>  <<IPPupdate101901.pdf>> 
> Good Morning,
> 
> Attached, please find our latest Power Generation Update.
> 
> 1. Governor Seeking to Renegotiate Contracts?   On October 18, our IPP
> composite traded off 3.6% following reports by the LA Times and Dow Jones
> News Wire which suggested that a new initiative was underway by California
> Governor Gray Davis to renegotiate the 53 power sales contracts between
> various generators and the California Department of Water Resources (CDWR)
> arranged during the first and second quarter of 2001.  Further, it was
> indicated that the Governor will host a press conference today to discuss
> this new initiative.  
> 
> 2. Initial Reports May Have Been Mistaken   Importantly, our contacts in
> Sacramento were unable to confirm that such an initiative is underway.
> Further, subsequent reports indicated that while the Governor would host a
> press conference today, he will not call for any contract renegotiations.
> 
> 
> 3. Current Stock Prices Assign No Value to the Contracts   Out of our
> coverage universe, such power contracts with the CDWR have been entered
> into by Calpine (CPN, $25.27, Strong Buy), Mirant (MIR, $27.35), and NRG
> Energy (NRG, $18.87, Buy).  To the extent the IPPs are trading at a 10%
> average discount to our estimate of the private market value of their
> assets, we do not believe investors are assigning any value to these
> contracts.  
> 
> 4. California Has Few Legal Options   Regardless, while it is possible to
> envision contract restructurings that are mutually beneficial to both
> parties, it is difficult to envision a scenario where the economics of the
> contracts would be dramatically altered.  The agreements between the
> generators and the state are binding contracts governed by Federal law and
> the US Constitution.  Simply because power prices have fallen since the
> contracts were signed does not give the State the right to renegotiate
> their terms.  
> 
> 5. CPN and MIR Are Least Vulnerable   Given the low cost nature of CPN's
> contracts, we believe they face minimal exposure should the state attempt
> to renegotiate.  In Mirant's case, because its contract is relatively
> short-term, we also regard its exposure as relatively minimal.
> 
> Regards,
> 
> Neil Stein   212/325-4217

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