CALPINE CORPORATION (CPN)

Repowering America

By Matthew Mitchell

Why Calpine is a Buy

• Increasing revenues in the electric utilities industry as the economy recovers and fuel prices rise

• Competitive advantage in its industry by concentrating on high-efficiency natural gas power plantson high-efficiency natural gas power plants

• Will alleviate debt and turn assets into revenue and profits once its plants in construction begin operation

• Profiting from increasing deregulation by entering markets where state-run utilities are being forced to divest

Company Profile

• Founded in 1984

• Largest fleet of natural gas turbines

• World’s largest geothermal power producer• World’s largest geothermal power producer

• Engaged in $15 billion power construction program

• Owns a growing amount of natural gas reserves

• Uses clean, efficient natural gas energy

• Generates revenue by selling electricity

Competitive Advantages

• Primary concentration on natural gas plants:

1. Decreases development costs

2. Often the primary customer for suppliers

3. Able to devote capital to acquire control of natural gas properties

• Natural gas plants can be built quickly and more cheaply than other energy facilities

• Natural gas usage encouraged by environmental groups

• c*Power Initiative

Peter Cartwright

• 40 years in the power industry

• Engineering degree; worked for the US Navy Civil Engineer Corps

• Involved with building nuclear power plants for GE

• Founded Calpine in 1984 as an Independent Power Producer to capitalize on power industry deregulation

• Believes management should not be highly structured and encourages teamwork among employees as most important

Business Model

Natural Gas Reserves

Generation Plant

End-UserReserves

Pipelines

Plant

Transmission Lines

End-User

Beauty of Natural Gas

• Cheaper, smaller, more modular design

• Fewer regulatory requirements

• Easily expanded

• Natural gas is one of the most inexpensive fossil fuels

• Coal plants require greater economies of scale

• Natural gas plants have quicker construction timeframes

• Require fewer employees to operate

Energy Consumption Outlook

Calpine Locations

Financial Measures

• Price/Earnings 6.57

• Fool Ratio -0.657

• Price/Sales 1.75

• Return on Equity 22.57%

• Profit Margins 7.60%

Financial Measures

• Current Ratio .75

• Quick Ratio .72• Quick Ratio .72

• Free Cash Flow Yield -444.34

• Debt/Equity 3.23

Earning Estimates: FY(02) 1.68

FY(03) 2.03

Potential Problems

• Energy demand and economic growth fail to increase substantially in 2002 and 2003

• Price of natural gas remains at low levels

• Mild weather continues into the summer and winter

• Unable to substantially reduce its debt and improve its credit rating

The Debt Dilemma

• Calpine has accumulated more than $10 Billion in debt as of December, 2001.

• Moody’s and S&P have downgraded its credit rating below investment grade

• Calpine has cut back its building program to save $3 Billion in • Calpine has cut back its building program to save $3 Billion in capital expenditures in 2002.

• 27 new plants expected to come on-line in 2002 & 2003 and energy demand and prices are projected to increase

• Securing a $2 Billion credit facility to improve its cash position

• High debt/equity ratios are part of the nature of the power industry

• Wall Street’s perception of the stock tarnished (inappropriately) by the Enron collapse, hurting its capital position