Harbinger Capital Partners

January 22, 2007 09:14 ET

Harbinger Responds to Calpine Monitor's Recommendation and Improves and Clarifies its Offer

CALGARY, ALBERTA--(CCNMatthews - Jan. 22, 2007) -


Harbinger Capital Partners today announced that it has submitted, through its indirect wholly-owned subsidiary HCP Acquisition Inc. ("HCP"), various improvements and clarifications to the offer (the "Offer") that HCP made on January 16, 2007 to Ernst & Young Inc., in its capacity as the court-appointed monitor in the Calpine Canadian insolvency proceedings, for all of the Class B subordinated units of Calpine Power, L.P. and certain administration, management and other agreements between affiliates of each of Calpine Corporation and Calpine Power Income Fund (the "Fund"). HCP's amended Offer is open for acceptance until 4:00 p.m. (Calgary time) on February 16, 2007, and may be extended by HCP. A copy of the amended Offer is attached.

Cautionary Statements

This news release contains forward-looking statements, which reflect HCP's and Harbinger Capital Partners' current beliefs and expectations. These forward-looking statements are subject to risks and uncertainties. Many factors could cause actual results to differ materially from the results discussed in the forward-looking statements. Undue reliance should not be placed on forward-looking statements.

This announcement does not constitute or form part of any offer or invitation to purchase, otherwise acquire, subscribe for, sell, otherwise dispose of or issue, or any solicitation of any offer to sell, otherwise dispose of, issue, purchase, otherwise acquire or subscribe for, any security. The release, publication or distribution of this announcement in certain jurisdictions may be restricted by law and therefore persons in such jurisdictions into which this announcement is released, published or distributed should inform themselves about and observe such restrictions.

This announcement contains certain information relating to the Fund and its subsidiary entities. Neither HCP nor Harbinger Capital Partners have had any due diligence access to the Fund or its subsidiary entities. The information in this announcement relating to the Fund and its subsidiary entities has been compiled from information included in public documents filed by the Fund only and has not been commented on or verified by the Fund, its trustees, or Harbinger Capital Partners or HCP. HCP and Harbinger Capital Partners believe that they are not in possession of any material non-public financial or other information in respect of the Fund or its subsidiary entities.

January 22, 2007

Ernst & Young Inc.,
In its capacity as Court Appointed
Monitor of the Applicants (as herein defined)
and the CCAA Parties (as herein defined)

Attention: Neil Narfason, Senior Vice-President

Dear Sir:

Re: Offer to Acquire the Class B Units (the "Class B Units") of Calpine Power, L.P. ("CLP") and Certain Contracts held by Calpine Canada Power Ltd. ("CCPL")

On January 16, 2007 HCP Acquisition Inc. (the "Offeror") submitted an offer to Ernst & Young Inc., in its capacity as monitor (the "Monitor") in the CCAA proceedings involving certain Canadian subsidiaries of Calpine Corporation ("Calpine") to acquire the Class B Units and certain Contracts held by CCPL (the "Offer").

The Offeror has now received and reviewed those portions of the Seventeenth Report of the Monitor dated January 19, 2007 (the "17th Report") containing the Monitor's recommendations and conclusions in respect of its comparison of the Offer and the settlement agreement (the "Settlement Agreement") between CCPL and Calpine Power Income Fund (the "Fund"). The Monitor recommended that an auction/marketing process should not be undertaken for the Class B Units and Contracts and that the Court should approve the Settlement Agreement rather than the Offer. The Monitor's concerns with an auction/marketing process seem to come down to an assessment that pursuing the Offer is too risky because it is conditional. However, the Monitor acknowledges that this is a very subjective conclusion and suggests that notwithstanding its recommendation, stakeholders should be given the opportunity to evaluate the risk of proceeding with the Offer and advise the Monitor on whether to pursue the Offer.

Amendments to the Offer

Therefore, in order to provide creditors with additional information to evaluate the risk of our Offer, to eliminate concerns regarding the Offer that may have caused the Monitor to recommend the Settlement Agreement rather than the Offer and to provide creditors greater benefits and certainty that the Offeror will complete the Offer, the Offeror hereby provides the following amendments and clarifications to the Offer. In this letter capitalized terms have the same meanings for those terms as in the Offer except where otherwise provided; and "Revised Offer" means the Offer as amended and clarified hereby.

1. The aggregate purchase price that the Offeror will pay for the Class B Units and the Contracts is increased to be the greater of:

(a) Cdn. $110 million (rather than Cdn. $100 million); and

(b) 110% of the Transaction Price (rather than the Transaction Price plus Cdn. $2 million);

and the definition of "Consideration" is modified accordingly.

2. If the Offeror is successful in acquiring all of the outstanding Units of the Fund, including pursuant to the Take-over Bid, as that bid may be modified or amended, the Offeror will:

(a) pay CCPL an additional Cdn. $25 million (rather than Cdn. $20 million) and the definition of "Increased Consideration" is modified accordingly; and

(b) will cause the Trust and its affiliates to withdraw any claims by the Trust and its affiliates in relation to the alleged fraudulent conveyance from Calpine Energy Services Canada Partnership ("CESCA") to Calpine Greenfield Commercial Trust ("CGCT") of its 49.995% interest in Greenfield Energy Centre L.P. on November 9, 2005 (the "Fraudulent Conveyance").

3. If rather than approving this Revised Offer or the Settlement Agreement the Court orders an auction or other kind of open, transparent marketing process for the Class B Units and the Contracts, the Offeror will consider further increasing the Consideration or Increased Consideration, as the case may be, that it is prepared to pay (even if the Court continues to order that all the terms of the Settlement Agreement will not be made available to the Offeror unless the Offeror signs a confidentiality and standstill agreement). The factors that may allow the Offeror to increase the Consideration, or Increased Consideration, as the case may be, in those circumstances include:

(a) the manner in which the auction or marketing process is to be conducted;

(b) the information that the Court makes available to the Offeror and bidders;

(c) the time for making bids; and

(d) the form of order and documentation proposed by the Monitor.

4. The requirement in the Offer to provide the Offeror the right to match a superior proposal to acquire the Class B Units and the Contracts is deleted; provided that any auction or other marketing process ordered or sanctioned by the Court provides the Offeror an opportunity to respond to alternate proposals. The Offeror will work with the Monitor, the Applicants and creditors in Calpine's CCAA proceedings to design an auction/marketing process that is fair to all participants. The Offeror will commit as part of that process that any response by the Offeror to an alternate proposal will be by an agreed minimum incremental amount.

5. The Revised Offer cannot be withdrawn by the Offeror without the permission of the Monitor before the earlier of:

(a) February 16, 2007;

(b) the Court approving an alternate proposal, including the Settlement Agreement, and the transaction contemplated by that alternate proposal being completed; and

(c) the Offeror making a replacement offer for the Class B Units and the Contracts which the Monitor concludes is superior to the Revised Offer (the "Replacement Offer").

6. One of the conditions in the Revised Offer is an order of the Court approving the Revised Offer in form acceptable to the Offeror. That order would provide that the Court approves the transfer of the Class B Units and the Contracts free and clear of liens, charges and encumbrances (other than disputes and claims being brought for Contract termination, breach and damages) and those transfers not being subject to any further consent or requirements by the general partner of CLP. The Offeror believes that the Court would conclude that the Revised Offer provides an assignee that would clearly meet the "reasonable consent" standard in the CLP limited partnership agreement and the Contracts, information in relation to which is provided below under "The Offeror's Qualifications Support Prompt Closing and Fund Consent to Transfers". The Offeror would also pay any fees and costs of transfer that the Court determines must be borne by CCPL under those Contracts.

The Offeror commits to settle with CCPL and the Monitor the legal documentation and the form of order required to complete the Revised Offer promptly following the Court's approval of the Revised Offer or the Court's determination that an auction/marketing process should begin. Therefore, if the Settlement Agreement is withdrawn by the Fund, CCPL will be in a position to rely on the Revised Offer in lieu thereof.

7. As with the Settlement Agreement, the Revised Offer eliminates the ongoing litigation risk for CCPL and the creditors on the same disputes addressed by the Settlement Agreement. It does so by providing that CCPL will receive the cash Consideration (or Increased Consideration, as the case may be) and the Offeror will substitute itself for CCPL in these disputes with the Fund. The Offeror will assume the risk of Contract termination, breaches and damages claims as well as those other liabilities of CCPL which the Court determines exist under those Contracts, along with the cost of any litigation associated therewith. Of course, the Offeror believes that it will prevail over the Fund in these disputes (as would have CCPL). The Revised Offer goes even further than the Settlement Agreement in potentially relieving CCPL of complex litigation in that the Trust's claims in the Fraudulent Conveyance would be withdrawn in the circumstances described in paragraph 2(b) above.

On completion of the Offeror's acquisition of the Class B Units and the Contracts the Offeror will, at its sole cost and expense, assume full responsibility and be liable for all claims advanced by the Fund and its affiliates regarding the Contracts, including the potential termination of those Contracts. To the extent the Court determines those claims exist and subject to retaining the rights of CCPL to recover on those claims from third parties, CCPL, the other Applicants and the Monitor would have no liability in respect of those claims.

Therefore, the Revised Offer is also conditional on the Court adjourning the January 26, 2007 application (the "Termination Application") of the CCT Trustees and the board of directors of the general partner of CLP to terminate each of the Agreements (as defined in the Termination Application) until a reasonable time following the closing of the Revised Offer, if accepted and approved, in order to enable the Offeror to prepare for and participate in the Court proceeding addressing the Termination Application.

The Revised Offer will therefore provide the same result to CCPL and the creditors (other than the Fund) with regard to the litigation, other than an ongoing obligation for CCPL's employees to cooperate with the Offeror in defending that litigation. Those employees would remain available to the Offeror under the assigned Contracts, and the Offeror currently intends to retain all such employees to perform the services under the Contracts.

8. The Revised Offer is not conditional on settlement of the litigation involving the Fund, CCT, CLP and CCPL relating to the subordination of an unsecured loan (the "CCPL Loan") from CCPL to Calpine Canada Whitby Holdings Company ("CCWH") to an unsecured loan from CLP to CCWH dated August 29, 2002 (the "Whitby Loan"). The Offeror agrees that CCPL may settle that litigation without the Offeror's consent or participation. The Offeror would support the Court confirming that the Whitby Loan is senior to the CCPL Loan on the same terms embodied in the Settlement Agreement. The Offeror believes that the elimination of this litigation could be accomplished on the terms in the Settlement Agreement without Fund consent, since those terms are consistent with the Fund prevailing in the litigation on the Whitby Loan.

To the extent of any inconsistencies between the Offer and this letter, the terms of this letter will govern.

Except as amended by this letter, the Offer continues in full force and effect, unamended.

The Offeror's Qualifications Support Prompt Closing and Fund Consent to Transfers

The Monitor, CCPL and the other Applicants and other stakeholders in Calpine's CCAA proceedings should be satisfied that the Offeror will complete the purchase of the Class B Units and the Contracts if the Revised Offer is accepted and approved by the Court.

The Revised Offer is not conditional on financing, while it would appear that the Settlement Agreement would be conditional on the Fund raising the required cash to fund the Transaction Price. In addition, the Settlement Agreement provides for complex escrow arrangements which may result in less proceeds flowing ultimately to creditors, which the Revised Offer does not. The Offeror is indirectly owned by Harbinger and Harbinger will provide it with the necessary capital, subject to the conditions herein, to promptly complete the Revised Offer, having in excess of US $5 billion in capital.

In addition, the Offeror and its affiliates have the expertise necessary to perform CCPL's duties under the Contracts and will assume CCPL's obligations in that regard.

As described in Schedule A to this letter, those affiliates operate power plants substantially similar to those of the Fund, with capacity approximately four times greater than the Fund's assets. Several large international banking institutions rely on those affiliates to operate these assets to support over US $1 billion in bank debt and the Federal Energy Regulatory Commission recently approved an acquisition by those affiliates of a power plant from Calpine. Those affiliates manage over 20 employees similar to the employees of CCPL and currently expect to retain all the Canadian employees of CCPL if the Revised Offer is successful. Therefore, the Offeror believes that with the Offeror as an assignee of the Contracts, the Fund and its unitholders would be in a better position than with the plants being operated either by CCPL or the CCT Trustees, as contemplated by the Settlement Agreement.

We are committed to completing the Revised Offer or a Replacement Offer, as the case may be, and have the necessary funds to do so. We look forward to discussing with you proceeding with the Revised Offer. We would be prepared to close the transactions contemplated by the Revised Offer within one (1) business day following the satisfaction of all closing conditions.

Please confirm that the foregoing is acceptable to and will be recommended by the Monitor for approval by the Court, rather than recommending the Settlement Agreement.

Yours very truly,


By: Howard Kagan, Director

cc: Patrick T. McCarthy, Borden Ladner Gervais LLP, Counsel to the Monitor (by email), Toby Austin, President and Chief Executive Officer, Calpine Canada Power Ltd. (by email), Robert Hodgins, Chairman of the Board of Trustees, Calpine Commercial Trust (by email), Brock Gibson, Blake Cassels & Graydon LLP, Counsel to the Board of Trustees (by email).



Mayflower Description

Mayflower is a holding company established for the management and ownership of the Plants described below and is wholly owned and controlled by Harbinger Capital Partners Master Fund I, Ltd ("Harbinger").

Mayflower is managed by Kelson Energy, LLC ("Kelson Energy") through a long-term incentive based management contract. Kelson Energy's management team consists of highly experienced power industry professionals and includes individuals who have acquired, financed and managed in excess of 7,500 MW of U.S. electric generating plants. Kelson Energy is led by Neal Cody and Jesse Gardner, with over 40 years of collective industry experience.

Mayflower owns and manages a 3,895 MW portfolio of natural gas generating facilities located in the Southwest Power Pool ("SPP"), the Tennessee Valley Authority ("TVA") and the Entergy-Texas sub-region of the Southeastern Reliability Council ("SERC"). The facilities include Dogwood, a nominal 580 MW gas-fired combined cycle power plant facility located in Pleasant Hill, Missouri ("Dogwood"); Cottonwood, a 1,205 MW gas-fired combined-cycle plant located Deweyville, Texas ("Cottonwood"); Magnolia, a 900 MW gas-fired combined-cycle plant located in Benton County, Mississippi ("Magnolia"); and Redbud, a 1,210 MW gas-fired combined-cycle plant located in Luther, Oklahoma ("Redbud") (collectively "the Plants").

Cottonwood, Magnolia and Redbud were originally owned, developed and constructed by affiliates of InterGen N.V. and later sold to Mayflower in September 2005. The Dogwood project was originally developed and constructed by Merchant Energy Partners Pleasant Hill, LLC ("MEP") as a 50/50 joint venture between Calpine Corporation ("Calpine") and Aquila Merchant Services, a subsidiary of Aquila, Inc. ("Acquila"). In March 2004, Calpine acquired the remaining 50% interest in Dogwood from Aquila. In January 2007, Mayflower purchased 100% of the Dogwood project from Calpine for $234 million.

Operating History

The Plants constitute a modern generation fleet, with each facility commencing operations in the last 5 years. The average years of operation for the portfolio is 3.75 years. The Plants utilize proven technology and enjoy strong operating track records.

The Cottonwood, Magnolia and Redbud facilities were constructed by Bechtel and commenced operations between July 2003 and January 2004. These combined-cycle facilities have full-load heat rates of approximately 7,000 Btu/kWh and utilize proven gas turbine technologies with GE 7FA combustion turbines, Foster Wheeler heat recovery steam generators and ALSTOM steam turbines.

Dogwood was constructed by Black & Veatch and commenced combined cycle operations in February 2002. The facility has a full-load heat rate of approximately 7,000 Btu/kWh and utilizes proven gas turbine technology with Siemens Westinghouse 501F combustion turbines, Toshiba three pressure heat recovery generators, and a Toshiba steam turbine.

Each of the facilities is fully operational and employs state-of-the-art emissions control technologies.

Contact Information