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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Calpine Corporation

I.R.S. Employer Identification No. 77-0212977

50 West San Fernando Street

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act).     Yes þ          No o

      Aggregate market value of the common equity held by non-affiliates of the registrant as of June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter: approximately $2.5 billion. Common stock outstanding as of March 19, 2004: 415,736,644 shares.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the documents listed below have been incorporated by reference into the indicated parts of this report, as specified in the responses to the item numbers involved.

FORM 10-K

TABLE OF CONTENTS

Table of Contents

PART I

      In addition to historical information, this report contains forward-looking statements. Such statements include those concerning Calpine Corporation’s (“the Company’s”) expected financial performance and its strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could cause actual results to differ materially from the forward-looking statements such as, but not limited to, (i) the timing and extent of deregulation of energy markets and the rules and regulations adopted on a transitional basis with respect thereto, (ii) the timing and extent of changes in commodity prices for energy, particularly natural gas and electricity, and the impact of related derivatives transactions, (iii) unscheduled outages of operating plants, (iv) unseasonable weather patterns that produce reduced demand for power, (v) systemic economic slowdowns, which can adversely affect consumption of power by businesses and consumers, (vi) commercial operations of new plants that may be delayed or prevented because of various development and construction risks, such as a failure to obtain the necessary permits to operate, failure of third-party contractors to perform their contractual obligations or failure to obtain project financing on acceptable terms, (vii) cost estimates are preliminary and actual costs may be higher than estimated, (viii) a competitor’s development of lower-cost power plants or of a lower cost means of operating a fleet of power plants, (ix) risks associated with marketing and selling power from power plants in the evolving energy market, (x) the successful exploitation of an oil or gas resource that ultimately depends upon the geology of the resource, the total amount and costs to develop recoverable reserves, and legal title, regulatory, gas administration, marketing and operational factors relating to the extraction of natural gas, (xi) our estimates of oil and gas reserves may not be accurate, (xii) the effects on the Company’s business resulting from reduced liquidity in the trading and power generation industry, (xiii) the Company’s ability to access the capital markets on attractive terms or at all, (xiv) sources and uses of cash are estimates based on current expectations; actual sources may be lower and actual uses may be higher than estimated, (xv) the direct or indirect effects on the Company’s business of a lowering of its credit rating (or actions it may take in response to changing credit rating criteria) including increased collateral requirements, refusal by the Company’s current or potential counterparties to enter into transactions with it and its inability to obtain credit or capital in desired amounts or on favorable terms, (xvi) possible future claims, litigation and enforcement actions pertaining to the foregoing, (xvii) effects of the application of regulations, including changes in regulations or the interpretation thereof; or (xviii) other risks as identified herein. Current information set forth in this filing has been updated to March 24, 2004, and Calpine undertakes no duty to further update this information. All other information in this filing is presented as of the specific date noted and has not been updated since that time.

      We file annual, quarterly and periodic reports, proxy statements and other information with the SEC. You may obtain and copy any document we file with the SEC at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549-1004. The SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our SEC filings are accessible through the Internet at that website.

      Our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, are available for download, free of charge, as soon as reasonably practicable after these reports are filed with the SEC, at our website at www.calpine.com. The content of our website is not a part of this report. You may request a copy of our SEC filings, at no cost to you, by writing or telephoning us at: Calpine Corporation, 50 West San Fernando Street, San Jose, California 95113, attention: Lisa M. Bodensteiner, Assistant Secretary, telephone: (408) 995-5115. We will not send exhibits to the documents, unless the exhibits are specifically requested and you pay our fee for duplication and delivery.

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OVERVIEW

      We are a leading North American power company engaged in the development, construction, ownership and operation of power generation facilities and the sale of electricity predominantly in the United States, but also in Canada and the United Kingdom. We were established as a corporation in 1984. We focus on two efficient and clean types of power generation technologies, natural gas-fired combustion turbine and geothermal. We currently lease and operate the largest fleet of geothermal power plants in the world, and have increased our operating portfolio of clean burning natural gas power plants by 17,201 megawatts (“MW”) over the past three years. We have a proven track record in the development of new power facilities and may make acquisitions as opportunities arise. We also have in place an experienced gas production and management team to give us a broad range of fuel sourcing options, and we own over 800 billion cubic feet equivalent (“Bcfe”) of net proved natural gas reserves located in Alberta, Canada as well as in the Sacramento Basin, Rockies and Gulf Coast regions of the United States. Additionally, we own a 25% interest in Calpine Natural Gas Trust, which has proved reserves of approximately 72 Bcfe (18 Bcfe net to Calpine’s equity interest). We are currently capable of producing, net to Calpine’s interest, 215 million cubic feet equivalent (“MMcfe”) of natural gas per day, and Calpine Natural Gas Trust (“CNG Trust”) total production, net of royalties, is currently 25 MMcfe (6.2 MMcfe net to Calpine’s interest) of natural gas per day. Calpine has the first right to purchase all of CNG Trust’s production at market prices.

      Currently, we own interests in 87 power plants having a net capacity of 22,206 MW. We also have 12 gas-fired projects and 1 project expansion currently under construction collectively having a net capacity of 7,685 MW. The completion of the new projects currently under construction would give us interests in 99 power plants located in 22 states, 3 Canadian provinces and the United Kingdom, and we will own net capacity of 29,891 MW. Of this total generating capacity, 97% will be attributable to gas-fired facilities and 3% will be attributable to geothermal facilities.

      Calpine Energy Services, L.P. (“CES”) provides the trading and risk management services needed to schedule power sales and to ensure fuel is delivered to the power plants on time to meet delivery requirements and to manage and optimize the value of our physical power generation and gas production assets.

      Complementing CES’s activities, we have recently reorganized our marketing and sales organization to better meet the needs of our growing list of wholesale and large retail customers. We focus our sales activities on load serving entities such as local utilities, municipalities and cooperatives, as well as on large-scale end users such as industrial and commercial companies. See a further discussion of our marketing and sales organization in “Strategy” below. As a general goal, we seek to have 65% of our available capacity sold under long-term contracts or hedged by our risk management group. Currently we have 52% of our available capacity sold or hedged for 2004.

      We continue to strengthen our system operations management and information technology capabilities to enhance the economic performance of our portfolio of assets in our major markets and to provide load-following and other ancillary services to our customers. These operational optimization systems, combined with our sales, marketing and risk management capabilities, enable us to add value to traditional commodity products in ways that not all competitors can match.

      Our construction organization has assembled what we believe to be the best-in-industry team of construction management professionals to ensure that our projects are built using our standard design specifications reflecting our exacting operational standards. We have established strategic alliances with leading equipment manufacturers for gas turbine generators, steam turbine generators and heat recovery steam generators and other key equipment. We will continue to leverage these capabilities and relationships to ensure that our power plants are completed on time and are the best built and lowest cost energy facilities possible.

      With a vision of enhancing the performance of our modern portfolio of gas-fired power plants and lowering our replacement parts maintenance costs, we have fostered the development of our wholly owned subsidiary, Power Systems Manufacturing (“PSM”), to design and manufacture high performance combustion system and turbine blade parts. PSM manufactures new vanes, blades, combustors and other replacement

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      In 2003 we expanded our energy services capabilities with the acquisition of Netherlands-based Thomassen Turbine Systems (“TTS”). TTS complements Calpine’s broad array of energy services by selling combustion turbine component parts and repair services worldwide.

      We established Calpine Power Services (“CPS”) to offer the unique skills that we have honed in building and operating our own power plants to third party customers. We are now selling, and have received contracts for, various engineering, procurement, construction management, plant commissioning, operations, and maintenance services through CPS.

      As we build the nation’s most modern and efficient portfolio of gas-fired generation assets and establish our low-cost position, our integrated operations and skill sets have allowed us to weather a multi-year downturn in the North American energy industry. We have demonstrated the flexibility to adapt to fundamental market changes. Specifically, we responded to the market downturn by reducing capital expenditures, selling or monetizing various gas, power, and contractual assets, restructuring our equipment procurement obligations, and reorganizing to reflect our transition from a development focused company to an operations focused company. These efforts have allowed us to cut costs and raise capital while positioning ourselves to continue our quest to be the power company in North America with the largest market capitalization. See Note 25 of the Notes to Consolidated Financial Statements for Operating Segments Disclosures.

THE MARKET

      The electric power industry represents one of the largest industries in the United States and impacts nearly every aspect of our economy, with an estimated end-user market of nearly $260 billion of electricity sales in 2003 based on information published by the Energy Information Administration of the Department of Energy (“EIA”). Historically, the power generation industry has been largely characterized by electric utility monopolies producing electricity from old, inefficient, polluting, high-cost generating facilities selling to a captive customer base. However, industry trends and regulatory initiatives have transformed some markets into more competitive grounds where load-serving entities and end-users may purchase electricity from a variety of suppliers, including independent power producers, power marketers, regulated public utilities and others. For the past decade, the power industry has been deregulated at the wholesale level allowing generators to sell directly to the load serving entities, such as public utilities, municipalities and electric cooperatives. Although industry trends and regulatory initiatives aimed at further deregulation have slowed, the power industry continues to transform into a more competitive market.

      The North American Electric Reliability Council (“NERC”) estimates that in the United States, peak (summer) electric demand in 2003 totaled approximately 720,000 MW, while summer generating capacity in 2003 totaled approximately 912,000 MW, creating a peak summer reserve margin of 192,000 MW, or 26.7%. Historically, utility reserve margins have been targeted to be 15% above peak demand to provide for load forecasting errors, scheduled and unscheduled plant outages and local area grid protection. Some regions have margins well in excess of the 15% target range, while other regions remain short of ideal reserve margins. The estimated 192,000 MW of reserve margin in 2003 compares to an estimated 120,000 MW in 2002. The increase is due in large part to the start-up of new low-cost, clean-burning, gas-fired power plants. The United States market consists of regional electric markets not all of which are effectively interconnected, so reserve margins vary from region to region.

      Even though most new power plants are fueled by natural gas, the majority of power generated in the U.S. is still produced by coal and nuclear power plants. The EIA has estimated that approximately 51% of the electricity generated in the U.S. is fueled by coal, 20% by nuclear sources, 17% by natural gas, 7% by hydro, and 5% from fuel oil and other sources. As regulations continue to evolve, many of the current coal plants will likely be faced with installing a significant amount of costly emission control devices. This activity could cause

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      Due primarily to the completion of gas-fired combustion turbine projects, we have seen power supplies increase and higher reserve margins in the last two years accompanied by a decrease in liquidity in the energy trading markets, and a general lessening of enthusiasm for investing in energy companies. In 2003 while electricity prices generally increased, the cost of natural gas grew at an even greater rate, further depressing spark spreads (the margin between the value of the electricity sold and the cost of fuel to generate that electricity) from the low levels in 2002.

      Based on strength in residential and commercial demand, overall consumption of electricity was estimated to have grown by approximately 2.9% in 2004 through February compared to the same period in 2003, according to Edison Electric Institute (“EEI”) published data. The growth rate for calendar year 2003 was 1.8%. The growth rate in supply is diminishing with many developers canceling, or delaying completion of their projects as a result of current market conditions. The supply and demand balance in the natural gas industry continues to be strained with gas prices rising to over $6.40 per million btu (“MMbtu”) in the first quarter of 2004, compared to an average of approximately $5.50 per MMbtu in 2003 and $3 per MMbtu in 2002. In addition, capital market participants are slowly making progress in restructuring their portfolios, thereby stabilizing financial pressures on the industry. Overall, we expect the market to continue these trends and work through the current oversupply of power in several regions within the next few years. As the supply-demand picture improves, we expect to see spark spreads improve and capital markets regain their interest in helping to repower America with clean, highly efficient energy technologies.

STRATEGY

      Our vision is to become North America’s largest power company and ultimately become a major worldwide power company. In achieving our corporate strategic objectives, the number one priority for our company is maintaining the highest level of integrity in all of our endeavors. We have posted on our website (www.calpine.com <http://www.calpine.com>) our Code of Conduct applicable to all employees, including our principal executive officer, principal financial officer and principal accounting officer. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding any amendments to or waivers from the Code of Conduct by posting such information on our website at www.calpine.com.

      Our timeline to achieve our strategic objectives is flexible and will be guided by our view of market fundamentals. When necessary, we will slow or delay our growth activities in order to ensure that our financial health is secure and our investment opportunities meet our long-term rate of return requirements.

Near-Term Objectives

      Our ability to adapt as needed to market dynamics has led us to develop a set of near-term strategic objectives that will guide our activities until market fundamentals improve. These include:

	•	Continue to focus on our liquidity position as our second highest priority after integrity;
	•	Complete our 2004 refinancing program, which includes Calpine Generating Company, LLC (“CalGen”) (see “Recent Developments” for more information), the remaining outstanding 4% Convertible Senior Notes Due 2006, and the Remarketable Term Income Deferrable Equity Securities (“HIGH TIDES”);
	•	Complete our current construction program and start construction of new projects in strategic locations only when financing is available and attractive returns are expected;
	•	Continue to lower operating and overhead costs per megawatt hour produced and improve operating performance with an increasingly efficient power plant fleet; and
	•	Utilize our industry-leading marketing and sales capabilities to selectively increase our power contract portfolio.

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Longer-Term Objectives

      We plan on realizing our strategy by (1) achieving the lowest-cost position in the industry by applying our fully integrated areas of expertise to the cost-effective development, construction, financing, fueling, and operation of the most modern and efficient power generation facilities and by achieving economies of scale in general, administrative and other support costs, and (2) enhancing the value of the power we generate in the marketplace (a) by operating our plants as a system, (b) by selling directly to load-serving entities and, to the extent allowable, to industrial customers, in each of the markets in which we participate, (c) by offering load-following and other ancillary services to our customers, and (d) by providing effective marketing, risk management and asset optimization activities through our CES and marketing and sales organizations.

      Our “system approach” refers to our ability to cluster our standardized, highly efficient power generation assets within a given energy market and to sell the energy from that system of power plants, rather than using “unit specific” marketing contracts. The clustering of standardized power generation assets allows for significant economies of scale to be achieved. Specifically, construction costs, supply chain activities such as inventory and warehousing costs, labor, and fuel procurement costs can all be reduced with this approach. The choice to focus on highly efficient and clean technologies reduces our fuel costs, a major expense when operating power plants. Furthermore, our lower-than-market heat rate (high efficiency advantage) provides us a competitive advantage in times of rising fuel prices, and our systems approach to fuel purchases reduces imbalance charges when a plant is forced out of service. Finally, utilizing our system approach in a sales contract allows us to provide power to a customer from whichever plant in the system is most economical at a given period of time. In addition, the operation of plants can be coordinated when increasing or decreasing power output throughout the day to enhance overall system efficiency, thereby enhancing the heat rate advantage already enjoyed by the plants. In total, this approach lays a foundation for a sustainable competitive cost advantage in operating our plants.

      The integration of gas production, hedging, optimization and marketing activities achieves additional cost reductions while simultaneously enhancing revenues. Our fleet of natural gas burning power plants requires a large amount of gas to operate. Our fuel strategy is to produce from our own gas reserves enough fuel to provide a natural hedge against gas price volatility, while providing a secure and reliable source of fuel and lowering our fuel costs over time. The ownership of gas provides our CES risk management organization with additional flexibility when structuring fixed price transactions with our customers.

      Recent trends confirm that both buyers and sellers of power benefit from signing long-term power contracts and avoiding the severe volatility often seen with power prices. The trend towards signing long-term contracts is creating opportunities for companies, such as ours, that own power plants and gas reserves to negotiate directly with buyers (end users and load serving entities) that need power, thereby skipping the trading middlemen, many of whom have now exited the market.

      Our marketing and sales organization is dedicated to serving wholesale and industrial customers with reliable, cost-effective electricity and a full range of services. The organization offers customers: (1) wholesale bulk energy; (2) firm supply energy; (3) fully dispatchable energy; (4) full service requirements energy; (5) renewable energy; (6) energy scheduling services; (7) engineering, construction, operations and maintenance services; and (8) critical reliability energy services. Our physical, financial and intellectual assets and our generating facilities that are pooled into unique energy centers in key markets, enable us to create customizable energy solutions for our customers. For example, our wholesale energy products deliver power when, where and in the capacity our customers need. Our power marketing experience gives us the know-how to structure innovative deals that meet our customers’ particular requirements. Our highly tailored, yet understandable energy contracts help customers offset pricing risk and other variables. Our “Virtual Power Plant” projects provide customers with an energy resource that is reliable and flexible. They give customers all of the advantages of owning and operating their own plants without many of the risks, by gaining access to a portfolio of highly efficient generation assets and by implementing our IT solutions to allow power to be dispatched as needed. Marketing and Sales is pursuing 21,000 MW of active opportunities with 135 customers across the United States. This customer base includes municipalities, cooperatives, investor owned utilities, industrial customers and commercial customers across the United States.

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      Our financing strategy includes an objective to achieve and maintain an investment grade credit and bond rating from the major rating agencies within the next several years. We intend to employ various approaches for extending or refinancing existing credit facilities and for financing new plants, with a goal of retaining maximum system operating flexibility. The availability of capital at attractive terms will be a key requirement to enable us to develop and construct new plants. We have adjusted to recent market conditions by taking near-term actions focused on liquidity. We have been very successful throughout 2003 and early 2004 at selling certain less strategically important assets, monetizing several contracts, establishing a Canadian natural gas trust to raise funds based on selling to the trust certain of our oil and gas assets, buying back our debt, issuing convertible and non-convertible senior notes, and raising capital with non-recourse project financing.

COMPETITION

      We are engaged in several different types of business activities each of which has its own competitive environment. To better understand the competitive landscape we face, it is helpful to look at five different groupings of business activities.

      Development and Construction. In this activity, we face competition from independent power producers (“IPPs”), non-regulated subsidiaries of utilities, and increasingly from regulated utilities and large end-users of electricity. Furthermore, the regulatory and community pressures against locating a power plant at a specific site can often be substantial, causing months or years of delays. Similarly, the construction process is highly competitive as there are only a few primary suppliers of key gas turbine, steam turbine and heat recovery steam generator equipment used in a state of the art gas turbine power plant. Additionally, we have seen periods of strong competition with respect to securing the best construction personnel and contractors.

      Power Plant Operations. The competitive landscape faced by our power plant operations organization consists of a patchwork of highly competitive and highly regulated market environments. This patchwork has been caused by an uneven transition to deregulated markets across the various states and provinces of North America. For example, in markets where there is open competition, our merchant capacity (that which has not been sold under a long-term contract) competes directly on a real time basis with all other sources of electricity such as nuclear, coal, oil, gas-fired, and renewable units owned by others. However, there are other markets where the local incumbent utility still predominantly uses its own supply to meet its own demand before dispatching competitively provided power. Each of these markets offers a unique and challenging competitive environment.

      Asset Acquisition and Divestiture. The recent downturn in the electricity industry has prompted many companies to sell assets to improve their financial positions. In addition, the postponement of plans for construction of new power plants is also creating a competitive market for the sale of excess equipment. Although there is a strong buyers market at the moment, relatively few assets are changing hands due to the gap between sellers’ and buyers’ price expectations.

      Gas Production and Operations. Gas production is a significant component of our operations and an area that we would like to expand when market conditions are attractive. However, this market is also highly competitive and is populated by numerous participants including majors, large independents and smaller “wild cat” type exploration companies. Recently, the competition in this sector has increased due to a fundamental shift in the supply and demand balance for gas in North America. This shift has driven gas prices higher and has led to increased production activities and development of alternative supply options such as LNG or coal gasification. In the near-term, however, we expect that the market to find and produce natural gas will remain highly competitive.

      Power Marketing and Sales. Power marketing and sales generally includes all those activities associated with identifying customers, negotiating, and selling energy and service contracts to load-serving entities and large scale industrial and retail end-users. Specifically, there has been a trend for trading companies that served a “middle man” role to exit the industry for financial and business model reasons. Instead, power generators are increasingly selling long-term power directly to load serving entities (utilities, municipalities,

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RECENT DEVELOPMENTS

      Financing. On January 9, 2004, one of the initial purchasers of the 4 3/4% Contingent Convertible Senior Notes Due 2023 exercised in full its option to purchase an additional $250.0 million of these notes. The notes are convertible into cash and into shares of Calpine common stock upon the occurrence of certain contingencies at an initial conversion price of $6.50 per share, which represents a 38% premium over the New York Stock Exchange closing price of $4.71 per share on November 6, 2003, the date the notes were originally priced. Upon conversion of the notes, we will deliver par value in cash and any additional value in Calpine shares.

      On January 15, 2004, we completed the sale of our 50-percent undivided interest in the 545-megawatt Lost Pines 1 Power Project to GenTex Power Corporation, an affiliate of the Lower Colorado River Authority (“LCRA”). Under the terms of the agreement, we received a cash payment of $146.8 million and recorded a gain before taxes of $35.5 million in January 2004. In addition, CES entered into a tolling agreement with LCRA to purchase 250 megawatts of electricity through December 31, 2004. At December 31, 2003, we classified our undivided interest in the Lost Pines facility as “held for sale” and reclassified all earnings to discontinued operations (see Note 10 of the Notes to Consolidated Financial Statements).

      In January 2004 CES concluded a settlement with the Commodity Futures Trading Commission (“CFTC”) related to the CFTC’s finding of inaccurate reporting of certain natural gas trading information by one former CES employee during 2001 and 2002. Neither Calpine nor CES benefited from the trader’s conduct. Under the terms of the agreement, CES paid a civil monetary penalty in the amount of $1.5 million without admitting or denying the findings in the CFTC’s order.

      Subsequent to December 31, 2003, we repurchased approximately $177.0 million in principal amount of our outstanding 4% Convertible Senior Notes Due 2006 (“2006 Convertible Senior Notes”) that can be put to us in exchange for approximately $176.0 million in cash. Additionally, on February 9, 2004, we made a cash tender offer, which expired on March 9, 2004, for all of the outstanding 2006 Convertible Senior Notes at a price of par plus accrued interest. On March 10, 2004, we paid an aggregate amount of $412.8 million for the tendered 2006 Convertible Senior Notes which included accrued interest of $3.4 million. Currently, 2006 Convertible Senior Notes in the aggregate principal amount of $73.7 million remain outstanding.

      On February 2, 2004, a class action complaint was filed in the United States District Court for the Southern District of New York against CES and others. The complaint alleges unlawful manipulation of natural gas futures and options contracts traded on NYMEX during the period January 21, 2000 through December 31, 2002. The causes of action alleged are fraudulent concealment and violations of the Commodity Exchange Act, and CES anticipates filing a motion to dismiss the complaint. This complaint was filed as a related action to another consolidated class action complaint involving numerous other defendants. The court has not granted class action certification for any of the matters at this time.

      On February 18, 2004, one of our wholly owned subsidiaries closed on the sale of natural gas properties to Calpine Natural Gas Trust (“CNG Trust”). We received consideration of Cdn$40.5 million (US$30.9 million). We hold 25% of the outstanding trust units of CNG Trust and account for the investment using the equity method.

      On February 18, 2004, we entered into an agreement to purchase the Brazos Valley Power Plant in Fort Bend County, Texas, for approximately $175.0 million in cash, subject to certain adjustments. We expect to acquire the 570-megawatt, natural gas-fired facility with the net proceeds from the sale of Lost Pines 1 and cash on hand. The special purpose companies that own Brazos Valley are indirectly owned by the consortium of banks that had provided construction financing for the power plant and had taken possession of the plant from the original developer in 2003. Upon completion of the transaction, Brazos Valley will become part of the collateral package for the Calpine Construction Finance Company, L.P. (“CCFC I”) First Priority Secured Institutional Term Loans Due 2009 and Second Priority Senior Secured Floating Rate Notes  Due 2011.

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      On February 20, 2004, we completed a $250.0 million, non-recourse project financing for the 600-megawatt Rocky Mountain Energy Center. A consortium of banks financed the construction of the plant at a rate of LIBOR plus 250 basis points. Upon commercial operation of the Rocky Mountain Energy Center in the summer of 2004, the banks will provide a three-year term-loan facility.

      On March 23, 2004, our wholly owned subsidiary CalGen, formerly Calpine Construction Finance Company II, LLC (“CCFC II”), completed its offering of secured term loans and secured notes. As expected, we realized net total proceeds from the offerings (after payment of transaction fees and expenses, including the fee payable to Morgan Stanley in connection with an index hedge) in the approximate amount of $2.3 billion. The offerings included:

(1)	We may also elect a Base Rate plus 275 basis points.
(2)	We may also elect a Base Rate plus 475 basis points.

      The secured term loans and secured notes described above in each case are secured, through a combination of pledges of the equity interests in CalGen and its first tier subsidiary, CalGen Expansion Company, liens on the assets of CalGen’s power generating facilities (other than its Goldendale facility) and related assets located throughout the United States. The lenders’ recourse is limited to such security, and none of the indebtedness is guaranteed by Calpine. Net proceeds from the offerings were used to refinance amounts outstanding under the $2.5 billion CCFC II revolving construction credit facility, which was scheduled to mature in November 2004, and to pay fees and transaction costs associated with the refinancing. Concurrently with this refinancing, we amended and restated the CCFC II credit facility (as amended and restated, the “CalGen revolving credit facility”) to reduce the commitments under the facility to $200.0 million and extend its maturity to March 2007. Interest under the CalGen revolving facility equals LIBOR plus 350 basis points (or, at our election, the Base Rate plus 250 basis points). Outstanding indebtedness and letters of credit at December 31, 2003, and at the refinancing date, under the CCFC II credit facility totaled approximately $2.3 billion and 2.4 billion, respectively.

      See “— Summary of Key Activities” for 2003 developments.

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DESCRIPTION OF POWER GENERATION FACILITIES

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      At March 24, 2004, we had ownership or lease interests in 87 operating power generation facilities representing 22,206 megawatts of net capacity. Of these projects, 68 are gas-fired power plants with a net capacity of 21,356 megawatts, and 19 are geothermal power generation facilities with a net capacity of 850 megawatts. We also have 12 gas-fired projects and 1 project expansion currently under construction with a net capacity of 7,685 megawatts. We expect to complete construction of advanced development projects. The timing of the completion of these projects will be based on market fundamentals and when our return on investment criteria are expected to be met, and financing is available on attractive terms. Each of the power generation facilities currently in operation produces electricity for sale to a utility, other third-party end user, or to an intermediary such as a trading company. Thermal energy produced by the gas-fired cogeneration facilities is sold to industrial and governmental users.

      The gas-fired and geothermal power generation projects in which we have an interest produce electricity and thermal energy that are sold pursuant to short-term and long-term power sales agreements or into the spot market. Revenue from a power sales agreement often consists of either or both of the following components: energy payments and capacity payments. Energy payments are based on a power plant’s net electrical output, and payment rates are typically either at fixed rates or indexed to fuel costs. Capacity payments are based on a power plant’s net electrical output and/or its available capacity. Energy payments are earned for each kilowatt-hour of energy delivered, while capacity payments, under certain circumstances, are earned whether or not any electricity is scheduled by the customer and delivered.

      Upon completion of our projects under construction, we will provide operating and maintenance services for 97 of the 99 power plants in which we have an interest. Such services include the operation of power plants, geothermal steam fields, wells and well pumps, gas fields, gathering systems and gas pipelines. We also supervise maintenance, materials purchasing and inventory control, manage cash flow, train staff and prepare operating and maintenance manuals for each power generation facility that we operate. As a facility develops an operating history, we analyze its operation and may modify or upgrade equipment or adjust operating procedures or maintenance measures to enhance the facility’s reliability or profitability. These services are sometimes performed for third parties under the terms of an operating and maintenance agreement pursuant to which we are generally reimbursed for certain costs, paid an annual operating fee and may also be paid an incentive fee based on the performance of the facility. The fees payable to us may be subordinated to any lease payments or debt service obligations of financing for the project.

      In order to provide fuel for the gas-fired power generation facilities in which we have an interest, natural gas reserves are acquired or natural gas is purchased from third parties under supply agreements. We manage a gas-fired power facility’s fuel supply so that we protect the plant’s spark spread.

      We currently hold interests in geothermal leaseholds in Lake and Sonoma Counties in northern California (“The Geysers”) that produce steam that is supplied to geothermal power generation facilities owned by us for use in producing electricity. In late 2003 we began to inject waste water from the City of Santa Rosa Recharge Project into our geothermal reservoirs. We expect this recharge project to extend the useful life and enhance the performance of The Geysers geothermal resources and power plants.

      Certain power generation facilities in which we have an interest have been financed primarily with project financing that is structured to be serviced out of the cash flows derived from the sale of electricity and thermal energy produced by such facilities and provides that the obligations to pay interest and principal on the loans are secured almost solely by the capital stock or partnership interests, physical assets, contracts and/or cash flow attributable to the entities that own the facilities. The lenders under non-recourse project financing generally have no recourse for repayment against us or any of our assets or the assets of any other entity other than foreclosure on pledges of stock or partnership interests and the assets attributable to the entities that own the facilities. Our plan historically has been to refinance project-specific construction financing with long-term capital market financing after construction projects enter commercial operation.

      Substantially all of the power generation facilities in which we have an interest are located on sites which we own or are leased on a long-term basis. See Item 2. “Properties.”

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      Set forth below is certain information regarding our operating power plants and plants under construction as of March 24, 2004.

Operating Power Plants

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(1)	Generation MWh is shown here as 100% of each plant’s gross generation in megawatt hours (“MWh”).
(2)	This facility is presented here only to state the facility’s generation in MWh for 2003. This facility was sold in January 2004. See Note 10 of the Notes to Consolidated Financial Statements for more information regarding the sale of this facility.
(3)	This facility is presented here only to state the facility’s generation in MWh through November 26, 2003, the date it was sold. See Note 7 of the Notes to Consolidated Financial Statements for more information regarding the sale of this facility.

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Projects Under Construction (All gas-fired)