereof
        so accepted for exchange by the Company and issue, and cause the trustee
        under the indenture governing the Exchange Notes to promptly
        authenticate and mail to each holder, a new Exchange Note, as the case
        may be, equal in principal amount to the principal amount of the
        Registrable Securities surrendered by such Holder.

                                       7
<PAGE>   9

               The Company shall use its best efforts to complete the Exchange
Offer as provided above and shall comply with the applicable requirements of the
Securities Act, the Exchange Act and other applicable laws in connection with
the Exchange Offer. The Exchange Offer shall not be subject to any conditions,
other than that the Exchange Offer does not violate applicable law or any
applicable interpretation of the staff of the SEC. The Company shall inform the
Purchaser of the names and addresses of the holders of Senior Notes to whom the
Ex change Offer is made, and the Purchaser shall have the right to contact such
holders and otherwise facilitate the tender of Registrable Securities in the
Exchange Offer.

               In connection with the Exchange Registration, the Company will
provide a letter to the staff of the SEC that contains statements and
representations substantially in the form set forth in Mary Kay Cosmetics, Inc.
(no-action letter available June 5, 1991), Morgan Stanley & Co. Incorporated
(no-action letter available June 5, 1991), Warnaco, Inc. (no-action letter
available October 11, 1991), Shearman & Sterling (no-action letter available
July 2, 1993), Grupo Financiero InverMexico, S.A. (no-action letter available
April 4, 1995) and no-action letters to similar effect.

               As provided in the Indenture, in the event that neither the Shelf
Registration nor the Exchange Offer Registration Statement is declared effective
by January 4, 1998, the interest rate on the Senior Notes shall be permanently
increased, beginning at such time, by 1/2% per annum.


                                       8
<PAGE>   10
4.       Registration Procedures

               In connection with the Company's registration obligations
pursuant to Section 3 hereof, the Company shall use its best efforts to effect
such registrations to permit the consummation of the Exchange Offer or the sale
of such Registrable Securities in accordance with the intended method or methods
of disposition thereof, and pursuant thereto the Company shall as expeditiously
as possible:

                      (a)    prepare and file with the SEC, within the time
period specified in Section 3, a Registration Statement or Registration
Statements on any appropriate form under the Securities Act, which form, in the
case of a Shelf Registration, shall be available for the sale of the Registrable
Securities by the holders thereof in accordance with the intended method or
methods of distribution thereof, and use its best efforts to cause each such
Registration Statement to become effective and remain effective as provided here
in; provided, however, that before filing a Registration Statement or Prospectus
or any amendments or supplements thereto (including documents which would be
incorporated or deemed to be incorporated therein by reference and amendments to
such documents, other than documents required to be filed pursuant to the
Exchange Act), the Company shall furnish to the Special Counsel copies of the
Registration Statement or Prospectus and all such documents in the form proposed
to be filed at least five business days prior thereto and with respect to amend-
ments or supplements thereof, at least two business days prior thereto, which
documents will be subject to the review of the Special Counsel, and the Company
shall not file any such Registration Statement or amendment there to or any
Prospectus or any supplement thereto (including such documents which, upon
filing, would be incorporated


                                       9
<PAGE>   11
or deemed to be incorporated by reference therein and amendments to such
documents, other than documents required to be filed pursuant to the Exchange
Act) to which the Special Counsel shall reasonably object on a timely basis,
unless the Company is advised by its counsel that such Registration Statement or
amendment thereto or any Prospectus or supplement thereto is required to be
filed by applicable law;

                      (b)    prepare and file with the SEC such amendments and
post-effective amendments to each Registration Statement as may be necessary to
keep such Registration Statement continuously effective for the applicable
period; cause the related Prospectus to be supplemented by any required
Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
(or any similar provisions then in force) under the Securities Act;

                      (c)    notify the selling holders of Registrable 
Securities (except in the cases of clauses (ii) and (iii) hereof) and their
Special Counsel promptly, and (if requested by any such person) confirm such
notice in writing, (i) when a Prospectus or any Prospec tus supplement or
post-effective amendment related to such Registrable Securities has been filed,
and, with respect to a Registration Statement or any post-effective amendment
related to such Registrable Securities, when the same has become effective, (ii)
of the receipt of any comments from the SEC, (iii) of any request by the SEC for
amendments or supplements to a Registration Statement or related Prospectus or
for additional infor mation, (iv) of the issuance by the SEC of any stop order
suspending the effectiveness of a Registration Statement or the initiation of
any proceedings for that purpose, (v) if at any time the representations and
warranties of the Company contained in any agreement contemplated by paragraph
(1) below in connection with the sale of Restricted Securi-


                                       10
<PAGE>   12
ties by selling holders thereof cease to be true and correct, (vi) of the
receipt by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale or exchange in any jurisdiction of the United States of
America or the initiation of any proceeding for such purpose, (vii) of the
happening of any event which makes any statement of a material fact made in such
Registration Statement or related Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue or which requires the
making of any changes in a Registration Statement or related Prospectus so that
such documents will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, and (viii) of the Company's determination that a post
effective amendment to a Registration Statement would be appropriate;

                      (d)    use every reasonable effort to obtain the
withdrawal of any order suspending the effectiveness of a Registration
Statement or the lifting of any suspension of the qualification (or exemption
from qualification) of any of the Registrable Securities for sale or exchange in
any jurisdiction of the United States of America, as promptly as practicable;

                      (e)    if reasonably requested by any holder of 
Registrable Securities covered by a Registration Statement, (i) promptly
incorporate in a Prospectus supplement or post-effective amendment such
information as such holder reasonably requests to be included there in as may be
required by applicable law, (ii) make all required filings of such Prospectus
supplement or such post-effective amendment as soon as the Company has received
notification of the matters to be incorporated


                                       11
<PAGE>   13
in such Prospectus supplement or such post-effective amendment, and (iii)
supplement or make amendments to any Registration Statement if reasonably
requested by any holder of Registrable Securities covered by such Registration
Statement as may be required by applicable law;

                      (f)    in the case of a Shelf Registration, furnish to 
each selling holder of Registrable Securities and the Special Counsel, without
charge, at least one conformed copy of the Registration Statement or Statements
and any post-effective amendment thereto, including financial statements and
schedules, all documents incorporated therein by reference or deemed
incorporated therein by reference and all exhibits (including those previously
furnished or incorporated by reference), at the earliest practicable time under
the circumstances after the filing of such documents with the SEC;

                      (g)    in the case of a Shelf Registration, deliver to
each selling holder of Registrable Securities and the Special Counsel, without
charge, as many copies of the Prospectus or Prospectuses (including each 
preliminary prospectus) and any amendment or supplement thereto as such Persons 
may reasonably request; the Company consents to the use of such Prospectus or
any amendment or supplement thereto in accordance with applicable law by each of
the selling holders of Registrable Securities in connection with the offering
and sale of the Registrable Securities covered by such Prospectus or any
amendment or supplement thereto in accordance with applicable law;

                      (h)  prior to any public offering or exchange of
Registrable Securities, to use its best efforts to register or qualify or
cooperate with the selling holders of Registrable Securities and their Special
Counsel in connection with the registration or qualification (or exemption from
such registration or qualification) of



                                       12
<PAGE>   14
such Registrable Securities for offer and sale or exchange, as the case may be,
under the securities or blue sky laws of such state or local jurisdictions as
any seller reasonably requests in writing; keep each such registration or
qualification (or exemption therefrom) effective during the period such
Registration Statement is required to be kept effective and do any and all other
acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by the applicable
Registration Statement; provided, however, that the Company will not be
required to (A) qualify generally to do business in any jurisdiction where it is
not then so qualified, (B) take any action which would subject it to general
service of process in any such jurisdiction where it is not then so subject or
(C) register or qualify securities prior to the effective date of any
Registration Statement under Section 3 hereof;

                      (i)  in the case of a Shelf Registration, cooperate with 
the selling holders of Registrable Securities to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold, which certificates shall not bear any restrictive legends; and enable
such Registrable Securities to be in such denominations and registered in such
names, in all cases consistent with the requirements set forth in the Indenture,
as the holders may request;

                      (j)  subject to the exceptions contained in (A), (B) and
(C) of subsection (h) hereof, cause the Registrable Securities covered by the
applicable Registration Statement to be registered with or approved by such
other federal, state and local governmental regulatory agencies or authorities
in the United States as may be necessary to enable the seller or sellers thereof
to consummate the disposition of such Registrable Securities and cooperate with
each seller of Registrable Securities


                                       13
<PAGE>   15
in connection with any filings required to be made with the National Association
of Securities Dealers, Inc.;

                      (k)  upon the occurrence of any event contemplated by 
Section 4(c)(vii) or 4(c)(viii) above, as promptly as practicable thereafter,
prepare and file with the SEC a supplement or post-effective amendment to the
applicable Registration Statement or a supplement to the related Prospectus or
any document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of the Registrable
Securities being sold thereunder, such Prospectus will not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;

                      (l)  in the case of a Shelf Registration, enter into such
customary agreements and take all such other actions in connection therewith
(including those reasonably requested by the holders of a majority of the
Registrable Securities being sold) in order to expedite or facilitate the
disposition of such Registrable Securities including, but not limited to, an
underwritten offering and in such connection, (i) to the extent possible, make
such representations and warranties to the holders and any underwriters of such
Registrable Securities with respect to the business of the Company and its
subsidiaries, the Registration Statement, Prospectus and documents incorporated
by reference or deemed incorporated by reference, if any, in each case, in form,
substance and scope as are customarily made by issuers to underwriters in
underwritten offerings and confirm the same if and when requested, (ii) obtain
opinions of counsel to the Company (which counsel and opinions, in form, scope
and substance, shall be reasonably satisfactory to Special Counsel) addressed
to each selling holder and under-


                                       14
<PAGE>   16
writer of Registrable Securities, covering the matters customarily covered in
opin ions requested in underwritten offerings, (iii) obtain "cold comfort"
letters from the independent certified public accountants of the Company (and,
if necessary, any other certified public accountant of any subsidiary of the
Company, or of any business acquired by the Company for which financial
statements and financial data is or is required to be included in the Registra
tion Statement) addressed to each selling holder and underwriter of Registrable
Securities, such letters to be in customary form and covering matters of the
type customarily covered in "cold comfort" letters in connection with
underwritten offerings, and (iv) deliver such documents and certificates as may
be reasonably requested by the holders of a majority in principal amount of the
Registrable Securities being sold to evidence the continued validity of the
representations and warranties of the Company made pursuant to clause (i) above
and to evidence compliance with any customary conditions contained in an
underwriting agreement;

                      (m)  in the case of a Shelf Registration, make available
for inspection by a representative of the holders of Registrable Securities
being sold, Special Counsel and an accountant retained by such selling holders,
in a manner designed to permit underwriters to satisfy their due diligence
investigation under the Securities Act, all financial and other records,
pertinent corporate documents and properties of the Company, and cause the
officers, directors and employees of the Company and its subsidiaries to supply
all information reasonably requested by any such representative, attorney or
accountant in connection with such registration; provided, however, that any
records, information or documents that are designated by the Company as
confidential at the time of delivery of such records, information or documents
shall be kept confidential by such persons, unless (i) such records, information
or docu-

                                       15
<PAGE>   17
ments are in the public domain or otherwise publicly available, (ii) disclosure
of such records, information or documents is required by court or administrative
order, (iii) disclosure of such records, information or documents, in the
written opinion of counsel to such person, is otherwise required by law
(including, without limitation, pursuant to the requirements of the Securities
Act) or (iv) disclosure of such records, information or document is necessary to
avoid or correct a misstatement or omission in the Registration Statement,
Prospectus supplement or any post-effective amendment;

                      (n)  provide an indenture trustee for the Registrable 
Securities or Exchange Notes, as the case may be, and cause the indenture (or
the indenture governing the Exchange Notes) to be qualified under the TIA not
later than the effective date of any registration; and in connection therewith,
cooperate with the trustee to effect such changes to such indenture as may be
required for such indenture to be so qualified in accordance with the terms of
the TIA and execute, and use its best efforts to cause the trustee to execute,
all documents as may be required to effect such changes, and all other forms
and documents required to be filed with the SEC to enable such indenture to be
so qualified in a timely manner; and

                      (o)  comply with all applicable rules and regulations of 
the SEC and, in the case of a Shelf Registration, make generally available to
its security holders an earnings statement satisfying the provisions of Section
11(a) of the Securities Act and Rule 158 thereunder no later than 45 days after
the end of any 12-month period (or 90 days after the end of any 12-month period
if such period is a fiscal year), commencing on the first day of the first
fiscal quarter of the Company commencing after the effective date of a
Registration Statement, which statement shall cover said 12-month period.



                                       16
<PAGE>   18
               The Company may require each seller of Registrable Securities
under a Shelf Registration to furnish to the Company such information regarding
the distribution of such Registrable Securities as the Company may from time to
time reasonably request in writing and each holder in acquiring such Registrable
Securities agrees to supply such information to the Company promptly upon such
request.

               Each holder of Registrable Securities agrees by acquisition of
such Registrable Securities that, in the event of a Shelf Registration, upon
receipt of any notice from the Company of the happening of any event of the kind
described in Section 4(c)(iii), 4(c)(iv), 4(c)(vi), 4(c)(vii) or 4(c)(viii)
hereof, such holder will forthwith discontinue disposition of such Registrable
Securities covered by such Registration Statement or Prospectus until such
holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 4(k) hereof, or until it is advised in writing (the
"Advice") by the Company that the use of the applicable Prospectus may be
resumed, and has received copies of any additional or supplemental filings which
are incorporated or deemed to be incorporated by reference in such Prospectus.


                                       17
<PAGE>   19
5.       Registration Expenses

               The Company shall pay all fees and expenses incident to the
performance of or compliance with this Agreement by the Company including,
without limitation, (i) all SEC, stock exchange or National Association of
Securities Dealers, Inc. registration and filing fees, (ii) all fees and
expenses incurred in connection with compliance with state securities or blue
sky laws (including reasonable fees and disbursements of counsel for any
underwriters or holders in connection with blue sky qualification of any of the
Exchange Notes or Registrable Securities), (iii) all expenses of any persons in
preparing or assisting in preparing, word processing, printing and distributing
any Registration Statement, any Prospectus, any amendments or supplements
thereto, any underwriting agreements, securities sales agreements and other
documents relating to the performance of and compliance with this Agreement,
(iv) all rating agency fees and (v) the fees and disbursements of counsel for
the Company, Special Counsel to the holders of Registrable Securities and of
the independent public accountants of the Company, including the expenses of any
special audits or "cold comfort" letters required by or incident to such
performance and compliance, but excluding fees of counsel to the underwriters
and underwriting discounts and commissions and transfer taxes, if any, relating
to the sale or disposition of Registrable Securities by a holder of Registrable
Securities.

6.       Indemnification

               The Company agrees to indemnify and hold harmless the Purchaser
and each holder of Registrable Securities and each person, if any, who controls
the Purchaser or any holder of Registrable Securities within the meaning of
either Section 15 of the Securities Act or Section 


                                       18
<PAGE>   20
20 of the Exchange Act, from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended and supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities are caused by any
such untrue statement or omission or alleged untrue statement or omission based
upon information relating to the Purchaser or any holder of Registrable
Securities furnished to the Company in writing by the Purchaser or holder of
Registrable Securities expressly for use therein.

               In connection with any Shelf Registration in which a holder of
Registrable Securities is participating, in furnishing information relating to
such holder of Registrable Securities to the Company in writing expressly for
use in such Registration Statement, any preliminary prospectus, the Prospectus
or any amendments or supplements thereto, the holders of such Registrable
Securities agree severally and not jointly, to indemnify and hold harmless the
Purchaser and each person, if any, who controls the Purchaser within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act and
the Company, its directors, its officers who sign a Registration Statement and
each person, if any, who controls the Company within the meaning of either such
Section, from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred


                                       19
<PAGE>   21
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, but only
with reference to such information relating to such holder of Registrable
Securities furnished in writing by or on behalf of such holder of Registrable
Securities expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto.

               The Purchaser agrees to indemnify and hold harmless the Company,
the holders of Registrable Securities, the directors of the Company, the
officers of the Company who sign the Registration Statement and each person, if
any, who controls the Company or any holder of Registrable Securities within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, but only
with reference to information relating to the Purchaser


                                       20
<PAGE>   22
furnished to the Company in writing expressly for use in the Registration
Statement, any preliminary prospectus, the Prospectus or any amendments or
supplements thereto.

               In case any proceeding (including any governmental 
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to any of the three preceding paragraphs, such
person (the "indemnified party") shall promptly notify the person against whom
such indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
parties to any such proceeding (including any impleaded parties) include both
the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to the actual or
potential differing interests between them. It is understood that the
indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for (a) the fees and expenses of more than one
separate firm (in addition to any local counsel) for the Purchaser and all
persons, if any, who control the Purchaser within the meaning of either Section
15 of the Securities Act or Section 20 of the Exchange Act, (b) the fees and
expenses of more than one separate firm (in addition to any local counsel) for
the Company, its directors, its officers who sign the 


                                       21
<PAGE>   23

Registration Statement and each person, if any, who controls the Company within
the meaning of either such Section and (c) the fees and expenses of more than
one separate firm (in addition to any local counsel) for all holders of
Registrable Securities and all persons, if any, who control any holders of
Registrable Securities within the meaning of either such Section, and that all
such fees and expenses shall be reimbursed as they are incurred. In such case
involving the Purchaser and such control persons of the Purchaser, such firm
shall be designated in writing by the Purchaser. In such case involving the
holders of Registrable Securities and such controlling persons of holders of
Registrable Securities, such firm shall be designated in writing by holders of a
majority in aggregate principal amount of Registrable Securities. In all other
cases, such firm shall be designated by the Company. The indemnifying party
shall not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by the second
and third sentences of this paragraph, the indemnifying party agrees that it
shall be liable for any settlement of any proceeding effected without its
written consent, provided that (i) such settlement is entered into more than 30
days after receipt by such indemnifying party of the aforesaid request and (ii)
such indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement unless the
indemnifying party has contested such obligation and provides reasonable
assurances that such payment can be made upon resolution of such dispute. No



                                       22
<PAGE>   24
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity 
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.

               If the indemnification provided for in the first, second or third
paragraph of this Section 6 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities in such proportion as is appropriate to reflect the
relative fault of the indemnifying party or parties on the one hand and of the
indemnified party or parties on the other hand in connection with the statements
or omissions that resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative fault of the
holders of Registrable Securities on the one hand and the Purchaser on the
other hand shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the holders
of Registrable Securities or by the Purchaser and the parties', relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.

               The parties hereto agree that it would not be just or equitable
if contribution pursuant to this Sec-


                                       23
<PAGE>   25

tion 6 were determined by pro rata allocation or by any other method of
allocation that does not take account of the equitable considerations referred
to in the immediately preceding paragraph. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages and liabilities
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 6, no holder of Registrable Securities shall be required to indemnify or
contribute any amount in excess of the amount by which the total price at which
the Registrable Securities sold by such holder of Registrable Securities and
distributed to the public were offered to the public exceeds the amount of any
damages that such holder of Registrable Securities has otherwise been required
to pay by reason of such untrue or alleged untrue statement or omission or 
alleged omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent 
misrepresentation. The remedies provided for in this Section 6 are not 
exclusive and shall not limit any rights or remedies which may otherwise be 
available to any indemnified party at law or in equity.

               The indemnity and contribution provisions contained in this
Section 6 shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Purchaser or any person controlling
the Purchaser, any holder of Registrable Securities or any person controlling
the holder of Registrable Securities, or the Company, its officers or directors
or any person controlling the Company.

                                       24
<PAGE>   26

7.       Miscellaneous

                      (a)  Remedies.  In the event of a breach by the Company of
any of its obligations under this Agreement, each holder of Registrable
Securities, in addition to being entitled to exercise all rights granted by law,
including recovery of damages, will be entitled to specific performance of its
rights under this Agreement. The Company agrees that monetary damages would not
be adequate compensation for any loss incurred by reason of a breach by it of
any of the provisions of this Agreement and hereby further agrees that, in the
event of any action for specific performance in respect of such breach, they
shall waive the defense that a remedy at law would be adequate.

                      (b)  No Inconsistent Agreements.  The Company shall not,
on or after the date of this Agreement, enter into any agreement with respect
to its securities which is inconsistent with the rights granted to the holders
of Registrable Securities in this Agreement or otherwise conflicts with the
provisions hereof.

                      (c)    Amendments and Waivers.  The provisions of this 
Agreement, including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be given, unless the Company has obtained the written
consent of holders of a majority of the then outstanding aggregate principal
amount of Registrable Securities. Notwithstanding the foregoing, a waiver or
consent to depart from the provisions hereof with respect to a matter which
relates exclusively to the rights of holders of Registrable Securities whose
securities are being sold pursuant to a Registration Statement and which does
not directly or indirectly affect the rights of other holders of Registrable
Securities may be given by holders of at least a majority in aggregate
principal


                                       25
<PAGE>   27
amount of the Registrable Securities being sold by such holders.

                      (d)    Notices.  All notices and other communications
provided or permitted hereunder shall be made in writing by hand-delivery,
registered first-class mail, telex, or telecopier:

                             (i)    if to a holder of Registrable
        Securities, at the most current address given by such holder to the
        Company in accordance with the provisions of this Section 7(d), which
        address initially is, with respect to the Purchaser, the address set
        forth on the first page of the Purchase Agreement; and

                             (ii)    if to the Company, initially at its address
        set forth on the first page of the Purchase Agreement and thereafter by
        such other address, notice of which is given in accordance with the
        provision of this Section 7(d).

               All such notices and communications shall be deemed to have been
duly given: when delivered by hand, if personally delivered; two business days
after being deposited in the mail, postage prepaid, if mailed; one business day
after being sent by next-day solvent air courier; when answered back, if
telexed; and when receipt acknowledged, if telecopied.

               Copies of all such notices, demands or other communications shall
be concurrently delivered by the person giving the same to the Trustee under the
Indenture at the address specified in such Indenture.

                      (e)    Successors and Assigns.  This Agreement shall 
inure to the benefit of and be binding upon the successors and assigns of each
of the parties, including without limitation and without the need for an


                                       26
<PAGE>   28
express assignment, subsequent holders of Registrable Securities.

                      (f)    Counterparts.  This Agreement may be executed in
any number of counterparts and by the parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.

                      (g)  Headings.  The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.

                      (h)  Governing Law.  This Agreement shall be governed by
and construed in accordance with the laws of the State of New York, without
regard to principles of conflicts of laws.

                      (i)  Severability.  If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such
which may be hereafter declared invalid, void or unenforceable.

                      (j)  Entire Agreement.  This Agreement is intended by the
parties as a final expression of their agreement, and is intended to be a
complete and exclusive



                                       27
<PAGE>   29
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein,
with respect to the registration rights granted by the Company with respect to
the securities sold pursuant to the Purchase Agreement. This Agreement
supersedes all prior agreements and under standings between the parties with
respect to such subject matter.

               (k) Securities Held by the Company or its Affiliates. Whenever
the consent or approval of holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
any of its affiliates (as such term is defined in Rule 405 under the Securities
Act) (other than the Purchaser or subsequent holders of Registrable Securities
if such subsequent holders are deemed to be such affiliates solely by reason of
their holding of such Registrable Securities) shall not be counted in
determining whether such consent or approval was given by the holders of such
required percentage or amount.



                                       28
<PAGE>   30
               IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first written above.

                             CALPINE CORPORATION



                             By: /s/ Ann B. Curtis
                                ---------------------------------
                                Name:       Ann B. Curtis
                                Title:      Senior Vice President


                             CREDIT SUISSE FIRST BOSTON CORPORATION



                             By: /s/ Raymond S. Wood
                                ---------------------------------
                                Name: Raymond S. Wood
                                Title: Director

<PAGE>   1
                                  EXHIBIT 5.1


                        BROBECK, PHLEGER & HARRISON LLP
                                   ONE MARKET
                                  SPEAR TOWER