Calpine Power Income Fund
TSX : CF.UN

Calpine Power Income Fund

August 02, 2006 21:55 ET

Calpine Power Income Fund Announces Second Quarter 2006 Results and Cash Distribution for August 2006

CALGARY, ALBERTA--(CCNMatthews - Aug. 2, 2006) - Calpine Power Income Fund (TSX:CF.UN) today announced that the cash distribution for the month of August, 2006 will be $0.0818 per trust unit.



------------------------------------------------------------------------
Record Date Distribution Date Distribution per Unit
------------------------------------------------------------------------
August 31, 2006 September 20, 2006 $0.0818
------------------------------------------------------------------------
The above reflects distributions expected to be paid, however,
distributions are subject to change based upon actual conditions.
------------------------------------------------------------------------


MANAGEMENT'S DISCUSSION AND ANALYSIS

FORWARD-LOOKING INFORMATION

Certain information in this Management's Discussion and Analysis ("MD&A") is forward-looking and subject to risks and uncertainties. All the forward-looking statements are based upon the Manager's belief and assumptions based on information available at the time of assumption was made. By its nature, such forward-looking statements are subject to various risks and uncertainties. The results or events predicted in the forward-looking statements may differ from actual results or events. Factors which could cause actual results or events to differ materially from current expectations include, among other things, the ability of the Fund and the Partnership to successfully implement the Fund's strategic initiatives and whether such strategic initiatives will yield the expected benefits, the availability and price of energy commodities, regulatory decisions, competitive factors in the power industry, and the prevailing economic conditions in North America. Additionally, actual results or events predicted in the forward-looking statements will be affected by the outcome of the voluntary reorganization filings in Canada and the United States by Calpine and certain of its subsidiaries having contracts with the Fund and its subsidiaries or investees, as well as other factors identified herein. Certain material assumptions in making these forward-looking statements are disclosed in this MD&A, as well as in the MD&A prepared in connection with the Fund's and Partnership's 2005 financial statements ("the 2005 MD&A"), in particular under the headings "Outlook" and "Business Risks". The 2005 MD&A is contained in the Fund's 2005 Annual Report. Readers are cautioned not to place undue reliance on these forward-looking statements. The Fund and the Partnership each disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The Calpine Power Income Fund (the "Fund") is an unincorporated open-ended trust established under the laws of Alberta. Through its 70% ownership interest in Calpine Power, L.P. (the "Partnership"), the Fund indirectly owns interests in power generating facilities in British Columbia, Alberta, and an economic interest in a power plant in Ontario. In addition, the Fund owns a power generating facility in California and holds a promissory note issued by Calpine Canada Power Ltd. ("the Manager"). The power generation facilities owned by the Fund and the Partnership are all modern and environmentally preferred, natural gas fired plants. The Fund and the Partnership are managed and administrated by the Manager.

The Fund's objective is to provide, on a per Trust Unit basis, a stable and sustainable flow of Distributable Cash of the Fund. To achieve this objective, the Manager seeks to maximize the efficiency and profitability of the facilities and acquire or develop future facilities in accordance with established acquisition and investment guidelines.

The following discussion and analysis as provided by Management should be read in conjunction with the unaudited consolidated financial statements and the notes thereto of the Fund and the Partnership for the three and six months ended June 30, 2006 and 2005, which have been prepared in accordance with Canadian generally accepted accounting principles, and is based on information to August 2, 2006. The following discussion and analysis as provided by Management should also be read in conjunction with the audited consolidated financial statements and the notes thereto of the Fund and the Partnership for the years ended December 31, 2005 and 2004, which have been prepared in accordance with Canadian generally accepted accounting principles. All dollar amounts are shown in Canadian dollars unless otherwise specified. The financial statements noted above and additional information concerning the Fund is available at www.calpinepif.com or on SEDAR at www.sedar.com.

SECOND QUARTER HIGHLIGHTS

- The Fund declared distributions of $0.2454 per Trust Unit to Unitholders during the second quarter of 2006, consistent with $0.2454 declared distributions per Trust Unit in the second quarter of 2005.

- On July 1, 2006 a second short-term tolling agreement was secured with TransAlta Energy Marketing Corporation ("TransAlta") to toll the capacity of the Calgary Energy Centre until August 31, 2006.

- Efforts to toll the long-term capacity of the Calgary Energy Centre are ongoing. Management commenced a competitive bid process during the quarter and anticipates the toll to be in place by the fourth quarter 2006. The Manager anticipates putting in place additional short-term tolling agreements should they be required until the commencement of a long-term tolling agreement.

- The Fund's and Partnership's power generation facilities continued their strong and reliable operating performance in the second quarter of 2006 as demonstrated below.



Availability Generation (MWh)
------------------ ------------------
Q2 2006 Q2 2005 Q2 2006 Q2 2005
------------------ ------------------

Calgary Energy Centre 85%(1) 100% 199,401 40,810
Island Cogeneration Facility 97% 95% 507,282 496,025
Whitby Cogeneration Facility 96% 95% 90,229 92,984
King City Facility 100% 97% 245,554 252,331
(1) Planned maintenance outage in May 2006


At June 30, 2006, the Fund had 61,742,288 Trust Units outstanding which units trade on the Toronto Stock Exchange. Calpine Corporation ("Calpine"), does not own, directly or indirectly, any Trust Units.

SIGNIFICANT EVENTS

Calpine Credit Event

On December 20, 2005 Calpine and certain subsidiaries and affiliates filed for voluntary reorganization under Chapter 11 of the US Bankruptcy Code ("Chapter 11") and certain subsidiaries and affiliates of Calpine in Canada filed for voluntary reorganization under the Companies' Creditors Arrangement Act ("CCAA") in Canada including the Manager. Additional information on these proceedings is provided in the 2005 MD&A contained in the Fund's 2005 Annual Report as well as the Fund's Annual Information Form dated April 19, 2006 (the "AIF") and 2006 first quarter results.

On July 12, 2006, the Court extended the stay of proceedings previously amended by the Court in respect of the Manager and certain of its affiliates until October 20, 2006. On August 1, 2006 the Partnership submitted a claim under the CCAA proceedings against Calpine Energy Services Canada Partnership ("CESCP") and its partners with respect to the Calgary Energy Centre as a consequence of the repudiation on January 16, 2006 by CESCP of the original tolling agreement.

The claim for payments under the original tolling agreement is in the amount of $769 million, before giving effect to mitigation of the claim through short-term and any long-term re-tolling of the capacity of Calgary Energy Centre and before discounting to provide for the net present value of the claim. The mitigation and discounting are expected to significantly reduce the claim by an amount that is undetermined but that is expected to be substantial. A claim for costs, expenses and legal fees incurred and to be incurred was also filed. The Partnership also submitted on August 1, 2006 a similar claim in Calpine's Chapter 11 proceedings against Calpine with respect to Calpine's guarantee of CESCP's obligations under original tolling agreement plus costs, expenses and legal fees.

Scheduled principal and interest payments due on the loan of approximately $35 million (the "Manager Loan") owing to Calpine Commercial Trust ("CCT") by the Manager for April 2006 were not received by May 3, 2006 which is an event of default under the Manager Loan. Scheduled interest and principal payments were not received for April, May and June 2006. The Manager estimates the loan to be fully collectible based upon the guarantee and security in place (as described further in the 2005 MD&A), subject to lifting of the stay of proceedings against the Manager, currently in effect until October 20, 2006. On July 25, 2006, the stay of proceedings against the Manager was temporarily lifted for the sole purpose of CCT making a demand of the Manager Loan. CCT subsequently made the demand and the stay was re-imposed. On August 1, 2006 CCT submitted a claim against the Manager under the CCAA proceedings for principal and interest in the amount $33.9 million, yield protection in the amount of $3.8 million and legal and accounting fees and expenses.

The Manager has advised the Fund of its understanding that there is an intercompany loan of approximately $32.7 million payable by Calpine Canada Whitby Holdings ("CCWHC") to the Manager, the terms of which have not been formally documented. The Manager has also advised that it has considered such intercompany loan to be subordinated to the loan by the Partnership to CCWHC (the "Whitby Loan"). The Manager has not put in place documentation to evidence such subordination nor has it brought an application to the Court to recognize such subordination. CCWHC was not an applicant in the CCAA proceedings or the Chapter 11 proceedings. Additional information on such intercompany loan and subordination is provided in the Fund's AIF, 2005 MD&A and the 2006 first quarter results. On August 1, 2006, the Fund, CCT and the Partnership submitted a claim against the Manager under the CCAA proceedings seeking a declaration that such intercompany loan is subordinated to the Whitby Loan and certain other alternative relief including but not limited to unliquidated damages, as well as related costs and expenses.

The Fund, CCT and the Partnership have completed assessing other potential claims to submit with respect to obligations owed to them by Calpine and its subsidiaries and on August 1, 2006 they submitted various claims against the Manager under the CCAA proceedings and Calpine under the Chapter 11 proceedings. The Partnership submitted contingent and unliquidated claims against the Manager, and Calpine as guarantor, with respect to the heat rate indemnity relating to the Island Facility and related costs and expenses.

The Fund and the Partnership submitted contingent and unliquidated claims against the Manager with respect to the transfer fee relating to the Island Facility and related costs and expenses, and the Partnership submitted a similar contingent and unliquidated claim against Calpine relating to its guarantee of such transfer fee and related costs and expenses.

The Fund, CCT and the Partnership submitted a claim against the Manager seeking a declaration the Manager has breached and repudiated the Management Agreement and the Administrative Services Agreement, seeking a declaration that the Fund, CCT and the Partnership are entitled to terminate such agreements, and seeking related relief and costs and expenses of enforcement. The Manager disputes the allegations of breach and repudiation made by the Fund, CCT and CLP in relation to the Management and Administrative Services Agreements. It is the Manager's view that it has acted, and continues to act, in compliance with its obligations under these agreements. Further, the Manager disputes any allegation that its conduct could be construed as a repudiation of these agreements. The Manager intends to continue to fulfill its obligations to the Fund, CCT and CLP under these agreements.

Pursuant to an order granted in the CCAA Proceedings, the Independent Trustees of CCT, on behalf of the Fund and CCT, and the directors of the general partner of CLP, on behalf of CLP, are authorized and responsible for filing and prosecuting claims against the Manager, Calpine and their affiliates.



RESULTS OF OPERATIONS

CALPINE POWER INCOME FUND

Selected Quarterly Three Three Six Six
Information months months months months
ended ended ended ended
(in 000's, other than Trust June 30, June 30, June 30, June 30,
Unit information) 2006 2005 2006 2005
------------------------------------------------------------------------
Equity earnings from
Calpine Power, L.P. $10,457 $12,766 $20,552 $26,774
Finance income 4,418 4,714 8,878 9,363
Interest and other income 1,561 2,052 3,192 4,212
---------------------------------------------
Total Revenue 16,436 19,532 32,622 40,349
Net Earnings 9,813 14,777 19,826 30,674
Net Earnings Per Trust Unit 0.1589 0.2393 0.3211 0.4968

Weighted Average Number of
Trust Units Outstanding 61,742,288 61,742,288 61,742,288 61,742,288

Total Assets 652,034 692,705 652,034 692,705
Total Long-term Liabilities 78,829 91,520 78,829 91,520
Distributions Declared Per
Trust Unit 0.2454 0.2454 0.4908 0.4908


Total Revenue

Total revenue for the three and six months ended June 30, 2006 was less than the three and six months ended June 30, 2005 due to lower equity earnings from the Partnership. Equity earnings from the Partnership declined as no revenue was earned by the Calgary Energy Centre from January 16, 2006 to February 15, 2006 following the repudiation of the original tolling agreement by CESCP. Also, tolling revenue from the short-term toll with EPCOR Merchant and Capital LP ("EPCOR"), which ran from February 16, 2006 to June 30, 2006, was significantly lower than the tolling revenue received from the CESCP toll. Also impacting Partnership earnings was a planned outage for major maintenance work in May 2006 at the Calgary Energy Centre. A detailed discussion of the Partnership's operating results can be found in the Calpine Power, L.P. section of this MD&A.

Finance income generated by the long-term lease (the "King City Lease") of the King City Facility to a subsidiary of Calpine ("Calpine King City") amounted to $4.4 million and $8.9 million for the three and six months ended June 30, 2006. The decrease in finance income of $0.3 million and $0.5 million from the same periods in 2005 is due to finance income recognized over a constant rate of return on a lower net investment in lease due to receipt of scheduled King City Lease payments as well as foreign exchange impacts.

Interest and other income relates mainly to interest earned, net of amortization of the discount, on the Manager Loan. Interest earned on a lower outstanding loan balance as a result of scheduled principal repayments resulted in a decrease of $0.5 million and $1.0 million for the three and six months ended June 30, 2006 compared to the same periods of 2005. As at June 30, 2006, scheduled payments on the Manager Loan for April, May and June were not received.

Net Earnings

Net earnings for the three and six months ended June 30, 2006 decreased from the three and six months ended June 30, 2005 due to lower equity earnings from the Partnership as well as increased management and administrative expenses, discussed below.



Selected Quarterly Three Three Six Six
Information months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
(in 000's) 2006 2005 2006 2005
------------------------------------------------------------------------
Management and administrative
expenses $2,550 $637 $5,195 $1,636
Amortization 102 311 203 622
Interest on long-term debt 2,507 3,171 5,083 6,296
Interest 34 160 85 356
Future Income Taxes 1,641 362 2,422 789


Management and Administrative Expenses

Management and administrative expenses were $2.6 million and $5.2 million for the three and six months ended June 30, 2006 compared to $0.6 million and $1.6 million for the same periods in 2005. Management and administrative expenses were up $1.9 million and $3.6 million due mainly to additional legal and advisory costs incurred as a result of the Calpine CCAA and Chapter 11 proceedings. The Fund is working with independent legal counsel, financial advisors and other consultants to assess and advise on possible implications of these proceedings to the Fund and to assist in assessing, making and litigating claims against Calpine and its subsidiaries, which claims were filed on August 1, 2006. Each of the claims seeks certain remedies and other costs and expenses which amounts cannot be fully determined until the related claims are determined.

Amortization

Amortization expenses attributable to the deferred financing costs of the Fund's credit facility (the "Credit Facility") and the King City project finance loan ("King City Loan") were $0.1 million and $0.2 million for the three and six months ended June 30, 2006. The cancellation of the $90 million acquisition tranche of the Fund's Credit Facility and expensing of related unamortized deferred financing costs in December 2005 resulted in a decrease in deferred financing costs.

Interest Expense

Interest on long-term debt of $2.5 million and $5.1 million for the three and six months ended June 30, 2006 relates to interest accrued on the King City Loan, compared to $3.2 million and $6.3 million for the three and six months ended June 30, 2005. The decrease of $0.7 million and $1.2 million from the comparative period is due to the impact of interest accrued on a lower outstanding loan balance as a result of scheduled principal repayments as well as changes in foreign exchange rates.

Interest expense of $34 thousand and $85 thousand for the three and six months ended June 30, 2006 relates to standby charges on the undrawn balance of the Fund's Credit Facility. No amounts were drawn on the facility in the quarter.

Future Income Taxes

The Fund recorded future tax expense of $1.6 million and $2.4 million on its income from the King City Facility for the three and six months ended June 30, 2006, representing an effective tax rate of 40.75%. Future tax expenses increased $1.3 million and $1.6 million from the comparative periods as a result of higher taxable income from the King City Facility in the current period. No cash taxes are expected to be paid in 2006 in the US due to US tax depreciation on the King City Facility being in excess of income from operations.



Selected Balance Sheet Information
Of Calpine Power Income Fund As at As at
(in 000's) June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Cash and cash equivalents $ 14,074 $ 16,797
Loan to Calpine Canada Power Ltd. 30,159 32,188
Interest receivable 1,042 -
Net Investment in lease 138,284 152,555
Accrued interest on long-term debt 4,996 11,937
Long-term debt 78,057 93,257
Future income tax 8,535 6,445


The unrestricted cash balance of $14.1 million in the Fund at June 30, 2006 has decreased $2.7 million from the balance at December 31, 2005. The main reason for this decrease is the use of the Levelization Reserve to support cash distributions as no scheduled principal and interest payments on the Manager Loan have been received in April, May, and June, 2006.

The Manager Loan balance has decreased by $2.0 million due to the collection of scheduled principal repayments in the first quarter of 2006. No payments were received from the Manager after March 31, 2006. Interest of $1.0 million has been accrued on the Manager Loan since March 31, 2006. Management expects the loan to be fully collectible based upon the guarantee and security in place (as described further in the 2005 MD&A and the AIF), subject to the lifting of the stay of proceedings against the Manager, currently in effect until October 20, 2006. On July 25, 2006, the stay of proceedings against the Manager was temporarily lifted for the sole purpose of CCT making a demand of the Manager Loan. CCT subsequently made the demand and the stay was re-imposed. On August 1, 2006 CCT submitted a claim against the Manager under the CCAA proceedings for principal and interest in the amount $33.9 million, yield protection in the amount of $3.8 million and reasonable legal and accounting fees and expenses.

The net investment in lease which relates to the King City Lease decreased by $14.3 million reflecting $19.4 million King City Lease receipts scheduled to be received on December 31, 2005 that actually were received on January 3, 2006, offset by finance income of $8.9 million accrued in the six months ended June 30, 2006 and foreign exchange impacts.

Accrued interest of $11.9 million and principal repayments of $11.7 million relating to the King City Loan, scheduled for payment on December 31, 2005 were paid on January 3, 2006 in conjunction with the King City Lease receipts. The balance of $5.0 million at June 30, 2006 relates to accrued interest on the King City Loan for 2006.

Long-term debt, which is denominated in USD, decreased by $11.9 million due to the principal repayments on the King City Loan made on January 3, 2006 as well as to the impact of foreign exchange. Foreign exchange impacts on long-term debt are largely offset by foreign exchange impacts on the USD denominated portion of the net investment in lease.

The future income tax liability has increased $2.1 million since year end due to the future tax expense on the Fund's income from the King City Lease. No cash taxes were paid in the six months ended June 30, 2006.



CALPINE POWER, L.P.

Selected Quarterly Three Three Six Six
Information months months months months
ended ended ended ended
(in 000's, except per Unit June 30, June 30, June 30, June 30,
amounts) 2006 2005 2006 2005
------------------------------------------------------------------------
Electricity, capacity and
thermal revenue $21,430 $27,598 $42,589 $56,373
Interest 1,095 1,017 2,100 1,981
---------------------------------------------
Total Revenue 22,525 28,615 44,689 58,354
Net Earnings 10,457 18,053 22,320 37,710
Net Earnings Per Class A
Priority Unit 0.2010 0.2455 0.3952 0.5149
Net Earnings Per Class B
Subordinated Unit - 0.2372 0.0793 0.4907

Total Assets 623,092 666,864 623,092 666,864

Total Long-term Liabilities 2,679 2,469 2,679 2,469
Distributions Declared
Per Class A Priority Unit 0.2699 0.2566 0.5270 0.5150
Per Class B Subordinated Unit - 0.2394 0.1124 0.4788


Total Revenue

Revenues for the three and six months ended June 30, 2006 were down $6.1 million and $13.7 million from the same periods in 2005. This decrease was due to the non-payment of the tolling revenue for the Calgary Energy Centre for the period from January 17, 2006 to February 15, 2006, following the repudiation of the original tolling agreement by CESCP, as well as the impact of reduced tolling revenue from the short-term toll with EPCOR, such revenue being significantly lower than the tolling revenue from the original tolling agreement with CESCP, for the same periods.

Interest earned on the loan to Calpine Canada Whitby Holdings Company (the "Whitby Loan") and other cash balances were $0.8 million and $1.6 million for the three and six months ended June 30, 2006, consistent with the three and six months ended June 30, 2005.

Net Earnings

Net earnings for the three and six months ended June 30, 2006 decreased 42% and 41% respectively compared to the same periods last year due to the non-payment of tolling revenue for the Calgary Energy Centre for the period January 17, 2006 to February 15, 2006 following the repudiation of the Tolling Agreement by CESCP, lower tolling revenue from EPCOR and a planned outage at the Calgary Energy Centre in May 2006 for major maintenance work.



Island Facility

Selected Quarterly Three Three Six Six
Information months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Availability 97% 95% 98% 97%
Electricity generated (MWh) 320,044(1) 496,025 833,709(1) 1,018,881
Steam generated (GJ) 280,212 309,775 756,513 812,352


Summary of Financial Results
(in '000s)
Revenues $14,361 $13,683 $29,433 $28,649
Operating and maintenance
expense 2,447 2,702 5,032 4,956
Depreciation and accretion 3,004 3,077 6,006 6,155
Interest expense - 158 2 322
------------------------------------------------------------------------
Net earnings $ 8,910 $ 7,746 $18,393 $17,216
------------------------------------------------------------------------
(1) Electricity generated was lower due to the 31 day period when the
Island Facility was dispatched off by BC Hydro. During this period
the Island Facility was paid for 187,238 MWh of deemed electricity
generation.


The Island Facility is a 240 MW combined cycle cogeneration plant located at Duncan Bay, near Campbell River, on Vancouver Island, British Columbia. Availability at the facility in the three and six months ended June 30, 2006 remained strong at 97% and 98%, consistent with the three and six months ended June 30, 2005.

Revenues

Electricity generation revenue was $12.8 million and $23.2 million for the three and six months ended June 30, 2006, compared to $11.0 million and $22.2 million for the three and six months ended June 30, 2005. Electricity generation revenue for the three and six months ended June 30, 2006, is net of the heat rate penalty of $0.6 million and $2.7 million respectively payable to BC Hydro under the Electricity Purchase Agreement. Although the Facility ran at similar heat rate efficiencies for the same periods last year, a new Dispatch Agreement with BC Hydro was in effect for a portion of the second quarter and resulted in a lower heat rate penalty for the three and six months ended June 30, 2006 over the same periods last year.

This Dispatch Agreement was entered into between the Island Facility, BC Hydro and Catalyst during the second quarter and enables BC Hydro to dispatch off the Island Facility when market conditions warrant. Any such dispatch will not negatively impact the net revenue of the Island Facility and may result in certain circumstances in an increase in net revenue. BC Hydro elected to dispatch the Island Facility off for the latter part of May and the beginning of June 2006 and the Island Facility was dispatched off for a total of 31 days. The Dispatch Agreement ensures that the Island Facility is kept whole for electrical and steam revenue while it is dispatched off.

Revenue from steam sold to Catalyst Paper Corporation ("Catalyst") was $1.5 million and $6.2 million for the three and six months ended June 30, 2006 compared to $2.6 million and $6.4 million in the three and six months ended June 30, 2005. The decrease in revenue is a result of lower natural gas prices (which is a component of the price of steam sold to Catalyst) during the three months ended June 30, 2006 than in the three months ended June 30, 2005, as well as less steam delivered as a result of BC Hydro dispatching the Island Facility off pursuant to the Dispatch Agreement.

Expenses

Operating and maintenance expense attributable to the Island Facility was $2.4 million and $5.0 million for the three and six months ended June 30, 2006, compared to $2.7 million and $5.0 million for the three and six months ended June 30, 2005. The decrease of $0.3 million quarter over quarter is due to the 31 day period the Island Facility was dispatched off by BC Hydro. Year to date operating and maintenance costs are consistent with the prior year due to additional costs of property taxes and maintenance costs that were incurred in the first quarter of 2006.

Depreciation expense attributable to the Island Facility was $3.0 million and $6.0 million for the three and six months ended June 30, 2006, consistent with the $3.1 million and $6.2 million for the three and six months ended June 30, 2005.



Calgary Energy Centre

Selected Quarterly Three Three Six Six
Information months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Availability 85% 100% 91% 99%
Electricity generated (MWh) 199,401 171,168 279,966 379,583

Summary of Financial Results
(in '000s)
Revenues $ 7,069 $13,915 $13,156 $27,724
Operating and maintenance
expense 3,973 2,032 6,185 4,114
Depreciation and accretion 2,225 2,444 4,458 4,818
------------------------------------------------------------------------
Net earnings $ 871 $ 9,439 $ 2,513 $18,792
------------------------------------------------------------------------


The Calgary Energy Centre is a natural gas-fired combined cycle facility located in Calgary, Alberta. The Calgary Energy Centre has a capacity of 300 MW, consisting of 250 MW of base capacity plus 50 MW of peaking capacity.

Plant availability for the three and six months ended June 30, 2006 was 85% and 91% respectively and consistent with budgeted availability for this period. The decreased availability in comparison to the three and six months ended June 30, 2005 was due to the major maintenance Combustion Inspection (CI) completed in May 2006. There were no major maintenance inspections required in 2005.

Revenues

Electricity revenues at the Calgary Energy Centre were $7.1 million and $13.2 million for the three and six months ended June 30, 2006, compared to revenues for the three and six months ended June 30, 2005 of $13.9 million and $27.7 million.

Revenue from January 1, 2006 to January 16, 2006 of $2.4 million was earned through the original tolling agreement with CESCP, a wholly-owned partnership of Calpine. On January 16, 2006 CESCP repudiated the agreement and no revenue was received for the period from January 17, 2006 to February 15, 2006.

On February 16, 2006, the Partnership entered into a short-term tolling agreement with EPCOR to toll the capacity of the Calgary Energy Centre until the end of June 2006. On July 1, 2006, a second short-term tolling agreement was competitively secured with TransAlta to toll the capacity from the Calgary Energy Centre until the end of August 2006.

Expenses

Operating and maintenance expense attributable to the Calgary Energy Centre for the three and six months ended June 30, 2006 was $4.0 million and $6.2 million compared to $2.0 million and $4.1 million for the three and six months ended June 30, 2005. The increase in expenditures reflects the successful completion of the planned major maintenance completed in May 2006. The previous major maintenance work was completed in the spring of 2004.

Depreciation expense attributable to the Calgary Energy Centre was $2.2 million and $4.5 million for the three and six months ended June 30, 2006 compared to $2.4 million and $4.8 million for the three and six months ended June 30, 2005. The decrease over the prior year is due to a reassessment of the useful life of certain spare parts in 2005 and a resulting decrease in depreciation expense.



Selected Balance Sheet Information As at As at
of Calpine Power, L.P. (in 000's) June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Cash and cash equivalents $ 20,008 $ 27,903
Accounts receivable 9,281 6,426
Prepaid expenses 9,063 6,465
Capital assets 559,628 569,923
Accounts payable and accrued
liabilities 7,500 10,807


Cash and cash equivalents decreased by $7.9 million to $20.0 million due to the payment of the annual heat rate penalty of $7.8 million for the Island Facility due at the end of the contract year, April 12, 2006.

The accounts receivable balance at June 30, 2006 was higher than the balance at December 31, 2005. The June 30, 2006 balance includes a full month of invoiced revenue for the Calgary Energy Centre whereas the December 2005 balance only includes invoiced revenue for 10 days from December 21 to December 31, 2005.

Prepaid expenses related mainly to amounts paid in accordance with Long Term Service Agreements (LTSA). The amounts will be expensed when the next scheduled major maintenance events occur at each plant. There was a major maintenance event at the Calgary Energy Centre in May of 2006 and $0.8 million in prepayments were expensed at that time.

Capital assets decreased over the balance at December 31, 2005 due to depreciation recognized in the six months ended June 30, 2006 of $10.3 million.

The decrease in accounts payable and accrued liabilities at June 30, 2006 over the balance at December 31, 2005 was mainly affected by the payment of the heat rate penalty accrual for the Island Facility. This amount is accrued for a fiscal year ending every April.



LIQUIDITY AND CAPITAL RESOURCES

Calpine Power Income Fund

Selected Quarterly Three Three Six Six
Information months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
(in 000's) 2006 2005 2006 2005
------------------------------------------------------------------------
Cash provided by operating
activities $10,854 $13,953 $32,128 $26,802
Cash provided by (used in)
investing activities (28) 3,950 2,644 4,813
Cash provided by (used in)
financing activities (15,152) (18,151) (41,963) (37,253)
Cash and cash equivalents 14,074 2,658 14,074 2,658
Restricted cash 1,048 5,750 1,048 5,750


Cash provided by operating activities was $10.9 million and $32.1 million for the three and six months ended June 30, 2006, compared to $14.0 million and $26.8 million for the same periods in 2005, a decrease of $3.1 million and an increase of $5.3 million for the three and six months ended June 30, 2006 respectively. The decrease quarter over quarter was due primarily to higher management and administrative expenses incurred as a result of legal and advisory costs relating to the Calpine CCAA and Chapter 11 proceedings. The increase year over year is mainly due to the timing of the King City Lease receipts and related interest payments on the King City Loan. The 2005 King City Lease receipts of $19.4 million were received on January 3, 2006 and in combination with restricted cash of $4.1 million, were used to fund principal payments of $11.7 million and interest payments of $11.9 million on the King City Loan on January 3, 2006. Excluding the effect of the King City Lease receipts and interest payments in 2006, cash provided by operating activities for the six months ended June 30, 2006 was $24.6 million.

For the three months ended June 30, 2006, cash used by investing activities was $28 thousand reflecting purchases of office furniture. For the six months ended June 30, 2006, cash provided by investing activities totaled $2.6 million reflecting the Fund's receipt of scheduled principal repayments on the Manager Loan of $2.7 million for the first quarter of 2006 only.

Cash used in financing activities of the Fund for the three and six months ended June 30, 2006 totaled $15.2 million and $42.0 million, comprised of distributions paid of $15.2 million and $30.3 million as well as $11.7 million used to fund principal payments on the King City Loan on January 3, 2006. For the same periods in 2005, cash provided by financing activities totaled $18.2 million and $37.3 million, including $3.0 million and $7.0 million issued as a note payable to Calpine Power, L.P. and $15.2 million and $30.3 million in distributions paid to Unitholders.

The Fund has a $30 million credit facility (the "Credit Facility") that expires October 3, 2006. At June 30, 2006, no amounts were drawn on the facility.

As part of the King City Transaction completed in 2004, the Fund deposited US$4.6 million of the funds received from the transaction as restricted cash into a segregated account as required under the terms of the King City Loan. The funds were used to purchase government and high quality investments with maturities that coincide with certain annual payments due on the King City Loan. On January 3, 2006 US$3.9 million of these restricted cash reserves were used to pay principal and interest on the King City Loan.



Calpine Power L.P.

Selected Quarterly
Information
(in 000's) Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Cash provided by operating
activities $ 8,371 $28,176 $23,110 $54,457
Cash provided by (used in)
investing activities (30) (91) (60) (189)
Cash provided by (used in)
financing activities (14,190) (20,295) (31,032) (36,404)
Cash and cash equivalents 20,008 31,614 20,008 31,614


Cash generated by operating activities of $8.4 million and $23.1 million in the three and six months ended June 30, 2006 was $19.8 million and $31.3 million less than the same periods in 2005. Payments for the 2005/06 Island heat rate penalty, property taxes and insurance were made in the second quarter of 2006, compared to the third quarter of 2005, resulting in a decrease in the quarter to quarter cash generated by operating activities. Also affecting this decrease was the lower short-term toll revenue received from EPCOR, and the loss of revenue from the Calgary Energy Centre for the period from January 17, 2006 to February 15, 2006.

Cash used in financing activities of the Partnership for the three and six months ended June 30, 2006 decreased by $6.1 million and $5.4 million compared to the same periods in 2005. Distributions to Unitholders decreased by approximately $4.8 million and $5.9 million primarily due to the reduction in the Class B Subordinated Unit distributions during the three and six months ended June 30, 2006. Distributions to A Unitholders remained consistent with amounts distributed in comparable periods in 2005. In 2005, the Partnership received $0.5 million in net financing from the Fund with respect to the capital upgrade at the Island Facility.

Future Obligations

Neither the Fund nor the Partnership have entered into any off-balance sheet arrangements.

DISTRIBUTABLE CASH AND DISTRIBUTIONS

Distributable Cash is not a measure under Canadian generally accepted accounting principles and there is no standardized measure of Distributable Cash. Distributable Cash, as presented, may not be comparable to similar measures presented by other companies. Distributable Cash has been presented to assist readers in determining possible future cash distributions. Distributable Cash cannot be assured and may vary.



Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
Calpine Power Income Fund 2006 2005 2006 2005
------------------------------------------------------------------------
FUNDS FROM OPERATIONS BEFORE
WORKING CAPITAL CHANGES $10,352 $11,352 $38,877 $21,351
(in 000's)
Add (Deduct):
Change in working capital 486 2,512 (7,106) 6,528
Levelization reserve 4,314 (1,385) 3,044 (2,919)
Payment of principal on
long term debt, net of
restricted cash used - - (7,183) -
Receipt of principal on
Calpine Canada Power Ltd.
loan - 2,672 2,672 5,343
---------------------------------------------

DISTRIBUTABLE CASH $15,152 $15,151 $30,304 $30,303
---------------------------------------------
---------------------------------------------
Weighted average number of
Trust Units outstanding 61,742,288 61,742,288 61,742,288 61,742,288
---------------------------------------------
---------------------------------------------
Distributable Cash per
Trust Unit(1) $0.2454 $0.2454 $0.4908 $0.4908
---------------------------------------------
(1) calculated as sum of monthly per unit distributions


The amount of Distributable Cash of the Fund to be distributed monthly to Unitholders is, as defined in the Fund Trust Indenture, based generally on the amount by which the Fund's cash on hand exceeds: (i) administration expenses of the Fund; (ii) amounts required for the business and operations including fees payable to the Manager under the Administration and Management Agreements; and (iii) any cash reserve which the Manager in its discretion determines is necessary to satisfy the Fund's current and anticipated obligations. The Fund pays monthly cash distributions to Unitholders on or about the 20th day of each month following the record date, which is the last business day of the preceding month.

Distributable Cash generated by the Fund totaled $15.2 million or $0.2454 per Trust Unit and $30.3 million or $0.4908 per Trust Unit for the three and six months ended June 30, 2006, consistent with the same periods in 2005.

Change in Working Capital

The change in working capital amount of $7.1 million for the six months ended June 30, 2006 includes $5.1 million of accrued interest payable on the King City Loan less interest paid on January 3, 2006 of $11.9 million as well as timing of payments relating to management and administrative expenses.
Levelization Reserve



Levelization Reserve

Levelization Reserve
------------------------------------------------------------------------
Balance at March 31, 2006 $16,341
Draws (4,475)
Income reinvested 161
------------------------------------------------------------------------
Balance at June 30, 2006 $12,027
------------------------------------------------------------------------


As at June 30, 2006 and March 31, 2006, the Levelization Reserve was invested entirely in guaranteed investment certificates. The CCT Trustees and the Manager are not subject to any mandatory requirements with respect to the timing or manner of utilization of the Levelization Reserve. If needed, the funds in the Levelization Reserve could be applied by the Fund for other purposes.

In the second quarter of 2006, the Fund drew on the Levelization Reserve in order to ensure distributions remained consistent with 2005 levels.



Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
Calpine Power, L.P. 2006 2005 2006 2005
------------------------------------------------------------------------
FUNDS FROM OPERATIONS BEFORE
WORKING CAPITAL CHANGES $15,599 $23,561 $32,697 $48,648

Add (Deduct):
(in '000s)
Capital expenditures (30) (224) (60) (278)
Maintenance reserve increase (1,538) (1,725) (3,205) (3,182)
Loan payable - (1,278) - 530
Change in working capital
and management reserves 5 (1,654) 479 (8,264)
---------------------------------------------
DISTRIBUTABLE CASH $14,036 $18,680 $29,911 $37,454
---------------------------------------------
---------------------------------------------

Allocation of
Distributable Cash
Class A Priority Units $14,036 $13,344 $27,406 $26,783
Class B Subordinated Units - 5,336 2,505 10,671
---------------------------------------------
$14,036 $18,680 $29,911 $37,454
---------------------------------------------
---------------------------------------------
Per Unit allocation of
Distributable Cash
Class A Priority Units $0.2699 $0.2566 $0.5270 $0.5150
---------------------------------------------
---------------------------------------------
Class B Subordinated Units $ - $0.2394 $0.1124 $0.4788
---------------------------------------------
---------------------------------------------


The amount of Distributable Cash, as defined in the Calpine Power, L.P. Partnership Agreement, is to be distributed monthly and is based generally on the amount by which the Partnership's cash on hand exceeds: (i) management and administration expenses of the Partnership; (ii) amounts required for the business and operations of the Partnership and its facilities (including expenses payable to the Manager under the operating and maintenance agreements); and (iii) any cash reserve which the Manager in its discretion has determined is necessary to satisfy the Partnership's current and anticipated obligations, including a reserve for the estimated major maintenance expenditures. The Partnership distributes Distributable Cash of the Partnership in respect of each month to the partners of record on the last day of each month based on the priority rights of the partnership units. Payments are made on or about the 20th day after each record date. The target distribution per Class A Priority Unit and Class B Subordinated Unit increases annually by 1%.

The Partnership makes monthly cash distributions to both the Class A Priority Unitholders and Class B Subordinated Unitholders to the extent Distributable Cash is available. The Fund, as the holder of Class A Priority Units in the Partnership, must be paid its target distribution before the Manager receives distributions on its Class B Subordinated Units. In addition, the Partnership makes a special distribution to the Class A Priority Unitholders equivalent to the amount of certain general and administrative expense of the Fund. The Class B Subordinated Units represent a 30% economic interest in the Island Facility, the Calgary Energy Centre and the Whitby Loan and their entitlement to distributions is subordinated to that of Class A Priority Unitholders until 2022. In light of the Manager's CCAA proceedings, distributions declared on the Class B Subordinated Units for December 2005 through February 2006 were reduced to match the required monthly principal and interest payment required on the Manager Loan. No Class B Subordinated Unit distributions were declared for March, April, May and June 2006.

Maintenance Reserve

The Partnership has established a maintenance reserve, the purpose of which is to substantially fund future maintenance costs. The annual increase/decrease in the maintenance reserve is deducted from/added to cash available for distribution. The Manager is not subject to any mandatory requirements with respect to the timing or manner of utilization of the Maintenance reserve. If needed, the funds in the Maintenance reserve could be applied by the Partnership for other purposes.



Maintenance Reserve
------------------------------------------------------------------------
Balance at March 31, 2006 $18,920
Contributions 1,344
Income reinvested 194
------------------------------------------------------------------------
Balance at June 30, 2006 $20,458
------------------------------------------------------------------------


Change in Working Capital and Management Reserves

Cash used to fund working capital for the three and six months ended June 30, 2006 is lower than the three and six months ended June 30, 2005 as cash reserves from 2005 were used to support distributions in the first and second quarter of 2006. Cash generated from operations was lower in the first quarter of 2006 as no tolling revenue was earned at the Calgary Energy Centre from January 17 to February 15, 2006.

TAX TREATMENT OF DISTRIBUTIONS

For Canadian tax purposes, the Manager anticipates that the taxable amounts of distributions to the Fund's Unitholders are anticipated to be approximately 30% for 2006. The remaining amounts of the distributions reduce the adjusted cost base of the Trust Units, thereby providing a significant tax deferral for the Unitholders. The tax deferral arises primarily due to the ability of the Partnership to shelter its taxable income with capital cost allowance claims on the Facilities. In 2005, the taxable amount was 20%. The Manager anticipates that a higher proportion of cash distributions made by the Fund in the future will be included in the income of the Unitholders for income tax purposes. Further Fund acquisitions could serve to extend or reduce the tax-deferred horizon. The Fund recommends that Unitholders consult their tax advisors regarding the tax implications of their investment in Trust Units.

CRITICAL ACCOUNTING ESTIMATES

Preparation of both the Fund and Partnership's financial statements in conformity with Canadian generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses for the period then ended. Additional information on critical accounting estimates may be found in the Fund's 2005 MD&A.

OUTLOOK

On June 26, 2006, Calpine Power L.P. entered into a further short-term agreement to toll the capacity from the Calgary Energy Centre with TransAlta Energy Marketing Corporation, a subsidiary of TransAlta Corporation, for a term commencing July 1, 2006 and ending August 31, 2006. This agreement replaces an earlier short-term agreement which ended on June 30, 2006.

The Manager's efforts to toll the long-term capacity of the Calgary Energy Centre pursuant to a competitive bid process continue to proceed. The Manager expects a long-term toll to be in place by the fourth quarter of 2006. The Manager anticipates putting in place additional short-term tolling agreements should they be required prior to the commencement of a long-term tolling agreement.

In September 2006 there will be a scheduled 37-day major maintenance event at the Island Facility. At this time, in conjunction with the scheduled major maintenance event, the Manager is also considering performing an additional upgrade to the Island Facility which is expected to increase output and improve efficiencies of the plant. This upgrade, if implemented, will add approximately 16 days to the 37-day planned outage.

As indicated, the stay in the CCAA proceedings has been extended to October 20, 2006. As part of any voluntary reorganization transaction implemented by the Manager under the CCAA proceedings, the Manager may dispose of its assets, including its interest in the Administration Agreement, the Management Agreement, the applicable Operating and Maintenance agreements to which it is a party and its Class B Subordinated Units of the Partnership, subject to certain consent rights of the Fund in relation to the agreements, although the Court has inherent jurisdiction to approve a sale transaction even if the Fund does not. Additionally, it is possible that creditors of Calpine subsidiaries who are applicants in the CCAA proceedings (including the Manager and CESCP) could apply to the Court to terminate the CCAA proceedings and seek to have the CCAA applicants petitioned into bankruptcy under the Bankruptcy Act (Canada), which would involve a liquidation of the applicants. Alternatively, it is possible that the Court could permit a liquidation of the CCAA applicants pursuant to CCAA proceedings.

The Manager has not put in place documentation to evidence the subordination of any loan between CCWHC and Calpine Canada Power Ltd, in favour of the Whitby Loan with the Partnership nor has the Manager made application to the Court to recognize such subordination.

On August 1, 2006, the Fund, CCT and the Partnership submitted a claim against the Manager under the CCAA proceedings seeking a declaration that such intercompany loan is subordinated to the Whitby Loan and certain other alternative relief including unliquidated damages, as well as related costs and expenses.

BUSINESS RISKS

The Fund and the Partnership are exposed to a variety of business risks and continue to monitor these risks. Additional information on business risks may be found in the Fund's 2005 MD&A.



SUMMARY OF QUARTERLY RESULTS

Calpine Power Income Fund

(unaudited) 2006 2005
(in 000's) Q2 Q1 Q4 Q3
------------------------------------------------------------------------

Revenue (2)
Equity earnings from
Calpine Power, L.P. $ 10,457 $ 10,095 $ 1,594 $ 13,649
Finance income(1) 4,418 4,460 4,543 4,613
Interest and other income 1,561 1,631 1,799 1,921
--------------------------------------------
16,436 16,186 7,936 20,183
--------------------------------------------

Expenses
Management and
administrative 2,550 2,645 1,501 523
Amortization 102 101 937 311
Accretion 28 28 27 27
Interest on long-term debt 2,507 2,576 2,998 3,069
Interest 34 51 107 140
Foreign exchange (239) (9) (64) (205)
Future income taxes 1,641 781 633 1,595
--------------------------------------------
6,623 6,173 6,139 5,460
--------------------------------------------
Net earnings $ 9,813 $ 10,013 $ 1,797 $ 14,723
--------------------------------------------
--------------------------------------------

Net earnings per
Trust Unit $ 0.1589 $ 0.1622 $ 0.0291 $ 0.2385
--------------------------------------------
--------------------------------------------


(unaudited) 2005 2004
(in 000's) Q2 Q1 Q4 Q3
------------------------------------------------------------------------

Revenue
Equity earnings from
Calpine Power, L.P. $ 12,766 $ 14,008 $ 13,292 $ 13,802
Finance income 4,714 4,649 4,843 5,076
Interest and other income 2,052 2,160 2,198 2,290
--------------------------------------------
19,532 20,817 20,333 21,168
--------------------------------------------

Expenses
Management and
administrative 637 999 1,620 661
Amortization 311 311 311 311
Accretion 28 19 27 28
Interest on long-term debt 3,171 3,125 3,132 3,433
Interest 160 196 237 218
Initial lease cost - - - -
Foreign exchange 86 (157) 20 53
Future income taxes 362 427 1,666 1,743
--------------------------------------------
4,755 4,920 7,013 6,447
--------------------------------------------
Net earnings $ 14,777 $ 15,897 $ 13,320 $ 14,721
--------------------------------------------
--------------------------------------------
Net earnings per
Trust Unit $ 0.2393 $ 0.2575 $ 0.2157 $ 0.2384
--------------------------------------------
--------------------------------------------

(1) Finance income is earned from the lease of the King City Facility to
Calpine King City.

(2) Reflects impact of the $16.0 million allowance for potential
impairment of the Whitby Loan on the Fund's share of Partnership
earnings.


Calpine Power, L.P

(unaudited) 2006 2005
(in 000's) Q2 Q1 Q4 Q3
------------------------------------------------------------------------

Revenue
Electricity, capacity
and thermal $ 21,430 $ 21,159 $ 27,146 $ 28,554
Interest - Whitby 836 792 817 837
Interest - Other 259 213 213 178
--------------------------------------------
22,525 22,164 28,176 29,569
--------------------------------------------

Expenses
Operating and maintenance 6,420 4,797 5,110 4,638
Allowance for impairment of
loan to Calpine - - 16,000 -
Canada Whitby Holdings
Company (1)
Depreciation 5,174 5,181 5,424 5,422
Accretion 55 54 51 50
General and administrative 506 267 43 137
Interest - 2 119 148
Foreign Exchange (87) - 7 (50)
--------------------------------------------
12,068 10,301 26,754 10,345
--------------------------------------------

Net earnings $ 10,457 $ 11,863 $ 1,422 $ 19,224
--------------------------------------------
--------------------------------------------

Net earnings per Unit
Class A Priority Unit $ 0.2010 $ 0.1941 $ 0.0307 $ 0.2625
Class B Subordinated Unit $ - $ 0.0793 $(0.0077) $ 0.2502



(unaudited) 2005 2004
(in 000's) Q2 Q1 Q4 Q3
------------------------------------------------------------------------

Revenue
Electricity, capacity
and thermal $ 27,598 $ 28,775 $ 28,467 $ 27,827
Interest - Whitby 846 837 846 855
Interest - Other 171 127 143 129
--------------------------------------------
28,615 29,739 29,456 28,811
--------------------------------------------

Expenses
Operating and maintenance 4,733 4,336 4,836 3,573
Depreciation 5,471 5,402 5,104 5,504
Accretion 50 50 46 47
General and administrative 163 152 604 82
Interest 158 164 107 88
Foreign Exchange (13) (22) 157 194
--------------------------------------------
10,562 10,082 10,854 9,488
--------------------------------------------

Net earnings $ 18,053 $ 19,657 $ 18,602 $ 19,323
--------------------------------------------
--------------------------------------------

Net earnings per Unit
Class A Priority Unit $ 0.2455 $ 0.2694 $ 0.2556 $ 0.2654
Class B Subordinated Unit $ 0.2372 $ 0.2535 $ 0.2383 $ 0.2477

(1) Reflects impact of the $16.0 million allowance for potential
impairment of the Whitby Loan on the Fund's share of Partnership
earnings.

The Partnership's revenues are subject to seasonality from its Island
Facility, which earns more revenue during winter months due to increased
requested output from contract counterparties.

CALPINE POWER INCOME FUND
CONSOLIDATED BALANCE SHEETS
(thousands)

As at As at
June 30, 2006 December 31, 2005
------------------------------------------------------------------------
(unaudited)
ASSETS

Current Assets
Cash and cash equivalents $ 14,074 $ 16,797
Restricted cash 1,048 5,597
Distributions receivable 4,664 4,519
Accounts receivable 177 271
Loan to Calpine Canada Power Ltd.,
current portion (Note 2) - 2,337
Net investment in lease, current
portion 937 20,712
Prepaid expenses 69 221
-------------- ------------------
20,969 50,454

Interest receivable on loan to Calpine
Canada Power Ltd. 1,042 -
Investment in Calpine Power, L.P.
(Note 3) 458,773 465,627
Net investment in lease, less current
portion 137,347 131,843
Loan to Calpine Canada Power Ltd., less
current portion (Note 2) 30,159 29,851
Land 1,870 1,870
Capital Assets 27 -
Deferred financing costs 1,847 2,052
-------------- ------------------
$ 652,034 $ 681,697
-------------- ------------------
-------------- ------------------

LIABILITIES AND UNITHOLDERS' EQUITY

Current Liabilities
Distributions payable $ 5,051 $ 5,051
Accounts payable and accrued
liabilities 2,538 1,669
Accrued interest on long-term debt 4,996 11,937
Long-term debt, current portion 9,118 21,216
-------------- ------------------
21,703 39,873
Future income tax 8,535 6,445
Asset retirement liability 1,355 1,358
Long-term debt, less current portion 68,939 72,041
-------------- ------------------
100,532 119,717
Unitholders' equity 551,502 561,980
-------------- ------------------
$ 652,034 $ 681,697
-------------- ------------------
-------------- ------------------
See accompanying notes to the consolidated financial statements


CALPINE POWER INCOME FUND
CONSOLIDATED STATEMENTS OF EARNINGS AND UNITHOLDERS' EQUITY
(thousands, except for Trust Units and per Trust Unit amounts)
(unaudited)

Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
REVENUES
Equity earnings
from
Calpine Power,
L.P. $ 10,457 $ 12,766 $ 20,552 $ 26,774
Finance income 4,418 4,714 8,878 9,363
Interest and other
income 1,561 2,052 3,192 4,212
---------------------------------------------------
16,436 19,532 32,622 40,349
---------------------------------------------------
EXPENSES
Management and
administrative 2,550 637 5,195 1,636
Depreciation and
amortization 102 311 203 622
Accretion 28 28 56 47
Interest on
long-term debt 2,507 3,171 5,083 6,296
Interest 34 160 85 356
Foreign exchange
(gain) loss (239) 86 (248) (71)
---------------------------------------------------
4,982 4,393 10,374 8,886
---------------------------------------------------
EARNINGS BEFORE
FUTURE INCOME TAXES 11,454 15,139 22,248 31,463
---------------------------------------------------
Future income taxes 1,641 362 2,422 789
---------------------------------------------------
NET EARNINGS 9,813 14,777 19,826 30,674
UNITHOLDERS'
EQUITY,
BEGINNING OF PERIOD 556,841 576,137 561,980 575,392
Distributions (15,152) (15,151) (30,304) (30,303)
---------------------------------------------------
UNITHOLDERS'
EQUITY, END OF
PERIOD $ 551,502 $ 575,763 $ 551,502 $ 575,763
---------------------------------------------------
---------------------------------------------------
Weighted average
number of Trust
Units outstanding 61,742,288 61,742,288 61,742,288 61,742,288
---------------------------------------------------
---------------------------------------------------
Net earnings per
Trust Unit $ 0.1589 $ 0.2393 $ 0.3211 $ 0.4968
---------------------------------------------------
---------------------------------------------------
See accompanying notes to the consolidated financial statements


CALPINE POWER INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)

Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 9,813 $ 14,777 $ 19,826 $ 30,674
Adjustments for
non-cash items:
Equity earnings
from Calpine
Power, L.P. (10,457) (12,766) (20,552) (26,774)
Finance income (4,418) (4,714) (8,878) (9,363)
Depreciation and
amortization 102 311 203 622
Amortization of
discount on loan to
Calpine Canada
Power Ltd. (308) (414) (643) (854)
Accretion 28 28 56 47
Foreign exchange
loss (gain) (239) 86 (248) (71)
Future income taxes 1,641 362 2,422 789
Lease receipts - - 19,431 -
Distributions
received from
Calpine Power, L.P. 14,190 13,682 27,260 26,281
-----------------------------------------------------
10,352 11,352 38,877 21,351
Change in non-cash
working capital
(Note 4) 502 2,601 (6,749) 5,451
-----------------------------------------------------
Net cash provided
by operating
activities 10,854 13,953 32,128 26,802
-----------------------------------------------------
INVESTING ACTIVITIES
Capital Assets (28) - (28) -
Receipt of
principal on loan
to Calpine Canada
Power Ltd. - 2,672 2,672 5,343
Loan to Calpine
Power, L.P. - - (4,007)
Loan to Calpine
Canada Power Ltd. - 1,278 3,477
-----------------------------------------------------
Net cash provided
(used) by investing
activities (28) 3,950 2,644 4,813
-----------------------------------------------------
FINANCING ACTIVITIES
Distributions paid (15,152) (15,151) (30,304) (30,253)
Repayment on Credit
Facility - (3,000) (7,000)
Payment of
principal on
long-term debt - - (11,659) -
-----------------------------------------------------
Net cash used in
financing
activities (15,152) (18,151) (41,963) (37,253)
-----------------------------------------------------
Foreign exchange
gain (loss) on cash
held in a foreign
currency (73) 58 (81) 304
-----------------------------------------------------
DECREASE IN CASH
AND CASH
EQUIVALENTS (4,399) (190) (7,272) (5,334)
Cash and cash
equivalents,
beginning of period 19,521 8,598 22,394 13,742
-----------------------------------------------------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD $ 15,122 $ 8,408 $ 15,122 $ 8,408
-----------------------------------------------------
Represented by:
Cash and cash
equivalents $ 14,074 2,658 $ 14,074 $ 2,658
Restricted cash,
current portion 1,048 4,602 $ 1,048 4,602
Restricted cash,
less current
portion - 1,148 1,148
-----------------------------------------------------
$ 15,122 $ 8,408 $ 15,122 $ 8,408
-----------------------------------------------------
SUPPLEMENTARY CASH
FLOW INFORMATION
Taxes paid $ - $ - $ - $ -
Interest received $ 150 $ 1,577 $ 11,964 $ 3,414
Interest paid $ 34 $ 160 $ 1,395 $ 356
See accompanying notes to the consolidated financial statements


CALPINE POWER INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005
(tabular amounts are in thousands except for Trust Units and per Trust
Unit amounts)
(unaudited)


1. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of the Calpine Power Income Fund (the "Fund") have been prepared by Calpine Canada Power Ltd. (the "Manager") in accordance with Canadian generally accepted accounting principles. The accounting policies applied are consistent with those outlined in the Fund's annual financial statements for the year ended December 31, 2005, except as noted below. These consolidated financial statements for the three and six months ended June 30, 2006 do not include all disclosures required in the annual consolidated financial statements in the Fund's 2005 Annual Report.

Effective April 1, 2006, the Fund adopted an accounting policy for Capital Assets. Property and equipment is recorded at cost and depreciated on the straight-line basis over the estimated useful life of the asset as follows:



Asset Estimated Useful Life
------------------------------ ------------------------------
Office furniture and fixtures 5 years


The Fund is not subject to any seasonality in its earnings except as may be derived from its investment in Calpine Power, L.P. (the "Partnership"), which earns more revenue during winter months due to increased requested output from contract counterparties. Partnership revenue for 2006 has not reflected this seasonality and has actually earned less revenue in the winter months with repudiation of contracts by certain counterparties and more revenue in the summer months from short-term contracts currently in place.

2. LOAN TO CALPINE CANADA POWER LTD.

The loan (the "Manager Loan") is a full recourse obligation of the Manager and is secured by a pledge of the Manager's limited partnership interest in the Partnership, including the Manager's right to receive distributions under the Class B Subordinated Units of the Partnership. In addition, the Manager affiliate that is the lessee of the King City Facility has provided the Fund with a limited recourse guarantee of the Manager's obligations under the loan and granted the Fund a subordinated security interest in its annual cash from operations. On December 20, 2005, the Manager filed for voluntary reorganization under the Canadian Companies' Creditors Arrangement Act ("CCAA"). As a result of these reorganization proceedings an event of default has occurred under the terms of the Manager Loan. Management estimates the loan to be fully collectible based upon the guarantee and security in place subject to the lifting of the stay of proceedings against the Manager, currently in effect until October 20, 2006. Amounts due and collected up to March 31, 2006 were classified as current at December 31, 2005 with the remaining balance classified as long-term. All scheduled principal and interest payments up to March 31, 2006 were received. Scheduled principal and interest payments due on the Manager Loan for April 2006 were not received by May 3, 2006 and an event of default by the Manager has occurred. Scheduled interest and principal payments were not received for April, May and June 2006.



3. INVESTMENT IN CALPINE POWER, L.P.

On August 29, 2002, the Fund purchased 52,001,351 Class A Priority Units
of the Partnership representing a 70% partnership interest.

As at June 30, 2006 and December 31, 2005, the equity investment in
Calpine Power, L.P. was comprised as follows:

------------------------------------------------------------------------
Investment in Calpine Power, L.P. at December 31, 2005 $ 465,627
Equity Earnings from Calpine Power, L.P. 20,552
Distributions received and receivable from Calpine Power,
L.P. (27,406)
------------------------------------------------------------------------
As at June 30, 2006 $ 458,773
----------
----------


4. CHANGE IN NON-CASH WORKING CAPITAL

Three Three Six Six
months months months months
ended ended ended ended
Change in non-cash June 30, June 30, June 30, June 30,
working capital 2006 2005 2006 2005
------------------------------------------------------------------------
Operating Activities
Accounts receivable $ 258 $ (23) $ 94 $ 115
Prepaid expenses 94 91 152 198
Interest receivable (1,042) - (1,042) -
Interest payable on
long-term debt 2,507 3,162 (6,822) 6,267
Accounts payable (1,315) (629) 869 (1,129)
------------------------------------------------
$ 502 $ 2,601 $ (6,749) $ 5,451
------------------------------------------------
------------------------------------------------


5. SEGMENTED INFORMATION

Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Revenue
Canada $ 11,990 $ 14,733 $ 23,687 $ 30,843
United States 4,446 4,799 8,935 9,506
------------------------------------------------
$ 16,436 $ 19,532 $ 32,622 $ 40,349
------------------------------------------------


As at As at
June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Total Assets
Canada $ 509,057 $ 519,833
United States 142,977 161,864
---------------------------------
$ 652,034 $ 681,697
---------------------------------


6. SUBSEQUENT EVENTS

On July 25, 2006, the stay of proceedings against the Manager was temporarily lifted for the sole purpose of CCT making a demand of the Manager Loan. CCT subsequently made the demand and the stay was reimposed. On August 1, 2006 CCT submitted a claim against the Manager under the CCAA proceedings for principal and interest in the amount $33.9 million, yield protection in the amount of $3.8 million and reasonable legal and accounting fees and expenses.

The Fund, CCT and the Partnership have completed assessing other potential claims to submit with respect to obligations owed to them by Calpine and its subsidiaries and on August 1, 2006 they submitted various claims against the Manager under the CCAA proceedings and Calpine under the Chapter 11 proceedings.

The Fund, CCT and the Partnership submitted a claim against the Manager seeking a declaration the Manager has breached and repudiated the Management Agreement and the Administrative Services Agreement, seeking a declaration that the Fund, CCT and the Partnership are entitled to terminate such agreements, and seeking related relief and costs and expenses of enforcement. The Manager disputes the allegations of breach and repudiation made by the Fund, CCT and CLP in relation to the Management and Administrative Services Agreements. It is the Manager's view that it has acted, and continues to act, in compliance with its obligations under these agreements. Further, the Manager disputes any allegation that its conduct could be construed as a repudiation of these agreements. The Manager intends to continue to fulfill its obligations to the Fund, CCT and CLP under these agreements.



CALPINE POWER, L.P.
CONSOLIDATED BALANCE SHEETS
(thousands)

As at As at
June 30, 2006 December 31, 2005
------------------------------------------------------------------------
ASSETS (unaudited)

Current Assets
Cash and cash equivalents $ 20,008 $ 27,903
Accounts receivable 9,281 6,426
Interest receivable 572 2,221
Inventory 2,798 2,650
Prepaid expenses 9,063 6,465
-------------- ------------------
41,722 45,665
Loan to Calpine Canada Whitby Holdings
Company, net of $16 million allowance
for impairment 21,742 19,414
Capital assets 559,628 569,923
-------------- ------------------
$ 623,092 $ 635,002
-------------- ------------------
-------------- ------------------

LIABILITIES AND PARTNERS' EQUITY

Current Liabilities
Distributions payable $ 4,664 $ 5,785
Accounts payable and accrued
liabilities 7,500 10,807
-------------- ------------------
12,164 16,592
Asset retirement liability 2,679 2,570
-------------- ------------------
14,843 19,162
Partners' equity (Note 3) 608,249 615,840
-------------- ------------------
$ 623,092 $ 635,002
-------------- ------------------
-------------- ------------------
See accompanying notes to the consolidated financial statements


CALPINE POWER, L.P.
CONSOLIDATED STATEMENTS OF EARNINGS AND PARTNERS' EQUITY
(thousands, except for per Unit amounts)
(unaudited)

Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
REVENUES
Electricity, capacity
and thermal $ 21,430 $ 27,598 $ 42,589 $ 56,373
Interest - Whitby 836 846 1,628 1,683
- Other Income 259 171 472 298
-------------------------------------------------
22,525 28,615 44,689 58,354
-------------------------------------------------
EXPENSES
Operating and
maintenance 6,420 4,733 11,217 9,069
Depreciation 5,174 5,471 10,355 10,873
Accretion 55 50 109 100
Interest - 158 2 322
General and
administrative 506 163 773 315
Foreign exchange gain (87) (13) (87) (35)
-------------------------------------------------
12,068 10,562 22,369 20,644
-------------------------------------------------
NET EARNINGS 10,457 18,053 22,320 37,710
PARTNERS' EQUITY,
BEGINNING OF PERIOD 611,828 632,236 615,840 631,353
Distributions (14,036) (18,680) (29,911) (37,454)
-------------------------------------------------
PARTNERS' EQUITY, END
OF PERIOD $ 608,249 $ 631,609 $ 608,249 $ 631,609
-------------------------------------------------
-------------------------------------------------
Net earnings per Unit
(Note 3):
Class A Priority Unit $ 0.2010 $ 0.2455 $ 0.3952 $ 0.5149
-------------------------------------------------
-------------------------------------------------
Class B Subordinated
Unit $ - $ 0.2372 $ 0.0793 $ 0.4907
-------------------------------------------------
-------------------------------------------------

See accompanying notes to the consolidated financial statements

CALPINE POWER, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)

Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 10,457 $ 18,053 $ 22,320 $ 37,710
Adjustments for
non-cash items:
Depreciation 5,174 5,471 10,355 10,873
Accretion 55 50 109 100
Foreign exchange gain (87) (13) (87) (35)
-------------------------------------------------
15,599 23,561 32,697 48,648
Change in non-cash
working capital
relating to operating
activities
(Note 2) (7,228) 4,615 (9,587) 5,809
-------------------------------------------------
Net cash provided by
operating activities 8,371 28,176 23,110 54,457
-------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (30) (224) (60) (278)
Change in non-cash
working capital
relating to investing
activities
(Note 2) - 133 - 89
-------------------------------------------------
Net cash used in
investing activities (30) (91) (60) (189)
-------------------------------------------------
FINANCING ACTIVITIES
Distributions (14,190) (19,017) (31,032) (36,934)
Loan payable - - - 4,007
Payment of principal
on loan payable - (1,278) - (3,477)
-------------------------------------------------
Net cash used in
financing activities (14,190) (20,295) (31,032) (36,404)
-------------------------------------------------
Foreign exchange gain
on cash held in
foreign currency 87 13 87 35
-------------------------------------------------
INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS (5,762) 7,803 (7,895) 17,899
Cash and cash
equivalents, beginning
of period 25,770 23,811 27,903 13,715
-------------------------------------------------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD $ 20,008 $ 31,614 $ 20,008 $ 31,614
-------------------------------------------------
-------------------------------------------------
SUPPLEMENTARY CASH
FLOW INFORMATION
Interest received $ 1,194 $ 1,071 $ 1,407 $ 3,698
Interest paid $ - $ 162 $ - $ 511


See accompanying notes to the consolidated financial statements

CALPINE POWER, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2006 and 2005
(tabular amounts are in thousands except for per Unit amounts)
(unaudited)


1. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of the Calpine Power, L.P. (the "Partnership") have been prepared by Calpine Canada Power Ltd. (the "Manager") in accordance with Canadian generally accepted accounting principles. The accounting policies applied are consistent with those outlined in the Partnership's annual financial statements for the year ended December 31, 2005. These consolidated financial statements for the three and six months ended June 30, 2006 do not include all disclosures required in the annual consolidated financial statements of the Partnership in the 2005 Calpine Power Income Fund (the "Fund") Annual Report.

The Partnership's earnings are subject to seasonality from its Island Facility, which earns more revenue during winter months due to increased requested output from contract counterparties. Partnership revenue for 2006 has not reflected this seasonality and has actually earned less revenue in the winter months with repudiation of contracts by certain counterparties and more revenue in the summer months from short-term contracts currently in place.



2. CHANGE IN NON-CASH WORKING CAPITAL

Three Three Six Six
months months months months
ended ended ended ended
Change in non-cash June 30, June 30, June 30, June 30,
working capital 2006 2005 2006 2005
------------------------------------------------------------------------
Operating activities:
Accounts receivable $ 296 $ 2,267 $ (2,855) $ 1,090
Interest receivable 113 17 (679) 1,681
Prepaid expenses (2,115) (884) (2,598) (1,972)
Accounts payable and
accrued liabilities (5,494) 3,327 (3,307) 5,331
Interest payable - (6) - (191)
Inventory (28) (106) (148) (130)
------------------------------------------------
$ (7,228) $ 4,615 $ (9,587) $ 5,809
------------------------------------------------
------------------------------------------------
Investing activities:
Accounts payable --
accrued capital $ - $ 133 $ - $ 89
------------------------------------------------
------------------------------------------------


3. PARTNERS' EQUITY

The Partnership is authorized to issue an unlimited number of Class A Priority Units and an unlimited number of Class B Subordinated Units. For the three and six months ended June 30, 2006, the Fund subsidiary that is the holder of Class A Priority Units, Calpine Commercial Trust ("CCT"), received the first $0.0806 of Distributable Cash per Class A Priority Unit per month (in addition to certain management and administrative expenses incurred by the Fund) on a cumulative basis in priority to any payments on the Class B Subordinated Units. For the three and six months ended June 30, 2006, the holder of Class B Subordinated Units, the Manager, was entitled to receive up to $0.0806 of Distributable Cash per Class B Subordinated Unit per month which amounts accumulate for a fiscal year (and if unpaid at the end of a fiscal year, this entitlement terminates for such fiscal year) following the priority payment of Distributable Cash to the holder of Class A Priority Units. Each year until 2022, the Distributable Cash target entitlements increase at an annual rate of 1%. Holders of Class A Priority Units and Class B Subordinated Units are entitled to share equally, on a class basis, any Distributable Cash in excess of their target entitlements in any calendar year.



Class A Units Class B Units Total
------------------------------------------------------------------------
As at December 31, 2005 $ 465,627 $ 150,213 $ 615,840
Net earnings 20,552 1,768 22,320
Distributions declared (27,406) (2,505) (29,911)
--------------------------------------------
As at June 30, 2006 $ 458,773 $ 149,476 $ 608,249
--------------------------------------------
--------------------------------------------


Net earnings per Class A Priority Unit and Class B Subordinated Unit for the three months ended June 30, 2006 have been calculated based on a weighted average of 52,001,352 Class A Priority Units (June 30, 2005 -- 52,001,352) and 22,286,294 Class B Subordinated Units (June 30, 2005 - 22,286,294).

3. SUBSEQUENT EVENTS

On July 1, 2006, a second short-term tolling agreement was competitively secured with TransAlta Energy Marketing Corporation to toll the capacity from the Facility until the August 31, 2006.

On August 1, 2006 the Partnership submitted a claim under the CCAA proceedings against Calpine Energy Services Canada Partnership ("CESCP") with respect to the Calgary Energy Centre as a consequence of the repudiation on January 16, 2006 by CESCP of the original tolling agreement.

The claim for payments under the original tolling agreement is in the amount of $769 million, before giving effect to mitigation of the claim through short-term and any long-term re-tolling of the capacity of Calgary Energy Centre and before discounting to provide for the net present value of the claim. The mitigation and discounting are expected to significantly reduce the claim by an amount that is currently undetermined but is expected to be substantial. A claim for costs, expenses and legal fees incurred and to be incurred was also filed. The Partnership also submitted on August 1, 2006 a similar claim in Calpine's Chapter 11 proceedings against Calpine with respect to Calpine's guarantee of CESCP's obligations under original tolling agreement plus costs, expenses and legal fees.

The Manager has advised the Fund of its understanding that there is an intercompany loan of approximately $32.7 million payable by Calpine Canada Whitby Holdings ("CCWHC") to the Manager, the terms of which have not been formally documented. The Manager has also advised that it has considered such intercompany loan to be subordinated to the loan by the Partnership to CCWHC (the "Whitby Loan"). The Manager has not put in place documentation to evidence such subordination nor has it brought an application to the Court to recognize such subordination. CCWHC was not an applicant in the CCAA proceedings or the Chapter 11 proceedings. Additional information on such intercompany loan and subordination is provided in the Fund's AIF, 2005 MD&A and the 2006 first quarter results. On August 1, 2006, the Fund, CCT and the Partnership submitted a claim against the Manager under the CCAA proceedings seeking a declaration that such intercompany loan is subordinated to the Whitby Loan and certain other alternative relief including but not limited to unliquidated damages, as well as related costs and expenses.

The Fund, CCT and the Partnership have completed assessing other potential claims to submit with respect to obligations owed to them by Calpine and its subsidiaries and on August 1, 2006 they submitted various claims against the Manager under the CCAA proceedings and Calpine under the Chapter 11 proceedings. The Partnership submitted contingent and unliquidated claims against the Manager, and Calpine as guarantor, with respect to the heat rate indemnity relating to the Island Facility and related costs and expenses.

The Fund and the Partnership submitted contingent and unliquidated claims against the Manager with respect to the transfer fee relating to the Island Facility and related costs and expenses, and the Partnership submitted a similar contingent and unliquidated claim against Calpine relating to its guarantee of such transfer fee and related costs and expenses.

The Fund, CCT and the Partnership submitted a claim against the Manager seeking a declaration the Manager has breached and repudiated the Management Agreement and the Administrative Services Agreement, seeking a declaration that the Fund, CCT and the Partnership are entitled to terminate such agreements, and seeking related relief and costs and expenses of enforcement. The Manager disputes the allegations of breach and repudiation made by the Fund, CCT and CLP in relation to the Management and Administrative Services Agreements. It is the Manager's view that it has acted, and continues to act, in compliance with its obligations under these agreements. Further, the Manager disputes any allegation that its conduct could be construed as a repudiation of these agreements. The Manager intends to continue to fulfill its obligations to the Fund, CCT and CLP under these agreements.

Contact Information

  • Calpine Power Income Fund
    Toby Austin
    President and Chief Executive Officer
    (403) 296-1411
    Email: ir@calpinecanada.com
    or
    Calpine Power Income Fund
    Lisa Winslow
    Interim Chief Financial Officer
    (403) 296-1415
    Website: www.calpinepif.com