Harbinger Capital Partners

January 29, 2007 09:39 ET

Harbinger Submits Clarification to its January 22nd 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.

CALGARY, ALBERTA--(CCNMatthews - Jan. 29, 2007) -

NOT FOR DISSEMINATION IN THE UNITED STATES OR OVER UNITED STATES WIRE SERVICES

Harbinger Capital Partners submitted the following letter to Ernst & Young Inc., in its capacity as Monitor to clarify its original offer to acquire the Class B Units and certain Contracts held by CCPL (the "Offer").



January 27, 2007

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

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 to acquire the Class B Units and certain Contracts held by CCPL (the "Offer"). The Offer was amended and clarified by a letter dated January 22, 2007 from the Offeror to the Monitor (the "Revised Offer").

The sales, transfers and assignments, as the case may be, of the Class B Units and the Contracts to the Offeror require certain consents by the general partner of CLP, the Fund and affiliates of the Fund. In order to facilitate completion of the transactions contemplated by the Revised Offer, the Offeror has entered into a support agreement (the "Support Agreement") with the Fund and CCT to obtain the Fund's agreement to provide, and to cause its affiliates, including the general partner of CLP to provide, the required consents to the sales, transfers and assignments, as the case may be, of the Class B Units and the Contracts to the Offeror in consideration for the Offeror increasing the price of its Take-over Bid to $13.00 per Unit. The Support Agreement also provides that the Fund and CCT and any of their respective affiliates agree, in accordance with its terms, that they shall not make or announce any intention to make a competing bid for any of the Fund-related Assets (defined below) or that is otherwise inconsistent with or may have an adverse effect on the transactions contemplated by the Final Offer (defined below) or the Fund's Offer (as defined in the Support Agreement), including without limitation making or proposing any amendment or modification to the Fund's Offer or any of the definitive documentation relating thereto, and, at the request of the Offeror, will oppose and not consent to any other bids that are inconsistent with or may have an adverse effect on the completion of the transactions contemplated by this Final Offer or the Fund's Offer, as applicable.

As a result thereof, the Offeror hereby provides the following amendments and clarifications to the Revised Offer. In this letter, capitalized terms have the same meanings for those terms as in the Offer, as amended by the Offeror's January 22, 2007 letter and this letter; and "Final Offer" means the Revised Offer as amended and clarified by this letter.

1. Consideration

The aggregate cash purchase price that the Offeror will pay for the Class B Units and the Contracts (collectively the "Fund-related Assets") is Cdn. $135 million (and the definition of the "Consideration" is modified accordingly).

There is no Increased Consideration.

2. Withdrawal

The Final 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 and the transaction contemplated by that alternate proposal being completed; and

(c) the Offeror making a replacement offer for the Fund-related Assets which the Monitor concludes is superior to the Final Offer.

3. Conditions

The Final Offer is conditional on:

(a) the execution and delivery of the documents to complete the purchase and sale of the Fund-related Assets pursuant to this Final Offer in form and content and on terms satisfactory to the Offeror, acting reasonably; and

(b) an order of the Court approving and giving effect to the transactions contemplated herein.

The Final Offer is not conditional on any regulatory approvals being obtained or the Offeror receiving or being satisfied with the terms of the Settlement Agreement.

Also, if third party consents, other than from the Fund and its affiliates, are not obtained for assignment of the Island O&M Agreement the Offeror will nonetheless close the transactions contemplated by the Final Offer if commercially reasonable arrangements are made to have CCPL continue to perform under the Island O&M Agreement with the Offeror as a subcontractor or in some other similar capacity.

4. The Court Order

The Court order referred to in Section 3(b) shall give effect to the transactions contemplated herein, including by ordering:

(a) that the stay in the CCAA proceedings involving the Applicants and the CCAA Parties is lifted for the limited purpose of permitting the transactions contemplated herein to take place and close.

(b) that, on Closing, the Court approves and directs that all right, title and interest in and to the Fund-related Assets shall vest in the Offeror free and clear of all liens, charges and encumbrances (except for disputes and claims being brought for Contract termination, breach or damages, other than arising out of or relating to defaults due to insolvency or any other matter whatsoever in relation to the CCAA proceedings) and notwithstanding any and all material consent rights which might otherwise apply, which consent rights shall be permanently stayed or discharged with respect to the transactions provided for herein;

(c) the permanent stay, injunction, discharge or dismissal of any and all claims for termination of the Contracts for default due to insolvency or any other matter whatsoever relating to or arising out of the CCAA proceedings and continuance of the stay of the balance of the Termination Application (as defined below) in the manner described in Section 8;

(d) that, to the extent necessary, the Court shall seek the aid and assistance of other courts of competent jurisdiction to give effect to the transactions contemplated herein;

(e) that the order granted by the Court is subject to any further order of the Court pursuant to s. 11(4)(c) of the CCAA; and

(f) such further and other terms and conditions as may be required or desirable to give full force and effect to the transactions contemplated herein.

In the event that the Court approves this Final Offer subject to the Offeror obtaining a further order of the Court to approve and direct the said transfers and assignments as contemplated herein, the Offeror covenants to file such application forthwith and to diligently prosecute the same on an expedited basis to final resolution.

For greater certainty the Offeror confirms that the Court order referred to in Section 3(b) may include arrangements between CCPL and the Offeror for a reasonable transition period in relation to the performance of CLP's obligations under the Contracts.

Whether or not the Offeror is successful in acquiring the Units pursuant to the Take-over Bid or otherwise, the Offeror commits to settle with CCPL and the Monitor the documentation and the form of order referred to in Section 3(b) promptly following the Court's approval of the Final Offer.

5. If the conditions to the Final Offer are satisfied or waived the Closing will occur on the earlier of:

(a) the business day immediately following the day that the Offeror acquires all of the outstanding Units of the Fund, including pursuant to the Take-over Bid and related transactions; and

(b) the first day on or after February 28, 2007 when either the Offeror obtains all material consents for the transfer and assignment of the Fund-related Assets to the Offeror, including but not limited to consents of the British Columbia Hydro and Power Authority under any agreement involving the Fund, CCT, CLP or their affiliates, or the Court orders the sale, transfer and assignment of the Fund-related Assets to the Offeror and stays or discharges any such third party consents associated therewith; in both cases on terms satisfactory to the Offeror.

6. If the Closing occurs after the Offeror acquires all of the outstanding Units of the Fund, the Offeror will be entitled, at its option, to cause the Class B Units to be redeemed and the Contracts to be cancelled, on commercially reasonable arrangements being put in place to address the subject matter thereof, rather than being transferred and assigned to the Offeror.

7. Section 6 of the Offeror's January 22, 2007 letter regarding the need for consents of the Fund or its affiliates is no longer applicable due to the undertakings of the Fund and CCT in the Support Agreement.

8. Litigation Proceedings

The Offeror will assume the risks of Contract termination, breaches and damages claims (other than for default due to insolvency) 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).

On Closing 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 and will indemnify CCPL, the Applicants and the Monitor from any liability in respect thereof. 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 Offer is also conditional on the Court permanently staying or dismissing any and all claims for termination of the Contracts for default due to insolvency and continuing the stay or otherwise holding in abeyance the application (the "Termination Application") of the CCT Trustees and the board of directors of the general partner of CLP to terminate the Contracts (other than for default due to insolvency) until a reasonable period following Closing, which period shall in any event be not less than 30 days from that Closing. This postponement is required in order to enable the Offeror to prepare for and participate in the Court proceedings regarding the Termination Application.

9. Offers of Employment

If the Final Offer is accepted and approved by the Court the Offeror will make fair and reasonable offers of employment to each of CCPL's existing employees who are involved in performing CCPL's obligations under the Contracts.

10. Whitby Loan and Other Matters

The Final Offer is not conditional on the Take-over Bid being successful. However, if the Offer is accepted and completed in accordance with its terms and the Offeror is successful in acquiring all of the outstanding Units of the Fund, pursuant to the Take-over Bid or otherwise, the Offeror will cause the Fund and its affiliates to complete the arrangements regarding the Whitby Loan referred to in Sections 17, 18 and 19 of the Eighteenth Report of the Monitor.

If the Offeror is not successful in acquiring all of the outstanding Units of the Fund, the Offeror will reimburse CCWH for any make whole payments paid to CLP calculated in accordance with Section 18 of the Eighteenth Report, if CCWH repays the Whitby Loan.

To the extent of any inconsistencies between the provisions of the Offeror's letters to the Monitor of January 16, 2007 and January 22, 2007 and this letter, the terms of this letter will govern. Except as amended by this letter, the Offeror's January 16, 2007 and January 22, 2007 letters continue in full force and effect.

The Offeror's Qualifications Support Prompt Closing

The Monitor, CCPL, the Applicants, the CCAA Parties 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 Final Offer is accepted and approved by the Court.

The Final Offer is not conditional on financing. 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 Final 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 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 Final Offer and have the necessary funds to do so. We look forward to proceeding with the Final Offer.



Yours very truly,

HCP ACQUISITION INC.

By: Howard Kagan
Director


cc: Josef Kruger, 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)


SCHEDULE A

HARBINGER POWER INVESTMENTS

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.

SCHEDULE B

CERTAIN DEFINED TERMS

In addition to terms defined in the Offer:

"Business day" as used herein means a day that is not a Saturday, Sunday or statutory holiday in Calgary, Alberta.

"Calpine" means Calpine Corporation, a Delaware corporation.

"CCAA" means the Companies' Creditors Arrangement Act (Canada).

"CCT Trustees" means the trustees of CCT.

"CCT" means Calpine Commercial Trust.

"CCWH" means Calpine Canada Whitby Holdings Company.

"Closing" means completion of the purchase and sale of the Fund-related Assets in accordance with the terms and conditions of the Offer.

"Contracts" has the same meaning as provided for that term in the Sixteenth Report.

"Court" means the Court of Queen's Bench of Alberta.

"Eighteenth Report" means the Eighteenth Report of the Monitor in Court of Queen's Bench of Action No. 0501-17864 dated January 23, 2007.

"Fund" means Calpine Power Income Fund.

"Harbinger" means Harbinger Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund, L.P.

"Island Facility" means the power generating facility located at Duncan Bay near Campbell River on Vancouver Island, British Columbia.

"Island GP" means Calpine Island Cogeneration Project Inc., a corporation incorporated under the federal laws of Canada.

"Island LP" means Calpine Island Cogeneration Limited Partnership, a partnership formed pursuant to the laws of British Columbia.

"Island O&M Agreement" means the Operating and Maintenance Agreement dated August 29, 2002 among CCPL, Island LP and Island GP, as amended in respect of the Island Facility.

"Monitor" means Ernst & Young Inc. in its capacity as monitor in the CCAA proceedings involving the Applicants and the CCAA Parties.

"Settlement Agreement" means the settlement agreement dated January 13, 2007 among the Fund, CCPL and other relevant parties.

"Sixteenth Report" means the Sixteenth Report of the Monitor in Court of Queen's Bench of Action No. 0501-17864 dated January 14, 2007.

"Take-over Bid" means the take-over bid by the Offeror dated December 20, 2006 for all of the Units not owned by the Offeror, Harbinger or their affiliates, as that take-over bid may be varied, extended or replaced; and includes any compulsory acquisition or second step transaction undertaken by the Offeror following that take-over bid.

"Units" means the issued and outstanding trust units of the Fund, together with the associated rights issued pursuant to the unitholders rights plan of the Fund dated August 12, 2006.

"Whitby Loan" means the unsecured loan from CLP to CCWH made as of August 29, 2002.

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