-----Original Message-----
From: Stein, Neil [mailto:neil.stein@csfb.com]
Sent: Wednesday, July 25, 2001 8:09 AM
To: undisclosed-recipients
Subject: IPP Update: Analysis of Power Market Conditions
IndicatesSelling Was Overdone; Focus on CPN and MIR


Good Morning,

Attached, please find our latest update on the IPP sector, which includes an
analysis of recent power market conditions

 <<IPPupdate072501.pdf>> 

1. Focus on CPN and MIR   On July 24, 2001, our IPP composite traded off 8%,
owing to heightened market concerns surrounding "soft" spot and forward
power prices.  We believe the weakness presents a buying opportunity across
the whole section and recommend that investors focus on our top 2 picks:
Calpine (CPN, Strong Buy) and Mirant (MIR, Buy).

2. Power Market Analysis   In this note we include an analysis of recent
power market conditions.  We conclude that power market conditions have been
more stable than is generally believed.  Further, if conditions had
worsened, the earnings impact would not be severe.  On that basis we believe
the sell-off across the sector was overdone.

3. Beware of National Power Indices!   In order to properly analyze recent
power price fluctuations, it is key to analyze the California market
separately.  Outside of California, spark spreads have actually increased by
2.7% on average since May in a number of key markets.  Within California,
there have been large declines in pricing and margins.  However, potential
returns on capital in that market remain well above anywhere else in the
country.

4. IPPs are not Call Options on Power Prices!   The bulk of the group has
contracted substantial portions of their output.  In particular, Calpine has
sold forward 90% of its output in 2001 and 80% in 2002

5. Current Valuations Reflect the Investor Uncertainties   2001 and 2002 P/E
multiples have compressed by more than 40% year to date

6. Buy on Weakness  To the extent earnings prospects remain intact, we view
the recent weakness as irrational.

Regards,

Neil Stein   212/325-4217
Bryan Sifert   212/325-3906


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