UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarter ended September 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from _____________________ to ______________________
Commission File Number: 033-73160
CALPINE CORPORATION
(A Delaware Corporation)
I.R.S. Employer Identification No. 77-0212977
50 West San Fernando Street
San Jose, California 95113
Telephone: (408) 995-5115
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
$0.001 par value Common Stock: 20,151,581 shares outstanding on
November 9, 1998
1
<PAGE>
CALPINE CORPORATION AND SUBSIDIARIES
Report on Form 10-Q
For the Quarter Ended September 30, 1998
INDEX
PART I. FINANCIAL INFORMATION ............................................ Page
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 .............. 3
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 ......... 5
Notes to Condensed Consolidated Financial Statements .... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 15
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings ................................................ 23
ITEM 2. Change in Securities ............................................. 24
ITEM 3. Defaults Upon Senior Securities .................................. 24
ITEM 4. Submission of Matters to a Vote of Security Holders .............. 24
ITEM 5. Other Information ................................................ 24
ITEM 6. Exhibits and Reports on Form 8-K ................................. 24
Signatures ................................................................ 27
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
CALPINE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- --------------
ASSETS (unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents ................................. $ 100,620 $ 48,513
Accounts receivable from others ........................... 96,206 35,133
Accounts receivable from related parties .................. 4,610 7,672
Prepaid operating lease, current portion .................. 15,246 13,652
Inventory ................................................. 13,926 6,015
Collateral securities, current portion .................... 1,820 6,036
Loans receivable from related parties, current portion .... 1,200 30,507
Other current assets ...................................... 9,988 19,050
---------- ----------
Total current assets .................................. 243,616 166,578
Property, plant and equipment, net ........................... 1,047,995 719,721
Investments in power projects ................................ 187,206 222,542
Project development costs .................................... 20,076 4,614
Collateral securities, net of current portion ................ 87,939 87,134
Loans receivable from related parties, net of current portion -- 101,304
Notes receivable from related parties ........................ 10,080 16,053
Restricted cash .............................................. 15,631 15,584
Deferred financing costs ..................................... 22,034 20,493
Other assets ................................................. 40,522 26,933
---------- ----------
Total assets .......................................... $1,675,099 $1,380,956
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 42,770 $ 30,441
Accrued interest payable .................................. 13,735 18,025
Accrued maintenance reserve ............................... 11,321 --
Accrued payroll and related expenses ...................... 7,268 4,950
Current portion of non-recourse project financing ......... 3,168 112,966
Other current liabilities ................................. 18,273 12,204
---------- ----------
Total current liabilities ............................. 96,535 178,586
Non-recourse project financing, net of current portion ....... 118,935 182,893
Senior Notes ................................................. 950,522 560,041
Deferred income taxes, net ................................... 141,130 142,050
Deferred lease incentive ..................................... 68,706 71,383
Other liabilities ............................................ 26,446 6,047
---------- ----------
Total liabilities ..................................... 1,402,274 1,141,000
---------- ----------
Stockholders' equity:
Common stock .............................................. 20 20
Additional paid-in capital ................................ 168,766 167,542
Retained earnings ......................................... 104,039 72,394
---------- ----------
Total stockholders' equity ............................ 272,825 239,956
---------- ----------
Total liabilities and stockholders' equity ............ $1,675,099 $1,380,956
========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
CALPINE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1998 and 1997
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
----------- ------------ -------------- ---------
Revenue:
<S> <C> <C> <C> <C>
Electricity and steam sales ................... $ 168,561 $ 79,441 $ 347,359 $ 175,767
Service contract revenue ...................... 7,835 3,342 16,363 6,871
Income from unconsolidated investments in power
projects....................................... 9,778 3,313 16,631 7,477
Interest income on loans to power projects .... -- 6,809 2,562 9,765
-------- --------- --------- ---------
Total revenue .............................. 186,174 92,905 382,915 199,880
Cost of revenue:
Plant operating expenses, depreciation,
operating lease expense and production royalties 112,178 40,435 241,515 104,711
Service contract expenses ..................... 4,926 2,704 11,714 6,223
-------- --------- --------- ---------
Total cost of revenue ...................... 117,104 43,139 253,229 110,934
-------- --------- --------- ---------
Gross profit ..................................... 69,070 49,766 129,686 88,946
Project development expenses ..................... 1,722 1,764 4,841 5,711
General and administrative expenses .............. 7,389 4,618 18,431 13,202
-------- --------- --------- ---------
Income from operations ..................... 59,959 43,384 106,414 70,033
Other expense (income):
Interest expense .............................. 24,348 17,219 65,138 43,364
Interest income ............................... (3,695) (3,280) (9,389) (10,169)
Other expense (income), net ................... 72 (616) (834) (1,620)
-------- --------- --------- ---------
Income before provision for income taxes ... 39,234 30,061 51,499 38,458
Provision for income taxes ....................... 15,820 10,914 19,213 13,951
-------- --------- --------- ---------
Income before extraordinary charge ............ 23,414 19,147 32,286 24,507
Extraordinary charge for retirement of debt,
net of tax benefit of $233, $-- and $441, $-- 339 -- 641 --
-------- --------- --------- ---------
Net income ................................. $ 23,075 $ 19,147 $ 31,645 $ 24,507
========= ========= ========= =========
Basic earnings per common share:
Weighted average shares outstanding .......... 20,137 19,975 20,083 19,913
Income before extraordinary charge ........... $ 1.16 $ 0.96 $ 1.61 $ 1.23
Extraordinary charge ......................... $ (0.01) $ -- $ (0.03) $ --
Net income ................................... $ 1.15 $ 0.96 $ 1.58 $ 1.23
Diluted earnings per common share:
Weighted average shares outstanding .......... 21,172 21,056 21,091 21,011
Income before extraordinary charge ........... $ 1.11 $ 0.91 $ 1.53 $ 1.17
Extraordinary charge ......................... $ (0.02) $ -- $ (0.03) $ --
Net income ................................... $ 1.09 $ 0.91 $ 1.50 $ 1.17
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
CALPINE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ---------
<S> <C> <C>
Net cash provided by operating activities .................... $ 72,931 $ 66,429
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and equipment .............. (39,417) (89,281)
Acquisitions .............................................. (225,176) (199,969)
Repayment of notes receivable ............................. 13,814 21,137
Investments in power projects and project development costs (23,288) (3,172)
Maturities of collateral securities ....................... 6,030 5,350
(Increase)/decrease in restricted cash .................... (47) 37,024
Other, net ................................................ (1,200) 67
--------- ---------
Net cash used in investing activities ............... (269,284) (228,844)
--------- ---------
Cash flows from financing activities:
Borrowings of non-recourse project financing .............. 56,424 4,950
Repayments of non-recourse project financing .............. (195,911) (118,209)
Proceeds from issuance of Senior Notes .................... 400,000 275,000
Repayments of notes payable ............................... (8,250) (7,131)
Repayments to bank ........................................ -- (11,031)
Borrowings from bank ...................................... -- 125,000
Proceeds from the sale of common stock .................... 1,053 1,111
Financing costs ........................................... (4,856) (9,542)
Other, net ................................................ -- 807
--------- ---------
Net cash provided by financing activities ........... 248,460 260,955
--------- ---------
Net increase in cash and cash equivalents .................... 52,107 98,540
Cash and cash equivalents, beginning of period ............... 48,513 100,010
--------- ---------
Cash and cash equivalents, end of period ..................... $ 100,620 $ 198,550
========= =========
Supplementary information cash paid during the period for:
Interest .................................................. $ 71,971 $ 36,314
Income taxes .............................................. $ 188 $ 1,185
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
CALPINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
Note 1. Organization and Operation of the Company
Calpine Corporation ("Calpine"), a Delaware corporation, and subsidiaries
(collectively, the "Company") is 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 power plants,
geothermal power plants and geothermal steam fields.
Note 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, 1997. The results for
interim periods are not necessarily indicative of the results for the entire
year.
Capitalized Interest - The Company capitalizes interest on projects during the
development and construction period. For the nine months ended September 30,
1998 and 1997, the Company capitalized $6.9 million and $2.6 million of interest
in connection with the development and construction of power plants.
Derivative Financial Instruments - The Company engages in activities to manage
risks associated with changes in interest rates. The Company has entered into
swap agreements to reduce exposure to interest rate fluctuations in anticipation
of certain debt commitments. The instruments' cash flows mirror those of the
underlying exposure. 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 these instruments are being amortized over the respective
lives of the underlying transaction or recognized immediately if the transaction
is terminated earlier than initially anticipated. Gains and losses on any
instruments not meeting the above criteria would be recognized in income in the
current period. Subsequent gains or losses on the related financial instrument
are recognized in income in each period until the instrument matures, is
terminated or is sold.
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 financial instruments to
manage its exposure to commodity price fluctuations. On September 30, 1998, CPSC
held swap contracts with several entities in order to ensure fulfillment of
certain sales contracts for the period from September 30, 1998 to March 31,
1999.
At September 30, 1998, CPSC had no net open positions which would expose the
Company to risks of fluctuating market prices. These types of risks could have
an adverse impact on the Company's financial position or results of operations.
However, the Company actively manages its positions, and it is the Company's
policy to not have any open positions. CPSC values its portfolio using the
aggregate lower of cost or market method. An allowance is recorded for net
aggregate losses of the entire portfolio resulting from the effect of market
changes on net open positions. Net gains are recognized when realized. The
Company's credit risk associated with power contracts results from the
risk-of-loss on non-performance by counter parties. The Company reviews and
assesses counter party risk to limit any material impact to its financial
position and results of operations. The Company does not anticipate
non-performance by the counter parties.
6
<PAGE>
CALPINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1998
Project Development Costs - The Company capitalizes project development costs
once it is determined that it is probable that such costs will be realized
through the ultimate construction of a power plant. Generally this occurs 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
equipment, net 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.
Reclassifications - Prior period amounts in the condensed consolidated financial
statements have been reclassified where necessary to conform to the 1998
presentation.
Impact of Recent Accounting Pronouncements - In April 1998, the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
("SOP") No. 98-5, "Reporting on the Costs of Start-Up Activities," which is
effective for financial statements for fiscal years beginning after December 15,
1998. For purposes of this SOP, start-up activities are defined broadly as those
one-time activities related to opening a new facility, conducting business in a
new territory, conducting business with a new class of customer or beneficiary,
initiating a new process in an existing facility, or commencing some new
operation. Start-up activities include activities related to organizing a new
entity (commonly referred to as organization costs). Although earlier adoption
is encouraged, the Company has not yet quantified or determined the timing of or
method of the adoption.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards, requiring every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and require
that a company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The
Statement must be applied to derivative instruments and to certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997.
The Company has not yet analyzed the impact of adopting SFAS No. 133 on the
financial statements and has not determined the timing of or method of the
adoption of SFAS No. 133. However, the Statement could increase volatility in
earnings.
Note 3. Accounts Receivable
At September 30, 1998, accounts receivable totaled $100.8 million, which
included $4.6 million receivable from related parties. Accounts receivable from
related parties at September 30, 1998 and December 31, 1997 included the
following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
<S> <C> <C>
Stonybrook Power Plant ................... $3,157 $4,140
Agnews Power Plant ....................... 271 269
Sumas Power Plant ........................ 462 527
Aidlin Power Plant ....................... 553 275
KIAC Partners ............................ 167 68
Texas Cogeneration Company (1) ........... -- 903
Bethpage Power Plant (2) ................. -- 1,490
------ ------
Accounts receivable from related parties $4,610 $7,672
====== ======
(1) On March 31, 1998, the Company acquired the remaining 50% interest in Texas
Cogeneration Company.
(2) On February 5, 1998, the Company acquired the remaining 55% interest in TBG
Cogen Partners.
</TABLE>
7
<PAGE>
CALPINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1998
Note 4. Results of Unconsolidated Investments in Power Projects
The Company has unconsolidated investments in power projects which are accounted
for under the equity method. Investments in less-than-majority-owned affiliates
and the nature and extent of these investments change over time. The combined
results of operations and financial position of the Company's equity-basis
affiliates are summarized below (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------------
September 30, September 30,
1998 1997
------------------ ------------------
Condensed Statement of Operations:
<S> <C> <C>
Revenue $ 366,412 $ 136,418
Net income $ 79,378 $ 23,024
Company's share of net income $ 16,631 $ 7,477
As of As of
September 30, December 31,
1998 1997
------------------ ------------------
Condensed Balance Sheet:
Assets $ 1,383,137 $ 1,693,454
Liabilities $ 1,097,254 $ 1,276,922
Investments $ 186,437 $ 220,623
Project development costs $ 770 $ 1,919
----------------- -----------------
Total investments $ 187,207 $ 222,542
================= =================
</TABLE>
The following details the Company's income from investments in unconsolidated
power projects and the service contract revenue recorded by the Company related
to those power projects (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------
Investments in Service
Ownership Power Projects Contract Revenue
Percentage 1998 1997 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sumas Power Plant (1)......... -- $ 4,052 $ 5,423 $ 1,231 $ 1,545
Agnews Power Plant ........... 20 (65) (45) 1,382 1,299
Aidlin Power Plant ........... 5 433 272 2,440 2,239
Auburndale Power Plant ....... 50 (956) -- -- --
Gordonsville Power Plant ..... 50 2,291 -- -- --
KIAC Partners ................ 50 2,837 -- -- --
Stonybrook Power Plant ....... 50 1,119 -- -- --
Lockport Power Plant ......... 11 2,593 -- -- --
Texas Cogeneration Company (2) -- 4,327 1,827 2,749 1,430
------- -------- -------- --------
Total .................... $16,631 $ 7,477 $ 7,802 $ 6,513
======= ======== ======== ========
</TABLE>
(1) On September 30, 1997, the partnership agreement governing Sumas
Cogeneration Company, L.P. ("Sumas") was amended changing the distribution
percentages to the partners. As provided for in the amendment, the Company's
percentage share of the project's cash flow increased from 50% to approximately
70% through June 30, 2001, based on certain specified payments. 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%. As a result of the
amendment of the partnership agreement and the receipt of certain distributions
during 1997, the Company's investment in Sumas was reduced to zero. Because the
investment has been reduced to zero and there are no continuing obligations of
the Company related to Sumas, the Company expects that income recorded in future
periods will approximate the amount of cash received from partnership
distributions.
(2) On March 31, 1998, the Company acquired the remaining 50% interest in Texas
Cogeneration Company.
8
<PAGE>
CALPINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1998
Note 5. Repayment of Non-Recourse Project Financing
On March 31, 1998, the Company repaid $89.6 million to The Bank of Nova Scotia
which represented the outstanding balance on the original $125.0 million of
non-recourse project financing utilized to fund a portion of the purchase of the
original 50% interest in Texas Cogeneration Company, and the purchase of $155.6
million of notes receivable from the related projects. The Company refinanced
the non-recourse project financing with a portion of the net proceeds from the
initial $300.0 million offering of 7-7/8% Senior Notes Due 2008 ("Senior Notes
Due 2008"), (See Note 11).
Note 6. Tiverton Transaction
On September 28, 1998, the Company entered into a partnership agreement with
Energy Management, Inc. ("EMI") to acquire an ownership interest in a 265
megawatt gas-fired plant under development in Tiverton, Rhode Island. EMI and
the Company will be co-general partners for this project, with EMI acting as the
Managing General Partner. The Company invested $40.0 million of equity in the
merchant power plant, which is scheduled to go into commercial operation in May
2000. The Company will receive up to 63% of all cash and income distributions
from the Tiverton project until it receives a 10.5% pre-tax rate of return.
Thereafter, the Company will receive 50% of all distributions.
Note 7. Sonoma Transaction
On July 17,1998, the Company completed the purchase of a 72 megawatt geothermal
power plant located in Sonoma County, California from the Sacramento Municipal
Utility District ("SMUD") for $13.0 million. The Company is the owner and
operator of the Sonoma geothermal steam fields (formerly the SMUDGEO#1 Steam
Fields), that provide steam to this facility (the "Sonoma Power Plant"). Under
the agreement, The Company paid SMUD $10.6 million at closing and agreed to pay
an additional $2.4 million over the next two years. In connection with the
acquisition, SMUD agreed to purchase 50 megawatts of electricity from the plant
at current market prices plus a renewable power premium through 2001. In
addition, SMUD has the option to purchase 10 megawatts of peak power production
through 2005. The Company will market the excess electricity into the California
power market.
Note 8. Dow Pittsburg Transaction
On July 21, 1998, the Company completed the acquisition of a 70 megawatt natural
gas-fired power plant from the Dow Chemical Company ("Dow") for approximately
$12.7 million. The power plant is located at Dow's Pittsburg, California
chemical facility. The Company's Pittsburg Power Plant will sell up to 18
megawatts of electricity to Dow under a ten-year power sales agreement, with the
balance sold to Pacific Gas & Electric Company under an existing power sales
agreement. In addition, the Company will sell approximately 200,000 lbs/hr of
steam to Dow and to USS-POSCO Industries' nearby steel mill.
Note 9. Texas City and Clear Lake Transaction
On March 31, 1998, the Company acquired the remaining 50% interest in the Texas
City Power Plant and the Clear Lake Power Plant for a purchase price of $52.8
million in cash. The Company has certain contingent purchase payments that could
approximate 2.2% of project revenue beginning in the year 2000, increasing to
2.9% in 2002. The Company acquired the remaining interests in these plants by
purchasing the capital stock of Texas Cogeneration Company ("TCC") from Dominion
Cogen, Inc. ("DCI"). As part of this transaction, the Company now owns a 7.5%
interest in the Bayonne Power Plant, a gas-fired power plant located in Bayonne,
NJ. The Company purchases the majority of its natural gas for the Texas power
plants from Enron Capital & Trade Resources Corp. In connection with the
acquisition, the Company paid approximately $105.3 million to restructure
certain gas contracts with Enron Capital & Trade Resources Corp.
The purchase of the capital stock from DCI and the payment for the restructuring
of certain gas contracts were funded
9
<PAGE>
CALPINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1998
with a portion of the net proceeds from the issuance of the Senior Notes Due
2008 (See Note 11). The acquisition was accounted for as a purchase.
On June 23, 1997, the Company acquired the initial 50% interest in the Texas
City and Clear Lake Power Plants through the acquisition of 50% of the capital
stock of Enron/Dominion Cogen Corp. ("EDCC") from a subsidiary of Enron Corp.
EDCC was subsequently renamed TCC. In addition to the purchase of the capital
stock of TCC in June 1997, the Company purchased from the project lenders $155.6
million of outstanding debt on the Texas City and Clear Lake Power Plants
(approximately $53.0 and $102.6 million, respectively).
The following represents unaudited pro forma results of operations for the year
ended December 31, 1997 and for the nine months ended September 30, 1998,
assuming the acquisition occurred as of January 1, 1997 (in thousands, except
per share data):
<TABLE>
<CAPTION>
Nine Months Ended Twelve Months Ended
September 30, 1998 December 31, 1997
------------------ ------------------
<S> <C> <C>
Revenue .................... $ 451,138 $ 555,955
Net income ................. $ 34,803 $ 69,275
Basic earnings per share ... $ 1.73 $ 3.47
Diluted earnings per share.. $ 1.65 $ 3.30
</TABLE>
Note 10. Bethpage Transaction
On February 5, 1998, the Company acquired the remaining 55% interest in TBG
Cogen Partners ("TBG Cogen"). The partnership owns the Bethpage Power Plant, a
57 megawatt gas-fired cogeneration facility located on Long Island, NY. The
total purchase price of $5.0 million consisted of: (i) a $4.6 million cash
payment and (ii) a $375,000 option applied toward the purchase, subject to final
adjustments. The Company was also assigned all of General Electric's interest as
operator of the Bethpage Power Plant.
Upon the acquisition of the remaining 55% interest, the Company assumed the
outstanding debt of TBG Cogen. On March 31, 1998, the Company made a payment to
Toronto Dominion, Inc. of approximately $38.2 million to pay off the existing
project debt, accrued interest, and a related interest rate swap with a portion
of the net proceeds from the Senior Notes Due 2008 (See Note 11). The
acquisition was accounted for as a purchase.
Note 11. Financial Instruments
On March 5, 1998, the Company terminated an existing forward Treasury bond
entered into in February 1998 in anticipation of the Senior Notes Due 2008
offering. The Company closed its position prior to the pricing date of the debt,
which resulted in a gain of $2.3 million. The gain was deferred and is
recognized as an offset to interest expense over the remaining life of the
Senior Notes Due 2008 using the effective interest method.
On March 31, 1998, the Company completed its Rule 144A offering of $300.0
million Senior Notes Due 2008. After deducting discounts to initial purchasers
and expenses of the offering, the net proceeds from the sale of the Senior Notes
Due 2008 were approximately $293.5 million. Proceeds from the Senior Notes Due
2008 were used as follows: (i) $52.8 million for the purchase of the remaining
50% interest in TCC (See Note 9), (ii) $105.3 million for the restructuring of
certain gas contracts associated with the TCC acquisition (See Note 9), (iii)
$89.6 million for the outstanding principal on the non-recourse project
financing provided by The Bank of Nova Scotia (See Note 5), and (iv) $38.2
million for the outstanding debt on the Bethpage Power Plant (See Note 10).
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 Senior Notes
Due 2008 using the effective interest rate method. Subsequent to this offering,
on July 24, 1998, the Company completed the Rule 144A offering of an additional
$100.0 million Senior Notes Due 2008, which mature on April 1, 2008, and bear
interest payable semi-annually on April 1 and October 1 of each year commencing
October 1, 1998. After deducting discounts to initial purchasers and expenses of
the offering, the net proceeds from the sale of the Senior Notes Due 2008 were
approximately $98.8 million. With the net proceeds, the Company has repaid in
full the non-recourse project financing
10
<PAGE>
CALPINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1998
on the Pasadena 1 Power Plant of $52.1 million to ING Capital Corp.
Additionally, the Company expects to use approximately $30.0 million for the
remaining construction costs on the Pasadena 1 Power Plant. The remainder of the
net proceeds will be used for the acquisition and development of power
generation facilities and 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 Senior Notes Due 2008 using the
effective interest rate method.
On April 9, 1998, the Company terminated an existing interest rate swap related
to $102.6 million of debt for the Clear Lake Power Plant which the Company
purchased on June 23, 1997. The Company paid approximately $3.7 million to close
its position with The Bank of Nova Scotia and recorded a purchase price
adjustment of approximately $2.3 million which was the market value of the swap
on June 23, 1997. The remaining $1.4 million was deferred and is amortized over
the remaining life of the swap.
Note 12. Revolving Credit Facility and Line of Credit
On May 15, 1998, the Company replaced its $50.0 million credit facility with a
$100.0 million credit facility, which has a three-year term expiring in May
2001. The Company's $100.0 million credit facility is available through a
consortium of commercial lending institutions with The Bank of Nova Scotia as
agent. At September 30, 1998, the Company had no borrowings and $26.7 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.
Note 13. Earnings per Share
Basic earnings per share were computed by dividing net earnings by the weighted
average number of common shares outstanding for the period. The dilutive effect
of the potential exercise of outstanding options to purchase shares of common
stock is calculated using the treasury stock method. The reconciliation of basic
earnings per share to diluted earnings per share is shown in the following table
(dollars in thousands except share data).
<TABLE>
<CAPTION>
Periods Ended September 30, 1998 1997
--------------------------------------- -------------------------------------
Net Net Shares
Income Shares EPS Income EPS
- -----------------------------------------------------------------------------------------------------------------------
Three Months:
Basic earnings per common share:
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary charge $ 23,414 20,137 $ 1.16 $ 19,147 19,975 $ 0.96
Extraordinary charge net of tax benefit
of $233, $-- 339 (0.01) -- --
----------- -------- ----------- --------
Net income $ 23,075 20,137 $ 1.15 $ 19,147 19,975 $ 0.96
=========== ======== =========== ========
Common shares issuable upon
Exercise of stock options using
treasury stock method 1,035 1,081
------- ------
Diluted earnings per common share
Income before extraordinary charge $ 23,414 21,172 $ 1.11 $ 19,147 21,056 $ 0.91
Extraordinary charge net of tax benefit
of $233, $-- 339 (0.02) -- --
----------- -------- ----------- --------
Net income $ 23,075 21,172 $ 1.09 $ 19,147 21,056 $ 0.91
=========== ======= ======== =========== ====== ========
</TABLE>
11
<PAGE>
CALPINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1998
<TABLE>
<CAPTION>
Net Net Shares
Income Shares EPS Income EPS
- -----------------------------------------------------------------------------------------------------------------------
Nine Months:
Basic earnings per common share:
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary charge $ 32,286 20,083 $ 1.61 $ 24,507 19,913 $ 1.23
Extraordinary charge net of tax benefit
of $441, $-- 641 (0.03) -- --
----------- -------- ----------- --------
Net income $ 31,645 20,083 $ 1.58 $ 24,507 19,913 $ 1.23
=========== ======== =========== ========
Common shares issuable upon
exercise of stock options using
treasury stock method 1,008 1,098
Diluted earnings per common share:
Income before extraordinary charge $ 32,286 21,091 $ 1.53 $ 24,507 21,011 $ 1.17
Extraordinary charge net of tax benefit
of $441, $-- 641 (0.03) -- --
----------- -------- ----------- --------
Net income $ 31,645 21,091 $ 1.50 $ 24,507 21,011 $ 1.17
=========== ======= ======== =========== ====== ========
</TABLE>
For the three months ended September 30, 1998, the Company recognized an
extraordinary charge of $339,000 or $0.01 per share (net of tax benefit of
$207,000) as a result of the repurchase of $4.3 million of the 10-1/2% Senior
Notes Due 2006. Year-to-date the Company has recognized a $641,000 extraordinary
charge (net of tax benefit of $441,000), for the repurchase of $8.3 million of
the 10-1/2% Senior Notes Due 2006. The notes were redeemed at a premium plus
accrued interest to the date of repurchase.
Unexercised employee stock options to purchase 49,000 and 47,500 shares of the
Company's common stock during the nine months ended September 30, 1998 and 1997,
respectively, were not included in the computation of diluted shares outstanding
because such inclusion would be anti-dilutive.
Note 14. CCNG Investments Transaction
On May 1, 1998, the Company granted CCNG Investments, L.P. ("CCNG") options to
purchase 1.1 million shares of the Company's common stock ("Stock Purchase
Agreement"). Under the terms of the Stock Purchase Agreement, CCNG had the
one-time right prior to September 28, 1998, to elect to purchase from the
Company up to 1.0 million shares of the Company's common stock, $0.001 par
value. CCNG did not exercise any part of this right. Additionally, prior to
December 31, 1998, CCNG has the one-time right to purchase from the Company up
to 50,000 shares of common stock at a price of $17-7/8 per share. To date, CCNG
has not exercised its option to purchase any shares.
Note 15. Commitments and Contingencies
Royalties and Leases - The Company is committed under several geothermal leases
and right-of-ways, easements and surface agreements. The geothermal leases
generally provide for royalties based on production revenue with reductions for
property taxes paid. The right-of-ways, easements and surface agreements are
based on flat rates and are not material.
Office and Equipment Leases - The Company leases its corporate office, Santa
Rosa, Houston, and Boston office facilities and certain office equipment under
non-cancelable operating leases expiring through 2002. Future minimum lease
payments under these leases for the remainder of 1998 are approximately
$360,000.
Greenleaf Operating Lease - In August 1998, the Company entered into a sales and
leaseback transaction for certain plant and equipment of its Greenleaf 1&2 Power
Plants, two 49.5 megawatt gas-fired cogeneration facilities located in Sutter
County, California for a net book value of $108.6 million. Under the terms of
the agreement, the Company received approximately $559,000 for the sale of all
its rights, title and interest in the stock of Calpine Greenleaf Corporation,
and transferred all non-recourse project financing of $71.6 million and deferred
taxes of $39.8 million. Annual rent payments under the operating lease
agreements for 1998 are approximately $4.9 million with future rent payments
from 1999 to 2004 continuing at $9.0 million per year and $71.6 million
thereafter through June 2014. A gain of $2.8 million was recorded on the balance
sheet and is being amortized and recognized over the term
12
<PAGE>
CALPINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1998
of the lease on June 2014. Additionally, the Company has an early purchase
option expiring September 30, 2003 to exercise the end of term purchase.
Watsonville Operating Lease - In June 1995, the Company acquired a 14.5 year
operating lease (through December 2009) for the 28.5 megawatt natural gas-fired
cogeneration power plant located in Watsonville, California. Under the terms of
the lease, basic and contingent rents are payable each month during the period
from July through December. At September 30, 1998 basic rent payments were $2.9
million each for 1997 and 1998, respectively. Future payments from 1998 to 2001
will equal $2.9 million per annum, and $24.4 million thereafter through December
2009. Contingent rent expense for the nine months ended September 30, 1998 and
1997 was $398,000 and $483,000 respectively. This expense is 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 distributed to the
lessor and 40% is retained by the Company.
King City Operating Lease - 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.
Under the terms of the lease the Company makes semi-annual lease payments to BAF
on each February 15 and August 15, a portion of which is supported by a $89.8
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. As of September 30, 1998 future rent
payments are $4.8 million for 1998, $19.4 million for 1999, $20.1 million for
2000, $20.8 million for 2001, and $183.2 million thereafter.
Legal Matters - On September 30, 1997, a lawsuit was filed by Indeck North
American Power Fund ("Indeck") in the Circuit Court of Cook County, Illinois
against Norweb plc. and certain other parties, including the Company. Some of
Indeck's claims relate to Calpine Gordonsville, Inc.'s acquisition of a 50%
interest in Gordonsville Energy L.P. from Northern Hydro Limited and Calpine
Auburndale, Inc.'s acquisition of a 50% interest in Auburndale Power Plant
Partners Limited Partnership from Norweb Power Services (No. 1) Limited. Indeck
is claiming that Calpine Gordonsville, Inc., Calpine Auburndale, Inc. and the
Company tortiously interfered with Indeck's contractual rights to purchase such
interests and conspired with other parties to do so. Indeck is seeking $25.0
million in compensatory damages, $25.0 million in punitive damages, and the
recovery of attorneys' fees and costs. In July 1998, the court granted motions
to dismiss, without prejudice, the claims against Calpine Gordonsville, Inc. and
Calpine Auburndale, Inc. In August 1998, Indeck filed an amended complaint and
the defendants filed motions to dismiss. A hearing on those motions is scheduled
for January 1999. The Company is unable to predict the outcome of these
proceedings.
There is currently a dispute between Texas-New Mexico Power Company ("TNP") and
Clear Lake Cogeneration Limited Partnership ("CLC"), which owns the Clear Lake
Power Plant, regarding certain costs and other amounts that TNP has withheld
from payments due under the power sales agreement. As of September 30, 1998, TNP
has withheld approximately $7.9 million related to transmission charges and has
continued to withhold approximately $450,000 per month thereafter. In October
1997, CLC filed a petition for declaratory order with the Texas Public Utilities
Commission ("Texas PUC") requesting a declaration that TNP's withholding is in
error, which petition is currently pending. Also, as of September 30, 1998, TNP
has withheld approximately $7.7 million of standby power charges and has
continued to withhold approximately $270,000 per month thereafter. In addition
to the Texas PUC petition, CLC has filed an action in Texas courts alleging
TNP's breach of the power sales agreement and is seeking in excess of $15.0
million in damages. A trial date is scheduled for January 1999. The Company is
unable to predict the outcome of either of these proceedings.
An action was filed against Lockport Energy Associates, L.P. ("LEA") and the New
York Public Service Commission ("NYPSC") in August 1997 by New York State
Electricity and Gas Company ("NYSEG") in the Federal District Court for the
Northern District of New York. NYSEG has requested the Court to direct NYPSC and
the Federal Energy Regulatory Commission (the "FERC") to modify contract rates
to be paid to the Lockport Power Plant. In October 1997, NYPSC filed a
cross-claim alleging that the FERC violated Public Utility Regulatory Policies
Act of 1978 as amended,
13
<PAGE>
CALPINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1998
("PURPA") and the Federal Power Act by failing to reform the NYSEG contract that
was previously approved by the NYPSC. Although it is unable to predict the
outcome of this case, in any event, the Company retains the right to require The
Brooklyn Union Gas Company ("BUG") to purchase the Company's interest in the
Lockport Power Plant for $18.9 million, less equity distributions received by
the Company, at any time before December 19, 2001.
The Company is involved in various other claims and legal actions arising out of
the normal course of business. The Company does not expect that the outcome of
these proceedings will have a material effect on the Company's financial
position or results of operations, although no assurance can be given in this
regard.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for historical financial information contained herein, the matters
discussed in this quarterly report may be considered forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended and subject to
the safe harbor created by the Securities Litigation Reform Act of 1995. Such
statements include declarations regarding the intent, belief or current
expectations of the Company and its management. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve a number of risks and uncertainties; actual results
could differ materially from those indicated by such forward-looking statements.
Among the important factors that could cause actual results to differ materially
from those indicated by such forward-looking statements are: (i) that the
information is of a preliminary nature and may be subject to further adjustment,
(ii) the possible unavailability of financing, (iii) risks related to the
development, acquisition and operation of power plants, (iv) the impact of
avoided cost pricing, energy price fluctuations and gas price increases, (v) the
impact of curtailment, (vi) the seasonal nature of the Company's business, (vii)
start-up risks, (viii) general operating risks, (ix) the dependence on third
parties, (x) risks associated with international investments, (xi) risks
associated with the power marketing business, (xii) changes in government
regulation, (xiii) the availability of natural gas, (xiv) the effects of
competition, (xv) the dependence on senior management, (xvi) volatility in the
Company's stock price, (xvii) fluctuations in quarterly results and seasonality,
and (xviii) other risks identified from time to time in the Company's reports
and registration statements filed with the Securities and Exchange Commission.
Overview
Calpine Corporation ("Calpine"), a Delaware corporation, and subsidiaries
(collectively, the "Company") is engaged in the acquisition, development,
ownership and operation of power generation facilities and the sale of
electricity and steam principally in the United States. At September 30, 1998,
the Company had interests in 26 power plants and steam fields in six states and
Mexico, having an aggregate capacity of 3,097 megawatts.
On February 5, 1998, the Company acquired the remaining 55% interest in, and
assumed operations and maintenance of, the Bethpage Power Plant. The Company
purchased the remaining interests for approximately $5.0 million. Additionally,
on March 31, 1998 the Company repaid all outstanding project debt of $38.2
million related to the Bethpage Power Plant.
On March 31, 1998, the Company completed the acquisition of the remaining 50%
interest in TCC, which is the owner of the Texas City and Clear Lake Power
Plants. The Company paid $52.8 million in cash and must make certain contingent
purchase payments that will approximate 2.2% of project revenue beginning in the
year 2000, increasing to 2.9% in 2002. As part of this acquisition, the Company
owns a 7.5% interest in the Bayonne Power Plant, a 165 megawatt natural
gas-fired cogeneration power plant located in Bayonne, NJ. In addition, the
Company paid $105.3 million to restructure certain gas contracts related to this
acquisition.
On July 13, 1998, the Company signed a letter of intent to enter into a joint
venture to develop, own and operate approximately 2,000 megawatts of new natural
gas-fired power plants in northern California, to primarily serve the San
Francisco Bay Area. The natural gas-fired plants are to be constructed by
Bechtel and operated by the Company. The Company intends for its first plant
developed under the joint venture to be an 800 megawatt unit located at the Dow
Chemical facility in Pittsburg, CA.
On July 17, 1998, the Company completed the purchase of a 72 megawatt geothermal
power plant located in Sonoma County, CA from the Sacramento Municipal Utility
District ("SMUD") for $13.0 million. The Company is the owner and operator of
the geothermal steam fields that provide steam to this facility. Under the
agreement, the Company paid SMUD $10.6 million at closing, and agreed to pay an
additional $2.4 million over the next two years. In connection with the
acquisition, SMUD agreed to purchase 50 megawatts of electricity from the plant
at current market prices plus a renewable power premium through 2001. In
addition, SMUD has the option to purchase 10 megawatts of peak power production
through 2005. The Company will market the excess electricity into the California
power market.
On July 21, 1998, the Company completed the acquisition of a 70 megawatt natural
gas-fired power plant from The Dow Chemical Company ("Dow") for approximately
$12.7 million. The power plant is located at Dow's Pittsburg, CA.
15
<PAGE>
chemical facility. The Company will sell up to 18 megawatts of electricity to
Dow under a ten-year power sales agreement, with the balance sold to Pacific Gas
& Electric Company under an existing power sales agreement. In addition, the
Company will sell approximately 200,000 lbs./hr of steam to Dow and to USS-POSCO
Industries' nearby steel mill.
On August 28, 1998, the Company entered into a sales and leaseback transaction
for certain plant and equipment of its Greenleaf 1&2 Power Plants, two 49.5
megawatt gas-fired cogeneration facilities located in Sutter County, California
for a net book value of $108.6 million. Under the terms of the agreement, the
Company received approximately $559,000 for the sale of all its rights, title
and interest in the stock of Calpine Greenleaf Corporation, and transferred all
non-recourse project financing of $71.6 million and deferred taxes of $39.8
million. Annual rent payments under the operating lease agreements for 1998 are
approximately $4.9 million with future rent payments from 1999 to 2004
continuing at $9.0 million per year and $71.6 million thereafter through June
2014. A gain of $2.8 million was recorded on the balance sheet and is being
amortized and recognized over the term of the lease of June 2014. Additionally,
the Company has an early purchase option expiring September 30, 2003 to exercise
the end of term purchase.
On September 28, 1998, the Company entered into a partnership agreement with
Energy Management, Inc. ("EMI") to acquire an ownership interest in a 265
megawatt gas-fired plant under construction in Tiverton, Rhode Island. EMI and
the Company will be co-general partners for this project, with EMI acting as the
Managing General Partner. The Company invested $40.0 million of equity in the
merchant power plant, which is scheduled to go into commercial operation in May
2000. The Company will receive up to 63% of all cash and income distributions
from the Tiverton project until it receives a 10.5% pre-tax rate of return.
Thereafter, the Company will receive 50% of all distributions.
Selected Operating Information
Set forth below is certain selected operating information for the power plants
and steam fields, for which results are consolidated in the Company's Condensed
Consolidated Statements of Operations (in thousands, except megawatts and price
per kilowatt hour data).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------
1998 1997 1998 1997
---------------------------------------------------
Power Plants:
Electricity revenues:
<S> <C> <C> <C> <C>
Energy .............. $ 89,150 $ 33,180 $ 182,885 $ 77,451
Capacity ............ $ 67,361 $ 35,105 $ 134,464 $ 67,048
Megawatt hours produced 2,665,399 730,412 4,995,089 1,551,078
Average energy price .. $ 0.03345 $ 0.04543 $ 0.03661 $ 0.04993
per kilowatt hour
Steam Fields:
Steam revenue: ........ $ 12,050 $ 11,156 $ 30,010 $ 31,268
Megawatt hours produced 658,766 693,367 1,637,402 1,972,439
Average price per ..... $ 0.01829 $ 0.01609 $ 0.01833 $ 0.01585
kilowatt hour
</TABLE>
Megawatt hours produced at the power plants increased significantly for the
three and nine months ended September 30, 1998, primarily due to production at
the Pasadena, Texas City, Clear Lake, Bethpage and Pittsburg Power Plants for
the three and nine months ended September 30, 1998.
16
<PAGE>
Other Financial Ratio Data
Set forth below are certain other financial data and ratios for the periods
indicated (in thousands, except ratio data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
Depreciation and amortization .......... $ 33,749 $ 13,370 $ 65,852 $ 36,919
Interest expense per indenture ......... $ 25,976 $ 18,583 $ 69,187 $ 47,204
EBITDA ................................. $ 93,434 $ 64,702 $187,016 $127,398
EBITDA to interest expense per indenture $ 3.60x $ 3.48x $ 2.70x $ 2.70x
</TABLE>
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. 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).
Interest expense per indenture is defined as total interest expense plus
one-third of all operating lease obligations, dividends paid in respect to
preferred stock and cash contributions to any employee stock ownership plan used
to pay interest on loans to purchase capital stock of the Company.
Results of Operations
Three and Nine Months Ended September 30, 1998 Compared to Three and Nine Months
Ended September 30, 1997
Revenue -- Total revenue was $186.2 million and $382.9 million for the three and
nine months ended September 30, 1998, as compared to $92.9 and $199.9 million
for the comparable periods in 1997.
Electricity and steam sales revenue increased 112% and 98% to $168.6
million and $347.4 million in 1998 compared to $79.4 million and $175.8 million
for the comparable three and nine months ended September 30, 1997. These results
were achieved from an existing portfolio of projects performing as expected and
due to acquisitions completed earlier in the year. The newly acquired power
plants at Texas City, Clear Lake, Pittsburg and Bethpage accounted for $82.7
million or 49% of the Company's third quarter electricity revenues.
Additionally, the Company benefited from the startup of its first merchant power
plant in Pasadena, Texas which became operational in July 1998. The increase in
revenues at the Texas City, Clear Lake and Pasadena Power Plants during the
third quarter were attributable to higher energy prices which were the result of
a shortage of capacity to support higher energy demands caused by unusually hot
weather in Texas during the period. The increase in electricity and steam sales
revenues for the nine months ended September 30, 1998 was due to $163.0 million
of electricity revenues at the Texas City, Clear Lake, Bethpage and Pittsburg
Power Plants which were acquired during the first nine months ended September
30, 1998. In addition the Company benefited from the Pasadena Power Plant which
became operational ahead of schedule allowing the Company to take full advantage
of this peak market prior to the initiation of its steam and electric sales
contract with Phillips Petroleum which commenced in mid-September. Capacity
revenues increased $67.4 million for the nine months ended September 30, 1998
primarily due to the acquisition of the Texas City, Clear Lake and Pittsburg
Power Plants.
Service contract revenue increased to $7.8 million and $16.4 million for
the three and nine months ended September 30, 1998, as compared to $3.3 million
and $6.9 million for the comparable periods in 1997. The $4.5 million increase
in service contract revenue for the three months ended was primarily
attributable to a $2.7 million increase from Calpine Power Services which was
selling the energy generated by the Pasadena Power Plant on the open market,
fuel management fees and related third party gas sales. The Company's $9.5
million increase for the nine months ended September 30, 1998 was due to $2.7
million for Calpine Power Services increased marketing activity for the Pasadena
Power Plant, $ 2.8 million for fuel management fees, and $3.8 million for third
party excess gas sales.
17
<PAGE>
Income from unconsolidated investments in power projects increased 197% to
$9.8 million for the three months ended September 30, 1998 which compared to
$3.3 million for the same period in 1997. The increase of $6.5 million is
primarily attributable to equity income from the Company's investments in the
Lockport and Bayonne Power Plants. For the nine months ended September 30, 1998,
the Company recorded equity income of $16.6 million as compared to $7.5 million
in 1997. This growth was primarily due to equity income from the Texas City and
Clear Lake Power Plants. The Company initially acquired a 50% interest in these
plants in June 1997 and subsequently purchased the remaining interest in March
1998. The investment in the Texas City, Clear Lake and Bayonne Power Plants
contributed $4.3 million for nine months in 1998 as compared to $1.8 million in
1997. Additionally, the Company's investment in the Lockport Power Plant
contributed $6.0 million of equity income during the first nine months of 1998.
These increases for the nine months ended September 30, 1998 were partially
offset by a $1.4 million decrease in equity income from the Sumas Power Plant.
Interest income on loans to power projects decreased to $0 and $2.6 million for
the three months and nine months ended September 30, 1998 as compared to $6.8
million and $9.8 million for the same periods in 1997. These decreases were
related to interest income recognized in 1997 on (i) loans assumed by the
Company for TCC in connection with the initial 50% acquisition (see Note 9 of
the Notes to the Condensed Consolidated Financial Statements), which was
subsequently repaid to the Company when the remaining 50% interest in TCC was
acquired on March 31, 1998, and (ii) loans made to the sole shareholder of Sumas
Energy Inc., the Company's partner in Sumas, which were repaid to the Company on
December 31, 1997.
Cost of revenue - Cost of revenue increased 172% and 128% to $117.1 million and
$253.2 million compared to $43.1 million and $110.9 million for the comparable
three and nine months in 1997. The increase of $74.0 and $142.3 million for the
three and nine months ended September 30, 1998 was primarily attributable to
increased plant operating, fuel and depreciation expenses as a result of the
acquisition of the interest in the Texas City, Clear Lake, Bethpage and
Pittsburg Power Plants and the startup of the Pasadena Power Plant.
Additionally, there was a $5.5 million increase in service contract expenses for
the nine months ended September 30, 1998, of which $3.6 million was related to
the Texas City and Clear Lake Power Plants' operating and maintenance contracts
and a $1.9 million increase for fuel management contracts.
Project development expenses - Project development expenses decreased to $1.7
million and $4.8 million for the three and nine months ended September 30, 1998
compared to $1.8 million and $5.7 million for the comparable periods in 1997.
The decrease is due primarily to certain one-time charges incurred during the
first three months of 1997 related to project development activities.
General and administrative expenses - General and administrative expenses
increased to $7.4 million and $18.4 million for the three and nine months ended
September 30, 1998 compared to $4.6 million and $13.2 million for the comparable
periods in 1997. The increase was attributable to the continued growth in
personnel and overhead costs necessary to support the overall growth in the
Company's operations.
Interest expense - Interest expense increased to $24.3 million for the three
months ended September 30, 1998, compared to $17.2 million for the same period
in 1997. The increase was primarily attributable to interest expense of $7.6
million related to the 7-7/8% Senior Notes Due 2008 issued in March and July
1998. This increase was partially offset by $492,000 for the reduction of debt
at Calpine Greenleaf. Interest expense increased to $65.1 million for the nine
months ended September 30, 1998, compared to $43.4 million for the same period
in 1997. The increase was attributable to interest expense of $14.3 million
related to the 8-3/4% Senior Notes Due 2007 issued July and September 1997, and
$13.6 million related to the 7-7/8 % Senior Notes Due 2008. These increases were
partially offset by $1.4 million of interest capitalized on the development and
construction of power projects, $3.3 million for the reduction for debt at
Calpine Geysers Company, $869,000 for the reduction of debt at Calpine Finance
Company, and $581,000 for the reduction of debt at Calpine Greenleaf.
Interest income - Interest income increased to $3.7 million for the three months
ended September 30, 1998, compared to $3.3 million for the same period in 1997.
The increase was the result of higher cash and cash equivalent balances during
the third quarter of 1998. Interest income decreased to $9.4 million for the
nine months ended September 30, 1998, compared to $10.2 million for the same
period in 1997. This decrease was the result of lower cash and cash equivalent
balances.
Other expense (income), net - Other expense (income) net, decreased to $72,000
and ($834,000) for the three and nine months ended September 30, 1998 compared
to ($616,000) and ($1.6 million) for the same periods in 1997. The decrease was
primarily due to lower royalty income at the Company's geothermal facilities.
18
<PAGE>
Provision for income taxes - The effective income tax rate was approximately
37.3% for the nine months ended September 30, 1998. The reductions from the
statutory rate were primarily due to depletion in excess of tax basis benefits
at the Company's geothermal facilities, and a decrease in the California tax
liability due to the Company's expansion into states other than California.
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 financing. 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 flows activities for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
1998 1997
---------------- ----------------
Cash flows from:
<S> <C> <C>
Operating activities $ 72,931 $ 66,429
Investing activities $ (269,284) $ (228,844)
Financing activities $ 248,460 $ 260,955
Total $ 52,107 $ 98,540
</TABLE>
Operating activities for the nine months ended Sept 30, 1998 provided $72.9
million, consisting of approximately $53.5 million of depreciation and
amortization, $31.6 million of net income, $17.7 million of distributions from
unconsolidated investments in power projects, and $14.1 million of deferred
income taxes. This was offset by $16.2 million of income from unconsolidated
investments, $16.5 million net increase in operating assets and $11.3 million
net decrease in operating liabilities.
Investing activities for the nine months ended September 30, 1998 used $269.3
million, primarily due to $155.6 million for the acquisition of the remaining
50% interest in the Texas City and Clear Lake Power Plants, $4.5 million for the
acquisition of the remaining 55% interest in the Bethpage Power Plant, $27.2
million of capital expenditures related to the construction of the Pasadena
Power Plant, $13.1 million for the acquisition of the Pittsburg Power Plant,
$11.9 million for the acquisition of the Sonoma Power Plant, $40.0 million for
the acquisition of the Tiverton Power Plant, $12.5 million of other capital
expenditures, $19.6 million of capitalized project development costs, $4.5
million of interest capitalized on construction projects, offset by the receipt
of $12.8 million of loan payments, $833,000 of investments in power projects
specifically Calpine Eastern, and $6.0 million of maturities of collateral
securities in connection with the King City Power Plant.
Financing activities for the nine months ended September 30, 1998 provided
$248.5 million of cash consisting of $52.1 million of borrowings for the
construction of the Pasadena 1 Power Plant, $4.3 million of borrowings for
contingent consideration in connection with the acquisition of the Gilroy Power
Plant, $395.2 million of net proceeds from additional financings, and $1.1
million for the issuance of common stock, partially offset by $195.9 million in
repayment of non-recourse project financing, $8.3 million of repurchase of
Senior Notes Due 2006 which includes a premium paid and accrued interest to the
date of repurchase.
At September 30, 1998, cash and cash equivalents were $100.6 million and working
capital was $147.1 million. For the nine months ended September 30, 1998, cash
and cash equivalents increased by $52.1 million and working capital increased by
$159.1 million as compared to December 31, 1997.
As a developer, owner and operator of power generation facilities, 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 cash from operations, borrowings under its credit facilities,
other lines of credit, non-recourse project financing or long-term debt, and the
sale of equity.
19
<PAGE>
Management continues to evaluate current and forecasted cash flow as a basis for
financing operating requirements and capital expenditures. The Company believes
that it will have sufficient liquidity from cash flow from operations,
borrowings available under the lines of credit and working capital to satisfy
all obligations under outstanding indebtedness, to finance anticipated capital
expenditures and to fund working capital requirements for the next twelve
months. The Company expects to commit significant capital in future years for
the acquisition and development of these power plants. The Company's actual
capital expenditures may vary significantly during any year.
On March 31, 1998, the Company completed the Rule 144A offering of its $300.0
million Senior Notes Due 2008 which mature on April 1, 2008 and bear an interest
payable semi-annually on April 1 and October 1 of each year commencing October
1, 1998 (See Note 11 to the Notes to Condensed Consolidated Financial
Statements). Subsequent to this offering, on July 24, 1998, the Company
completed the Rule 144A offering of an additional $100.0 million Senior Notes
Due 2008. After deducting discounts to initial purchasers and expenses of the
offerings, the net proceeds from the sale of the Senior Notes Due 2008 were
approximately $98.8 million. (See Note 11 to the Notes to the Condensed
Consolidated Financial Statements).
At September 30, 1998, the Company had a $100.0 million revolving credit
facility available with a consortium of commercial lending institutions. The
Company had no borrowings and $26.7 million of letters of credit outstanding
under the credit facility (See Note 12 of Notes to Condensed Consolidated
Financial Statements). The credit facility contains certain restrictions that
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.
At September 30, 1998, the Company also had $105.0 million of outstanding 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 $171.8 million of outstanding 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. During 1997, the Company issued 8-3/4% Senior Notes
Due 2007, which mature on July 15, 2007, and bear interest payable semi-annually
on January 15 and July 15 of each year. At September 30, 1998, $275.0 million of
these senior notes were outstanding.
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, 1998, the Company had no borrowings under this working
capital line and $74,000 of letters of credit outstanding. Borrowings are at
prime plus 1%.
Outlook
Expand diversify domestic portfolio of power projects - In pursuing its growth
strategy, the Company intends to focus on opportunities for the acquisition,
development and operation of power generation facilities. The approach includes
design, engineering, procurement, finance, construction management, fuel and
resource acquisition, operations and power marketing, which the Company believes
provides it with a competitive advantage.
Acquisition of power plants - The Company has significantly expanded and
diversified its project portfolio through the acquisition of power generation
facilities. Since 1993, the Company has completed transactions involving gas
cogeneration facilities and steam fields. As a result of these transactions, the
Company has significantly increased its aggregate power generation capacity and
substantially diversified its fuel mix.
Development of new power plants - The Company is also pursuing the development
of efficient, low-cost power plants that seek to take advantage of
inefficiencies in the electric market. The Company intends to sell all or a
portion of the power generated by such new plants into the competitive market
through a portfolio of short-, medium- and long-term power sales agreements. The
Company currently plans to develop additional low-cost, gas-fired facilities in
California, Texas, New England and other power markets.
Impact of Avoided Cost Pricing - The Company receives from Pacific Gas &
Electric ("PG&E") a fixed price of 13.83 cents for each unit of electrical
energy according to schedules set forth in the long-term power sales agreements
for the Bear Canyon and West Ford Flat Power Plants. The fixed price periods
under these power sales agreements expired in September and December 1998,
respectively. 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 will adjust from
20
<PAGE>
the interim short-run avoided cost ("SRAC") to the energy clearing price of the
independent power exchange, once it is deemed fully implemented. The average
prices per kilowatt for SRAC for the year 1997 and for the first nine months of
1998 were 2.94 cents and 2.61 cents, respectively. Due to seasonality, such
average energy prices may not be indicative of future energy prices. During the
first nine months of 1998, the Bear Canyon and West Ford Flat Power Plants
generated approximately 304,384,000 kilowatt hours of electrical energy for
sale. The Company expects decreased royalty expenses and operating cost
reductions can mitigate the forecasted decline in energy revenues at these
facilities, although there can be no assurances in this regard. The Company
expects to continue its strategy of replacing decreased revenues through its
acquisition and development program.
Deregulation within the Power Generation Industry - Many states are implementing
or considering regulatory initiatives designed to increase competition in the
domestic power generation industry. In December 1995, the California Public
Utilities Commission ("CPUC") issued an electric industry restructuring
decision, which envisioned commencement of deregulation and implementation of
customer choice of electricity supplier by January 1, 1998. Legislation
implementing this decision was adopted in September 1996 and deregulation
commenced on April 1, 1998. As part of its policy decision, the CPUC indicated
that power sales agreements of existing qualifying facilities would be honored.
The Company believes that the restructuring will not have a material effect on
any of its 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.
Impact of Recent Accounting Pronouncements - In April 1998, the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
("SOP") No. 98-5, "Reporting on the Costs of Start-Up Activities," which is
effective for financial statements for fiscal years beginning after December 15,
1998. For purposes of this SOP, start-up activities are defined broadly as those
one-time activities related to opening a new facility, conducting business in a
new territory, conducting business with a new class of customer or beneficiary,
initiating a new process in an existing facility, or commencing some new
operation. Start-up activities include activities related to organizing a new
entity (commonly referred to as organization costs). Although earlier adoption
is encouraged, the Company has not yet quantified or determined the timing of or
method of the adoption.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards, requiring every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and require
that a company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The
Statement must be applied to derivative instruments and to certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997.
The Company has not yet analyzed the impact of adopting SFAS No. 133 on the
financial statements and has not determined the timing of or method of the
adoption of SFAS No. 133. However the Statement could increase volatility in
earnings.
Year 2000 Compliance - The "Year 2000 problem" refers to the fact that some
computer hardware, software and embedded systems were designed to read and store
dates using only the last two digits of the year.
The Company is coordinating its efforts to address the impact of Year 2000 on
the Company's business through a Year 2000 Project Team comprised of
representatives from each business unit and the Company's Year 2000 Project
Office. The Year 2000 Project Office is charged with addressing additional Year
2000 related issues including, but not limited to, business continuation and
other contingency planning. The Year 2000 Project Team meets regularly to
monitor the efforts of assigned staff and contractors to identify, remediate and
test the Company's technology.
The Year 2000 Project Team is focusing on four separate technology domains:
* corporate applications, which include core business systems;
21
<PAGE>
* non-information technology, which includes all operating and
control systems;
* end-user computing systems (that is, systems that are not,
considered core business systems but may
contain date calculations); and
business partner and vendor systems.
Corporate Applications - Corporate applications are those major core
systems, such as customer information, human resources and general ledger, for
which the Company's Management Information Systems department has the
responsibility. The Company utilizes PeopleSoft for its major core systems. The
PeopleSoft applications utilized by the Company are in operation and have been
determined to be Year 2000 compliant.
Non-Information Technology/Embedded Systems - Non-information technology
includes such items as power plant operating and control systems,
telecommunications and facilities-based equipment (e.g. telephones and two-way
radios) and other embedded systems. Each business unit is responsible for the
inventory and remediation of its embedded systems. In addition, the Company is
working with the Electric Power Research Institute, a consortium of power
companies, including investor-owned utilities, to coordinate vendor contacts and
product evaluation. Because many embedded systems are similar across utilities,
this concentrated effort should help to reduce total time expended in this area
and help to ensure that the Company's efforts are consistent with the efforts
and practices of other power companies and utilities.
Inventory of non-information technology/embedded systems was completed in
October 1998. The Company plans to complete remediation of non-compliant systems
by the second quarter of 1999. To date, all embedded systems that have been
identified by the Company can be upgraded or modified within the Company's
current schedule.
Testing of embedded systems is complex because some of the testing must be
completed during power plant scheduled maintenance outages. Much of the testing
will be accomplished in the spring of 1999 during regularly scheduled
maintenance outage periods. At that time, at least one typical unit of each
critical type will be tested by the Company or in cooperation with other power
companies, and the requirement for further testing will be determined.
End-User Computing Systems - Some of the Company's business units have
developed systems, databases, spreadsheets, etc. that contain date calculations.
Compliance of individual workstations is also included in this domain. These
systems comprise a relatively small percentage of the required modification in
terms of both number and criticality.
The Company's end-user computing systems are being inventoried by each
business unit and evaluated and remediated by the Company's MIS staff. The
Company expects to complete remediation and testing of the end-user computing
systems by mid-1999.
Business Partner and Vendor Systems - The Company has contracts with
business partners and vendors who provide products and services to the Company.
The Company is vigorously seeking to obtain Year 2000 assurances from these
third parties. Year 2000 Project Team and appropriate business units are jointly
undertaking this effort.
Contingency Planning Contingency and business continuation planning are in
various stages of development for critical and high-priority systems. The
Company's existing disaster response plan and other contingency plans are
scheduled to be evaluated and will be adopted for use in case of any Year
2000-related disruption. The Company expects to complete its contingency
planning by October 1999.
Costs - The costs of expected modifications is currently estimated to be
approximately $1.7 million which will be charged to expense as incurred. From
January 1, 1998 through September 30, 1998, $81,000 has been charged to expense.
Approximately 12% of the estimated total cost will be incurred in 1998, and the
remainder will be incurred in 1999 and 2000. These costs have been and will be
funded through operating cash flow. These estimates may change as additional
evaluations are completed and remediation and testing progress.
Risks - The Company currently expects to complete its Year 2000 efforts
with respect to critical systems by mid-1999. This schedule and the Company's
cost estimates may be affected by, among other things, the availability of Year
2000 personnel, the readiness of third parties, the timing for testing the
Company's embedded systems, the availability of vendor resources to complete
embedded system assessments and produce required component
22
<PAGE>
upgrades and the Company's ability to implement appropriate contingency plans.
The Company produces revenues by selling power it produces to customers. The
Company depends on transmission and distribution facilities that are owned and
operated by investor-owned utilities to deliver power to the Company's
customers. If either the Company's customers or the providers of transmission
and distribution facilities experience significant disruptions as a result of
the Year 2000 problem, the Company's ability to sell and deliver power may be
hindered, which could result in a loss of revenue.
The cost or consequences of a materially incomplete or untimely resolution of
the Year 2000 problem could adversely affect future operations, financial
results or the financial condition of the Company.
The forward-looking statements discussed in this outlook section involve a
number of risks and uncertainties. Other risks and uncertainties include, but
are not limited to, the general economy, regulatory conditions, the changing
environment of the power generation industry, pricing, the effects of legal and
administrative cases and proceedings, and such other risks and uncertainties as
may be detailed from time to time in the Company's SEC reports and filings.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 30, 1997, a lawsuit was filed by Indeck North American Power Fund
("Indeck") in the Circuit Court of Cook County, Illinois against Norweb plc. and
certain other parties, including the Company. Some of Indeck's claims relate to
Calpine Gordonsville, Inc.'s acquisition of a 50% interest in Gordonsville
Energy L.P. from Northern Hydro Limited and Calpine Auburndale, Inc.'s
acquisition of a 50% interest in Auburndale Power Plant Partners Limited
Partnership from Norweb Power Services (No. 1) Limited. Indeck is claiming that
Calpine Gordonsville, Inc., Calpine Auburndale, Inc. and the Company tortiously
interfered with Indeck's contractual rights to purchase such interests and
conspired with other parties to do so. Indeck is seeking $25.0 million in
compensatory damages, $25.0 million in punitive damages, and the recovery of
attorneys' fees and costs. In July 1998, the court granted motions to dismiss,
without prejudice, the claims against Calpine Gordonsville, Inc. and Calpine
Auburndale, Inc. In August 1998, Indeck filed an amended complaint and the
defendants filed motions to dismiss. A hearing on those motions is scheduled for
January 1999. The Company is unable to predict the outcome of these proceedings.
There is currently a dispute between Texas-New Mexico Power Company ("TNP") and
Clear Lake Cogeneration Limited Partnership ("CLC"), which owns the Clear Lake
Power Plant, regarding certain costs and other amounts that TNP has withheld
from payments due under the power sales agreement. As of September 30, 1998, TNP
has withheld approximately $7.9 million related to transmission charges and has
continued to withhold approximately $450,000 per month thereafter. In October
1997, CLC filed a petition for declaratory order with the Texas Public Utilities
Commission ("Texas PUC") requesting a declaration that TNP's withholding is in
error, which petition is currently pending. Also, as of September 30, 1998, TNP
has withheld approximately $7.7 million of standby power charges and has
continued to withhold approximately $270,000 per month thereafter. In addition
to the Texas PUC petition, CLC has filed an action in Texas courts alleging
TNP's breach of the power sales agreement and is seeking in excess of $15.0
million in damages. A trial date is scheduled for January 1999. The Company is
unable to predict the outcome of either of these proceedings.
An action was filed against Lockport Energy Associates, L.P. ("LEA") and the New
York Public Service Commission ("NYPSC") in August 1997 by New York State
Electricity and Gas Company ("NYSEG") in the Federal District Court for the
Northern District of New York. NYSEG has requested the Court to direct NYPSC and
the Federal Energy Regulatory Commission (the "FERC") to modify contract rates
to be paid to the Lockport Power Plant. In October 1997, NYPSC filed a
cross-claim alleging that the FERC violated PURPA and the Federal Power Act by
failing to reform the NYSEG contract that was previously approved by the NYPSC.
Although it is unable to predict the outcome of this case, in any event, the
Company retains the right to require The Brooklyn Union Gas Company ("BUG") to
purchase the Company's interest in the Lockport Power Plant for $18.9 million,
less equity distributions received by the Company, at any time before December
19, 2001.
The Company is involved in various other claims and legal actions arising out of
the normal course of business. The Company does not expect that the outcome of
these proceedings will have a material effect on the Company's financial
23
<PAGE>
position or results of operations, although no assurance can be given in this
regard.
ITEM 2. CHANGE IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)-1. Reports on Form 8-K
None.
(b)-2. Exhibits
The following exhibits are filed herewith unless otherwise indicated:
3.1 -- Amended and Restated Certificate of Incorporation of
Calpine Corporation, a Delaware
corporation.(b)
3.2 -- Amended and Restated Bylaws of Calpine Corporation, a Delaware
corporation.(b)
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.(d)
4.3 -- Indenture dated as of July 8, 1997 between the Company and The
Bank of New York, as Trustee,including form of Notes.(g)
4.4 -- Indenture dated as of March 31, 1998 between the Company and The
Bank of New York, as Trustee,
including form of Notes.(l)
10.1 -- Financing Agreements
10.1.1 -- Construction and Term Loan Agreement, dated as of
January 30, 1992, between Sumas Cogeneration Company, L.P.,
The Prudential Insurance Company of America and Credit Suisse,
New York Branch.(a)
10.1.2 -- Amendment No. 1 to Construction and Term Loan Agreement, dated
as of May 24, 1993, between Sumas Cogeneration Company, L.P.,
The Prudential Insurance Company of America and Credit Suisse,
New York Branch.(a)
10.1.3 -- Lease dated as of April 24, 1996 between BAF Energy A California
Limited Partnership, Lessor,
and Calpine King City Cogen, LLC, Lessee.(c)
10.1.4 -- Credit Agreement, dated as of August 28, 1996, among Calpine
Gilroy Cogen, L.P. and Banque Nationale de Paris.(b)
10.1.5 -- Credit Agreement, dated as of September 25, 1996, among Calpine
Corporation and The Bank of Nova Scotia.(c)
10.1.6 -- Credit Agreement, dated December 20, 1996, among Pasadena
Cogeneration L.P. and ING (U.S.) Capital Corporation and
The Bank Parties Hereto.(e)
10.2 -- Purchase Agreements
10.2.1 -- Asset Purchase Agreement, dated as of August 28, 1996, among
Gilroy Energy Company, McCormick & Company, Incorporated and
Calpine Gilroy Cogen, L.P.(d)
24
<PAGE>
10.2.2 -- Noncompetition/Earnings Contingency Agreement, dated as of
August 28, 1996, among Gilroy Energy Company, McCormick &
Company, Incorporated and Calpine Gilroy Cogen, L.P.(d)
10.2.3 -- Purchase and Sale Agreement dated March 27, 1997 for the
purchase and sale of shares of Enron/Dominion Cogen Corp.
Common Stock among Enron Power Corporation and Calpine
Corporation.(i)
10.2.4 -- Stock Purchase and Redemption Agreement dated March 31, 1998,
among Dominion Cogen, Inc.Dominion Energy, Inc. and Calpine
Finance (i)
10.2.5 -- Stock Purchase Agreement Among Gas Energy Inc., Gas Energy
Cogeneration Inc., Calpine Eastern Corporation and Calpine
Corporation dated August 22, 1997.(h)
10.2.6 -- First Amendment to the Stock Purchase Agreement Among Gas Energy
Inc., Gas Cogeneration Inc., The Brooklyn Union Gas Company and
Calpine Eastern Corporation and Calpine Corporation dated
August 22, 1997; as amended on December 19, 1997. (h)
10.2.7 -- Amended and Restated Cogenerated Electricity Sale and Purchase
Agreement by and between Cogenron Inc., and Texas Utilities
Electric Company dated June 12, 1985; as previously amended,
and as amended and restated on December 29, 1997. (h)
10.2.8 -- Agreement for the Purchase of Electrical Power and Energy between
Capital Cogeneration Company Ltd. And Texas-New Mexico Power
Company Agreement.(h)
10.2.9 -- Stock Purchase Agreement dated May 1, 1998 and between Calpine
Corporation and CCNG Investments,L.P.(k)
10.3 -- Power Sales Agreements
10.3.1 -- Long-Term Energy and Capacity Power Purchase Agreement relating
to the Bear Canyon Facility, dated November 30, 1984, between
Pacific Gas & Electric and Calpine Geysers Company, L.P.(formerly
Santa Rosa Geothermal Company, L.P.), Amendment dated
October 17, 1985, Second Amendment dated October 19, 1988,
and related documents.(a)
10.3.2 -- Long-Term Energy and Capacity Power Purchase Agreement relating
to the Bear Canyon Facility, dated November 29, 1984, between
Pacific Gas & Electric and Calpine Geysers Company, L.P.
(formerly Santa Rosa Geothermal Company, L.P.), and Modification
dated November 29, 1984, Amendment dated October 17, 1985,
Second Amendment dated October 19, 1988, and related
documents.(a)
10.3.3 -- Long-Term Energy and Capacity Power Purchase Agreement relating
to the West Ford Flat Facility, dated November 13, 1984, between
Pacific Gas & Electric and Calpine Geysers Company, L.P.
(formerly Santa Rosa Geothermal Company, L.P.), and Amendments
dated May 18, 1987, June 22, 1987, July 3, 1987 and
January 21, 1988, and related documents.(a)
10.3.4 -- Agreement for Firm Power Purchase, dated as of February 24, 1989,
between Puget Sound Power & Light Company and Sumas Energy, Inc.
and Amendment thereto dated September 30, 1991.(a)
10.3.5 -- Long-Term Energy and Capacity Power Purchase Agreement, dated
December 5,1985, between Calpine Gilroy Cogen, L.P. and Pacific
Gas and Electric Company, and Amendments thereto dated
December 19, 1993, July 18, 1985, June 9, 1986, August 18, 1988
and June 9, 1991. (b)
10.3.6 -- Amended and Restated Energy Sales Agreement, dated
December 16, 1996, between Phillips Petroleum Company and
Pasadena Cogeneration, L.P.(e)
10.4 -- Steam Sales Agreements
10.4.1 -- Amendment to the Steam and Electricity Service Agreement between
Cogenron Inc. and Union Carbide Corporation dated
June 12, 1985. (h)
10.6 -- Gas Supply Agreements
10.6.1 -- Gas Sale and Purchase Agreement, dated as of December 23, 1991,
between ENCO Gas, Ltd. and SumaS Cogeneration Company, L.P.(a)
10.6.2 -- Gas Management Agreement, dated as of December 23, 1991, between
Canadian Hydrocarbons Marketing Inc., ENCO Gas, Ltd. And Sumas
Cogeneration Company, L.P.(a)
10.8 -- General
10.8.1 -- Limited Partnership Agreement of Sumas Cogeneration Company,
L.P., dated as of August 28, 1991, between Sumas Energy, Inc.
and Whatcom Cogeneration Partners, L.P.(a)
10.8.2 -- First Amendment to Limited Partnership Agreement of Sumas
Cogeneration Company, L.P., dated as
of January 30, 1992, between Whatcom Cogeneration Partners, L.P.
and Sumas Energy, Inc.(a)
10.8.3 -- Second Amendment to Limited Partnership Agreement of Sumas
Cogeneration Company, L.P., dated as of May 24, 1993, between
Whatcom Cogeneration Partners, L.P. and Sumas Energy, Inc.(a)
10.8.4 -- Amended and Restated Limited Partnership Agreement of Geothermal
Energy Partners Ltd., L.P., dated as of May 19, 1989, between
Western Geothermal Company, L.P., Sonoma Geothermal Company,
L.P., and Cloverdale Geothermal Partners, L.P.(a)
25
<PAGE>
10.8.5 -- Ground Lease Agreement, between Union Carbide Corporation and
Northern Cogeneration One Company, dated January 1, 1986.(h)
10.9.1 -- Calpine Corporation Stock Option Program and forms of agreements
thereunder.(a)
10.9.2 -- Calpine Corporation 1996 Stock Incentive Plan and forms of
agreements thereunder.(b)
10.9.3 -- Calpine Corporation Employee Stock Purchase Plan and forms of
agreements thereunder.(b)
10.10.1 -- Amended and Restated Employment Agreement between Calpine
Corporation and Mr. Peter Cartwright.(b)
10.10.2 -- Senior Vice President Employment Agreement between Calpine
Corporation and Ms. Ann B. Curtis.(b)
10.10.3 -- Senior Vice President Employment Agreement between Calpine
Corporation and Mr. Lynn A. Kerby.(b)
10.10.4 -- Vice President Employment Agreement between Calpine Corporation
and Mr. Ron A. Walter.(b)
10.10.5 -- Vice President Employment Agreement between Calpine Corporation
and Mr. Robert D. Kelly.(b)
10.10.6 -- First Amended and Restated Consulting Contract between Calpine
Corporation and Mr. George J. Stathakis.(b)
10.11 -- Form of Indemnification Agreement for directors and officers. (b)
21.1 -- Subsidiaries of the Company.(d)
27.0 -- Financial Data Schedule.*
____________
(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 Registration Statement on
Form S-1 (Registration Statement No. 333-07497).
(c) Incorporated by reference to Registrant's Current Report on Form 8-K dated
May 1, 1996 and filed on May 14, 1996.
(d) Incorporated by reference to Registrant's Current Report on Form 8-K dated
August 29, 1996 and filed on September 13, 1996.
(e) Incorporated by reference to Registrant's Annual Report on Form 10-K
dated December 31, 1996, filed on March 27, 1996.
(f) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
dated March 31, 1997 and filed on May 12, 1997
(g) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
dated June 30, 1997 and filed on August 14, 1997.
(h) Incorporated by reference to Registrant's Annual Report on Form 10-K/A
dated December 31, 1997 and filed on April 1, 1998.
(i) Incorporated by reference to Registrant's Current Report on Form 8-K
dated March 31, 1998 and filed on April 14, 1998.
(j) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
dated March 31, 1998 and filed on April 14, 1998.
(k) Incorporated by reference to Registrant's Current Report on Form 8-K
dated May 26, 1998 and filed on June 9, 1998.
(l) Incorporated by reference to Registrant's Registration Statement on
Form S-4, filed on August 10, 1998 (Registration Statement No. 333-61047).
* Filed herewith.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALPINE CORPORATION
By: /s/ Ann B. Curtis Date: November 13, 1998
--------------------------
Ann B. Curtis
Executive Vice President
(Chief Financial Officer)
By: /s/ Gloria S. Gee Date: November 13, 1998
--------------------------
Gloria S. Gee
Corporate Controller
(Chief Accounting Officer)
27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CALPINE
CORPORATION'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998, AND
FROM THE CONDENSED CONSOLIDATED STATMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998,AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000916457
<NAME> CALPINE CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 100,620
<SECURITIES> 1,820
<RECEIVABLES> 100,816
<ALLOWANCES> 0
<INVENTORY> 13,926
<CURRENT-ASSETS> 243,616
<PP&E> 1,379,427
<DEPRECIATION> 331,432
<TOTAL-ASSETS> 1,675,099
<CURRENT-LIABILITIES> 96,535
<BONDS> 950,522
0
0
<COMMON> 20
<OTHER-SE> 272,805
<TOTAL-LIABILITY-AND-EQUITY> 1,675,099
<SALES> 347,359
<TOTAL-REVENUES> 382,915
<CGS> 241,515
<TOTAL-COSTS> 253,229
<OTHER-EXPENSES> 23,272
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,138
<INCOME-PRETAX> 51,499
<INCOME-TAX> 19,213
<INCOME-CONTINUING> 32,286
<DISCONTINUED> 0
<EXTRAORDINARY> 641
<CHANGES> 0
<NET-INCOME> 31,645
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.50
</TABLE>