Exhibit 10.5.3
EMPLOYMENT AGREEMENT
     This Employment Agreement (the “Agreement”) is entered into effective as of
January 30, 2006, between CALPINE CORPORATION, a Delaware corporation (the
“Company”), and SCOTT J. DAVIDO (“Executive”) to provide the terms and
conditions for Executive’s employment with the Company and its affiliates from
time to time (together, the “Group”).
     The Board of Directors of the Company (the “Board”) named Executive as
Executive Vice President and Chief Financial Officer of the Company on
February 1, 2006 (the “Start Date”) and Chief Restructuring Officer thereafter.
     The Company and Executive have agreed that Executive will be employed by
the Company and will serve as the Company’s Executive Vice President, Chief
Financial Officer and Chief Restructuring Officer, upon the terms and conditions
set forth below.
     Accordingly, and in consideration of the mutual obligations set forth in
this Agreement, which Executive and the Company agree are sufficient, Executive
and the Company agree as follows:

1   Term of Employment.

     Subject to the provisions of paragraph 4 below, Executive’s term of
employment (“Term of Employment”) consists of the initial term and any
subsequent term for which the Agreement is renewed. The initial term of this
Agreement begins on February 1, 2006, and ends on February 1, 2008, subject to
the termination provisions of paragraph 4 below. No later than 150 days prior to
the end of the initial Term of Employment, the Company shall inform Executive if
it intends to renew this Agreement for a subsequent Term of Employment. If no
notice is given, and Executive’s employment continues after the Term of
Employment, Executive’s continued employment and any subsequent termination
thereof shall not be subject to the terms of this Agreement.

2   Position and Responsibilities.

     During the Term of Employment, Executive shall have the position and
responsibilities described in this paragraph 2. Executive shall be employed as
the Company’s Executive Vice President, Chief Financial Officer and Chief
Restructuring Officer, with the general executive powers and authority that
accompany those positions. Executive shall report directly to the Chief
Executive Officer and shall have the duties and responsibilities that are
typically performed by the chief financial officer of a public company, as well
as any other duties consistent with his position that are assigned to Executive
by the Chief Executive Officer or the Board. In addition, as Executive Vice
President, Chief Financial Officer and Chief Restructuring Officer, Executive
shall have overall responsibility for management of the Company’s chapter 11
reorganization, including: (i) development of a short-term and long-term
business plan and a strategic plan; (ii) development of a plan of
reorganization; (iii) evaluation of all assets and management of the disposition
of nonstrategic assets; and (iv) employment and management of all outside
professionals involved in any matter relating to the restructuring. Executive
agrees to comply with such lawful policies of the Company as may be adopted from
time to time. Although Executive may be reasonably required to travel from time
to time for business reasons, his principal place of employment shall be the
Company’s corporate offices wherever located.

 

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  (a)   Executive shall devote all of his full business time and his best
efforts, skill, and attention to the Company’s business and affairs and to
promoting the Company’s best interests.     (b)   Notwithstanding the foregoing,
nothing herein shall preclude Executive from (i) serving on the boards of
directors of not more than two other corporations and/or charitable
organizations (subject to the approval of the Chief Executive Officer, such
approval not to be unreasonably withheld), (ii) engaging in charitable
activities and community affairs, and (iii) managing his personal investments
and affairs, provided that any such activities listed in (i) and (ii) above do
not interfere in more than a de minimis manner with the proper performance of
his duties and responsibilities hereunder and comply with the limitations set
forth in paragraph 5.a.

3   Compensation.

     For all of his services during the Term of Employment, Executive shall
receive the following compensation:

  (a)   Base Salary. Executive’s annual base salary shall be $700,000 (as may be
increased from time to time, the “Base Salary”). The Chief Executive Officer and
Board (or a committee thereof) will review the Base Salary at least annually and
the Board may increase it at any time for any reason, in its sole discretion;
however, they shall have no obligation to do so.     (b)   Bonus. In addition to
his Base Salary, Executive shall be eligible to receive an annual cash
performance bonus (the “Bonus”) for each fiscal year ending during the Term of
Employment if, and to the extent that, (x) except with respect to any Bonus
payable earlier as severance under paragraph 4.b.ii.1, Executive remains
employed by the Company on the last day of such fiscal year and (y) corporate
performance objectives established by the Chief Executive Officer and the Board
are achieved, as determined by the Chief Executive Officer and the Board (or a
committee thereof), in their sole discretion. Payment of the Bonus shall be made
at the same time that other senior-level executives receive their bonuses, and
no later than March 15th of the calendar year after the calendar year in which
the Bonus is earned. The target level for Executive’s Bonus shall be established
by the Chief Executive Officer and the Board (or a committee thereof), in their
sole discretion, provided that the minimum target level for any year shall be
100% of the Base Salary (the “Target Annual Bonus”). However, subject to the
minimum Bonuses for the Company’s fiscal years ending December 31, 2006, and
December 31, 2007, set forth below, Executive’s actual Bonus in any year may
range from 0% to 150% of the Target Annual Bonus:

  (i)   For the Company’s fiscal year ending December 31, 2006, Executive shall
be entitled to receive a minimum Bonus of $700,000 to be paid no later than
March 15, 2007 but no earlier than January 1, 2007.     (ii)   For the Company’s
fiscal year ending December 31, 2007, Executive shall be entitled to receive a
minimum Bonus of $700,000, to be paid no later than March 15, 2008 but no
earlier than January 1, 2008.

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  (c)   Benefits. Executive shall be eligible to participate in all Company
benefit plans and programs as are generally available for its senior executives,
and his benefits shall be based on the terms of the applicable plan as
established by the Company from time to time. Nothing in this Agreement shall
restrict the Company’s ability to change or terminate any or all of its employee
benefit plans and programs from time to time; nor shall anything in this
Agreement prevent any such change from affecting Executive.     (d)   Signing
Bonus. In addition to the Base Salary and Bonus, Executive shall be entitled to
receive a one-time payment of $500,000, payable within 15 days after entry of an
order approving this Agreement by the U.S. bankruptcy court having jurisdiction
over the Company’s bankruptcy case (the “Bankruptcy Court”). If Executive
resigns his employment without Good Reason or Executive’s employment is
terminated by the Company for Cause, Executive shall repay a pro rata portion
(based on the number of full calendar months remaining in the initial 24-month
term divided by 24 months) of the signing bonus (net of any associated income
and employment taxes) within 10 days after such resignation or termination of
employment. Within 10 days after the filing of Executive’s federal income tax
return for the year in which such repayment is made, Executive shall pay to the
Company the amount by which Executive’s federal and state income tax liability
for such year was reduced as a result of such repayment. If Executive resigns
for Good Reason, dies or becomes Disabled or if Executive’s employment is
terminated by the Company without Cause, Executive shall be entitled to retain
the full amount of the signing bonus. The Company acknowledges and agrees that
the payment of Executive’s signing bonus is unrelated to any services that he
performed in the State of California.     (e)   Success Fee. When a plan of
reorganization that is confirmed by the Bankruptcy Court becomes effective (the
“Plan Effective Date”) during Executive’s tenure as Chief Financial Officer and
Chief Restructuring Officer of the Company, Executive shall be entitled to
receive a one-time payment in an amount equal to the amount set forth on
Exhibit A attached hereto (the “Success Fee”). If at any time after the Start
Date, Executive resigns his employment for Good Reason or Executive’s employment
is terminated by the Company without Cause before the Plan Effective Date,
Executive shall be entitled to payment of the Success Fee if the Plan Effective
Date occurs within 12 months after the date of termination of employment. In any
case such Success Fee shall be due and payable on the Plan Effective Date.
Executive shall not be entitled to all or any portion of the Success Fee if the
Company terminates his employment for Cause, Executive resigns his employment
without Good Reason or Executive’s employment terminates due to death or
Disability before the Plan Effective Date.     (f)   Guaranteed Minimum Success
Fee. Executive shall be entitled to receive the guaranteed minimum success fee
(the “Guaranteed Minimum Success Fee”) described in this paragraph 3.f;
provided, however, to the extent the Success Fee is paid, the Success Fee shall
be reduced by the Guaranteed Minimum Success Fee, or any portion thereof, paid
to Executive and shall be paid as promptly as

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      practicable in a lump sum. In such case, no further payment shall be made
with respect to the Guaranteed Minimum Success Fee. The Guaranteed Minimum
Success Fee shall be deemed earned as of the date this Agreement is approved by
the Bankruptcy Court.

  (i)   Amount and Payment Schedule. Executive’s Guaranteed Minimum Success Fee
(in addition to the other payments specifically contemplated in this Agreement
including, without limitation, the minimum emergence bonus set forth on
Exhibit A attached hereto) shall be an amount equal to two times his annual Base
Salary as of the earlier of (a) the date his term of employment under this
Agreement terminates or (b) the Plan Effective Date. The Guaranteed Minimum
Success Fee shall be paid to Executive on the earliest of (x) the date Executive
is terminated by the Company without Cause, (y) the date Executive terminates
his employment for Good Reason and (z) the Plan Effective Date. Subject to the
timing rule described in paragraph 3.f.ii below, all payments shall be made as
promptly as practicable. Subject to paragraph 3.f above, if the Guaranteed
Minimum Success Fee is paid on any date prior to the Plan Effective Date, the
Guaranteed Minimum Success Fee shall be paid ratably on the same payment
schedule that applied to Executive’s salary as of such date. If the Guaranteed
Minimum Success Fee is paid on the Plan Effective Date, Executive shall be
entitled to a lump sum payment.     (ii)   Timing. To the extent necessary to
comply with the restriction in Section 409A(a)(2)(B) of the Internal Revenue
Code of 1986, as amended (the “Code”) concerning payments to specified
employees, the first Guaranteed Minimum Success Fee payment (if the Guaranteed
Minimum Success Fee is paid ratably) to Executive shall be made on the first
installment date (determined under paragraph 3.f.i above) that is at least six
months after Executive’s termination date. The first payment shall include any
installments that would have been paid previously under paragraph 3.f i were it
not for this special timing rule, plus interest on the delayed installments at
an annual rate (compounded monthly) equal to the federal short-term rate (as in
effect under Section 1274(d) of the Code on Executive’s termination date).

  (g)   Relocation. The Company shall reimburse Executive for customary and
reasonable commuting expenses from Executive’s current residence in St. Paul,
Minnesota, and temporary furnished housing and living expenses in the area in
which the Company’s headquarters is located for a period of six months from the
Start Date. In the sole discretion of the Chief Executive Officer, this initial
six-month period may be extended from time to time. Reimbursements shall be paid
monthly, on an “as incurred” basis, and in all events before March 15 of the
calendar year after the calendar year in which the applicable expenses were
incurred. Upon termination of this temporary commuting arrangement, Executive
shall be reimbursed for the following costs associated with relocating to the
area in which the Company’s headquarters is located:

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      All reasonable transaction costs and expenses (including any real estate
brokerage fees, commissions and closing costs) and moving expenses incurred by
Executive, in each case while an employee of the Company, in connection with
relocating his spouse, dependents and personal property and goods from
Executive’s current residence to the area in which the Company’s headquarters is
located, provided that Executive provides appropriate documentation (the
“Reimbursement”). Reimbursements under this paragraph shall be paid promptly and
in all events on or before March 15 of the calendar year after the calendar year
in which the applicable expenses were incurred. In connection with such payment,
during the calendar year after the calendar year in which the applicable
expenses are incurred, the Company shall pay Executive an additional payment in
an amount such that after the actual payment by Executive of taxes, if any,
imposed in connection with the Reimbursement, Executive retains an amount equal
to the Reimbursement.

  (h)   Legal Fees. On or before March 30, 2006, or such later date to which
Executive and Company mutually agree, the Company shall pay Executive’s
reasonable legal fees that are directly related to the negotiation, entry and
approval by the Bankruptcy Court of this Agreement and were actually incurred
during such negotiation, entry or approval, in an amount not to exceed $50,000.

4   Termination.

  (a)   Termination of Employment.

  (i)   Termination by the Company for Cause. The Board or Chief Executive
Officer may terminate Executive’s employment for Cause at any time after (x)
providing Executive with 5 business days’ advance written notice explaining the
circumstances that justify the termination (a “Termination Notice”); and (y)
except in the case of termination for an event covered by (2) below, providing
Executive with the opportunity to appear before the Board prior to any vote to
terminate Executive’s employment for Cause, which opportunity may occur during
the 5 business day notice period. “Cause” means any of the following: (1)
Executive’s breach of any material term of this Agreement that is not corrected
within 10 days after delivery of a Termination Notice to Executive with respect
to such breach; (2) Executive’s commission of, or formal prosecutorial charge or
indictment alleging commission of, a felony or any crime of similar status, any
crime involving fraud, or any crime involving moral turpitude (other than motor
vehicle related) (it being agreed that in the case of a crime involving moral
turpitude, only to the extent such crime materially and adversely affects the
business, standing or reputation of the Company or any other member of the
Group); (3) Executive’s breach of fiduciary duty to the Company or any other
member of the Group that has any material and adverse impact on the Company that
is not corrected within 10 days after delivery of a Termination Notice to
Executive with respect to such breach; (4) Executive’s misappropriation of funds
or material property of the

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      Company or any other member of the Group; (5) Executive’s refusal to
follow the lawful directives of the Chief Executive Officer or the Board without
a materially valid business justification that is not corrected within 10 days
after delivery of a Termination Notice to Executive with respect to such
refusal; (6) Executive’s fraud related to the Company that is not corrected
within 10 days after delivery of a Termination Notice to Executive with respect
to such fraud; (7) Executive’s material dishonesty, disloyalty, gross negligence
or willful misconduct, where such dishonesty, disloyalty, gross negligence or
willful misconduct is reasonably likely to result, in substantial and material
damage to the Company or any other member of the Group, and that is not
corrected within 10 days after delivery of a Termination Notice to Executive
with respect to such event; (8) Executive’s willful and material violation of
any of the Company’s Code of Conduct or employment policies that is not
corrected within 10 days after delivery of a Termination Notice to Executive
with respect to such violation; or (9) Executive’s material violation of any
federal, state or local laws that could result in a direct or indirect financial
loss to the Company or any other member of the Group or damage the reputation of
the Company or any other member of the Group.         For this definition, no
act or omission by the Executive will be “willful” unless it is made by him in
bad faith or without a reasonable belief that his act or omission was in the
best interests of the Company or the Group. Any act, or failure to act, based
upon the advice of counsel to the Company or any member of the Group shall be
presumed to be done, or omitted to be done, by the Executive in good faith and
in the best interests of the Company and the Group.     (ii)   Termination by
the Company without Cause. The Company may terminate Executive’s employment
under this Agreement without Cause upon at least 20 days’ prior written notice
to Executive.     (iii)   Death or Disability. Executive’s employment by the
Company will immediately terminate upon Executive’s death and, at the option of
either Executive or the Company, exercisable upon written notice to the other
party, may terminate upon the Executive’s Disability. For purposes of this
Agreement, “Disability” will occur if (A) Executive becomes eligible for
benefits under a long-term disability policy provided by the Company, if any, or
(B) Executive has become unable, due to physical or mental illness or
incapacity, to substantially perform the essential duties of his employment with
reasonable accommodation for a period of 90 days or an aggregate of 180 days
during any consecutive 12 month period, as determined by an independent
physician approved by the Company and Executive.     (iv)   Termination by
Executive for Good Reason. Executive may terminate his employment for Good
Reason at any time. “Good Reason” shall

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      mean the occurrence, during the Term of Employment, of any of the
following actions or failures to act, but in each case only if it is not
consented to by Executive in writing: (A) a material adverse change in
Executive’s duties, reporting responsibilities, titles or elected or appointed
offices as in effect immediately prior to the effective date of such change
(including but not limited to the appointment of any person to an executive
position at the Company that is co-equal or senior to that of Executive other
than the CEO); (B) any reduction or failure to pay when due the Executive’s Base
Salary, the minimum 2006 and 2007 Bonus, Signing Bonus or Success Fee; (C) any
reduction by the Company in Executive’s Target Annual Bonus opportunity; (D) the
Company’s failure to timely renew this Agreement, (E) the Company’s breach of
any material term of this Agreement that is not corrected within 10 days after
delivery of a notice to the Company with respect to such breach or (F) the
failure of the Company to obtain the assumption in writing of this Agreement by
any successor to or an acquirer of all or substantially all of the assets of the
Company on or prior to a merger, consolidation, sale or similar transaction. For
purposes of this definition, none of the actions described in clauses
(A) through (F) above shall constitute “Good Reason” with respect to Executive
if it was an isolated and inadvertent action not taken in bad faith by the
Company and if it is remedied by the Company within 10 days after receipt of
written notice thereof given by Executive.

  (v)   Termination by Executive without Good Reason. Executive may terminate
his employment under this Agreement without Good Reason upon at least 20 days’
prior written notice to the Company.

  (b)   Consequences of Termination of Employment.

  (i)   Termination by the Company without Cause or by Executive for Good Reason
prior to the Plan Effective Date. Executive shall receive the benefits described
in this paragraph 4.b (excluding the severance benefits set forth in paragraphs
4.b.ii.1 and 4.b.ii.2) if the Company terminates Executive’s employment without
Cause (under paragraph 4.a.ii) at any time during the Term of Employment or if
Executive terminates his employment at any time during the Term of Employment
for Good Reason (under paragraph 4.a.iv) prior to the Plan Effective Date. For a
period of one year following the date of termination of Executive’s employment
from the Company, the Company shall at its sole cost and expense (but
disregarding any individual tax liability of Executive), and at the election of
COBRA by Executive, provide Executive (and his spouse and eligible dependents)
with group health benefits substantially similar to those benefits that
Executive (and his spouse and eligible dependents) were receiving immediately
before his termination (which may at the Company’s election be pursuant to
reimbursement of the applicable COBRA premium). Such coverage shall

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      be provided to Executive as COBRA benefits and shall terminate prior to
the end of the one-year period if Executive, his spouse or eligible dependents
are no longer eligible for COBRA coverage. To the extent possible, the benefits
under this section 4.b.i.1 shall be made in a manner that is tax efficient for
the Executive so long as there is no adverse tax consequences to the Company.

  (ii)   Termination by the Company without Cause or by Executive for Good
Reason after the Plan Effective Date. Executive shall receive the benefits
described in this paragraph 4.b (including the benefits set forth in paragraph
4.b.i) if the Company terminates Executive’s employment without Cause (under
paragraph 4.a.ii) at any time during the Term of Employment or if Executive
terminates his employment at any time during the Term of Employment for Good
Reason (under paragraph 4.a.iv) after the Plan Effective Date. If Executive
receives the benefits set forth in this paragraph 4.b.ii, Executive shall not be
eligible for severance benefits from any other plan, program or policy of the
Company then in effect.

  1.   Amount and Payment Schedule. Executive’s severance benefit (in addition
to the other payments specifically contemplated in this Agreement) shall be an
amount equal to two times his annual Base Salary as of the date his employment
terminates. Subject to the timing rule described in paragraph 4.b.ii.2 below,
the severance benefit shall be paid ratably on the same payment schedule that
applied to Executive’s salary at the time of his termination.     2.   Timing.
To the extent necessary to comply with the restriction in Section 409A(a)(2)(B)
of the Internal Revenue Code of 1986, as amended (the “Code”) concerning
payments to specified employees, the first severance payment to Executive shall
be made on the first installment date (determined under paragraph 4.b.ii.1
above) that is at least six months after Executive’s termination date. The first
payment shall include any installments that would have been paid previously
under paragraph 4.b.ii.1 were it not for this special timing rule, plus interest
on the delayed installments at an annual rate (compounded monthly) equal to the
federal short-term rate (as in effect under Section 1274(d) of the Code on
Executive’s termination date).

  (iii)   Death or Disability. In the event of termination of Executive’s
employment due to death or Disability (under paragraph 4.a.ii), Executive shall
be entitled to receive (in addition to any other payments specifically
contemplated in this Agreement) a pro rata portion of his Target Annual Bonus
for the portion of the calendar year before the date of termination of
employment, as promptly as practicable and in any

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      event payable on or before March 15th of the calendar year after the
calendar year in which such termination of employment occurs; but Executive
shall not be eligible to receive any other severance benefit under this
paragraph 4. Executive’s eligibility (if any) to receive a severance or
retirement benefit under any other severance or retirement plan or program
maintained by the Company shall be determined by the terms of that plan or
program as in effect on his termination date.

  (iv)   Termination for Cause or Voluntary Termination. If the Company
terminates Executive’s employment for Cause (under paragraph 4.a.i), or if
Executive terminates his employment without Good Reason (under paragraph 4.a.v),
Executive shall not be eligible to receive any severance benefit under this
paragraph 4.b.iv. Executive’s eligibility (if any) to receive a severance or
retirement benefit under any other severance or retirement plan or program
maintained by the Company shall be determined by the terms of that plan or
program as in effect on his termination date. The foregoing shall not limit the
remedies available to the Group, at law or in equity, for any loss or other
injury caused directly or indirectly by Executive.     (v)   Earned but Unpaid
Bonus. In addition to any other amounts owed to Executive under this paragraph
4.b, if the Company terminates the Executive’s employment for any reason other
than Cause or if Executive terminates employment after December 31 of any year,
Executive shall be entitled to receive any Bonus earned by Executive for the
preceding year as calculated in accordance with paragraph 3.b but not yet paid
as of the termination date.     (vi)   Release. The Company will not be required
to make the payments stated in this paragraph 4 unless the Executive executes
and delivers to the Company an agreement releasing from all liability (other
than Executive’s rights under this Agreement and any indemnification arrangement
of the Company with respect to Executive) the Group and any of their respective
past or present directors, officers, employees, shareholders, controlling
persons or agents of the Group. No payment will be made until the period for
revocation of the release has ended and unless Executive has not revoked the
release. This agreement will be substantially in the form attached hereto as
Exhibit B.

5   Restrictive Covenants.

  (a)   Non-Competition. During the time Executive is employed by the Company
and for 12 months thereafter, Executive shall not directly or indirectly manage,
operate, participate in, be employed by, perform consulting services for, or
otherwise be connected with NRG Energy, Inc., Mirant Corporation, Reliant
Energy, Dynegy Inc., Edison Mission Energy/Edison International, Constellation
Energy Group, Inc. (FPL Group, Inc.) and Pacific Gas & Electric Company (each a
“Competitive Enterprise”); nor shall Executive receive compensation from any
other company or business during the time Executive is employed with the

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      Company unless the arrangement giving rise to such compensation has been
(i) disclosed to and approved by the Board in advance or (ii) is otherwise
permitted by the terms of this Agreement. Executive may invest in any
Competitive Enterprise, provided that Executive and his immediate family members
(as defined in Section 1361(c)(B) of the Code) do not own collectively more than
three percent of the voting securities of any such entity at any time.

  (b)   Use and Disclosure of Proprietary Information.

  (i)   Definition of Proprietary Information. “Proprietary Information” means
confidential or proprietary information, knowledge or data concerning (1) the
Group’s businesses, strategies, operations, financial affairs, organizational
matters, personnel matters, budgets, business plans, marketing plans, studies,
policies, procedures, products, ideas, processes, software systems, trade
secrets and technical know-how, (2) any other matter relating to the Group,
(3) any matter relating to clients of the Group or other third parties having
relationships with the Group and (4) any confidential information from which the
Group derives business advantage or economic value. Proprietary Information
includes (A) the names, addresses, phone numbers and buying habits and
preferences and other information concerning clients and prospective clients of
the Group, and (B) information and materials concerning the personal affairs of
employees of the Group. In addition, Proprietary Information may include
information furnished to Executive orally or in writing (whatever the form or
storage medium) or gathered by inspection, in each case before or after the date
of this Agreement. Proprietary Information does not include information (X) that
was or becomes generally available to Executive on a non-confidential basis, if
the source of this information was not reasonably known to Executive to be bound
by a duty of confidentiality, (Y) that was or becomes generally available to the
public, other than as a result of a disclosure by Executive, directly or
indirectly, or (Z) that Executive can establish was independently developed by
Executive without reference to Proprietary Information.     (ii)  
Acknowledgements. Executive acknowledges that he will obtain or create
Proprietary Information in the course of Executive’s involvement in the Group’s
activities and may already have Proprietary Information. Executive agrees that
the Proprietary Information is the exclusive property of the Group. In addition,
nothing in this Agreement will operate to weaken or waive any rights the Group
may have under statutory or common law, or any other agreement, to the
prohibition of unfair competition or the protection of trade secrets,
confidential business information and other confidential information.     (iii)
  During Employment. Executive will use and disclose Proprietary Information
only for the Group’s benefit and in accordance with any restrictions placed on
its use or disclosure by the Group.

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  (iv)   Post-Employment. After the termination of Executive’s employment,
Executive will not use or disclose any Proprietary Information for any purpose.
For the avoidance of doubt, but without limitation of the foregoing, after
termination of Executive’s employment, Executive will not directly or indirectly
use Proprietary Information from which the Group derives business advantage or
economic benefit to solicit, impair or interfere with, or attempt to solicit,
impair or interfere with, any person or entity, who, at the time of the
termination of Executive’s employment, is then a customer, vendor or business
relationship of the Group (or who Executive knew was a potential customer,
vendor or business relationship of the Company within the six months prior to
the termination of his Employment).

  (c)   Non-Solicitation of Employees. During the Term of Employment and for an
18 month period after termination of Executive’s employment, Executive will not
directly or indirectly solicit or attempt to solicit anyone who, at the time of
the termination of Executive’s employment, is then an employee of the Group (or
who was an employee of the Group within the six months prior to the termination
of his Employment) to resign from the Group or to apply for or accept employment
with any company or other enterprise.

  (d)   Non-Disparagement. During and after Executive’s employment with the
Company, the parties mutually covenant and agree that neither will directly or
indirectly disparage the other, or make or solicit any comments, statements, or
the like to any clients, competitors, suppliers, employees or former employees
of the Company, the press, other media, or others that may be considered
derogatory or detrimental to the good name or business reputation of the other
party. Nothing herein shall be deemed to constrain either party’s cooperation in
any Board authorized investigation or governmental action. In the event of
Executive’s termination or the non-renewal of this Agreement, Executive and
Company shall agree on any press release relating to such termination or
non-renewal and the Company and Executive shall not publicly discuss or comment
on Executive’s termination or non-renewal in any manner other than as mutually
agreed in the press release.

6   Excise Tax. If, (I) in the written opinion of the Company’s independent
accountants, (x) any payment or benefit to Executive under this Agreement or
otherwise contingent upon a change of control (including without limitation, the
Success Fee, the Guaranteed Minimum Success Fee and any payments under paragraph
4.b above) is an “excess parachute payment” as defined in Section 280G(b) of the
Code, and (y) such excess parachute payment is subject to the excise tax imposed
by Section 4999 of the Code (or any similar tax under state or local law) or
(II) the Internal Revenue Service determines that any payment or benefit to
Executive under this Agreement is an excess parachute payment that is subject to
the excise tax imposed by Section 4999 of the Code, the Company shall pay to
Executive such amount or amounts necessary to place Executive in the same
after-tax position in which Executive would have been if such excise tax
(together with any interest and penalties) had not been imposed (the
“Gross-Up”). The

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    Gross-Up shall be in an amount determined by the Company’s independent
accountants and shall be paid on or prior to the date the applicable withholding
taxes are due. For purposes of determining the amount of the Gross-Up, the
Executive shall be deemed to pay federal, state and local income taxes at the
highest marginal rate of taxation for the calendar year in which the Gross-Up is
to be made. Notwithstanding anything to the contrary, the Gross-Up obligation of
the Company under this Section shall survive any termination of this Agreement
or Executive’s termination of employment.

7   Employment Taxes. All payments and other compensation under this Agreement
shall be subject to withholding of the applicable income and employment taxes.

8   Nonduplication of Benefits. No term or other provision of this Agreement may
be interpreted to require the Company to duplicate any payment or other
compensation that Executive is already entitled to receive under a compensation
or benefit plan, program, or other arrangement maintained by the Company.

9   Indemnification. To the fullest extent permitted by applicable law, the
Company shall provide indemnification for Executive under its Articles of
Incorporation and Bylaws. Executive shall be covered by the Company’s standard
indemnification agreement and by any director’s and officer’s liability
insurance policy maintained by the Company.

10   Successors. Any successor to the Company or to all or substantially all of
the Company’s business and/or assets (whether a direct or indirect successor,
and whether by purchase, lease, merger, consolidation, liquidation, or
otherwise) shall assume the obligations under this Agreement. In case of any
succession, the term “Company” shall refer to the successor. The terms of this
Agreement and all of Executive’s rights hereunder shall inure to the benefit of,
and be enforceable by, Executive’s personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees, and legatees.

11   No Third-Party Beneficiaries. Except as provided in paragraph 9 above,
nothing in this Agreement may confer upon any person or entity not a party to
this Agreement any rights or remedies of any nature or kind whatsoever under or
by reason of this Agreement.

12   No Duty to Mitigate. Executive shall not be required to seek new employment
or otherwise to mitigate the payments contemplated by this Agreement. The
payments contemplated by this Agreement shall not be reduced by earnings that
Executive may receive from any other source; provided, however, that COBRA
payments may cease in accordance with the provisions of this Agreement.

13   Notice. Notices and other communications between the parties to this
Agreement shall be delivered in writing and shall be deemed to have been given
when personally delivered or on the third business day after mailing by U.S.
registered or certified mail, return receipt requested and postage prepaid.

  (a)   Notices and other communications to Executive shall be addressed to
Executive, at the most recent home address that he provided in writing to the
Company.     (b)   Notices and other communications to the Company shall be
addressed to the

12

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      Company’s corporate headquarters, to the attention of the Company’s
Secretary.

14   Waiver and Amendments. No provision of this Agreement may be modified,
waived, or discharged, unless the modification, waiver, or discharge is agreed
to in writing signed by Executive and by an authorized representative of the
Company (other than Executive). Unless specifically characterized as a
continuing waiver, no waiver of a condition or provision at anyone time may be
considered a waiver of the same provision or condition (or any different
provision or condition) at any other time.

15   Costs. In the event that Executive is a prevailing party in any dispute or
disagreement with the Company relating to this Agreement and/or the Company’s
obligations under this Agreement, the Company will reimburse any expenses,
including reasonable attorney’s fees (and such fees incurred at Executive’s
attorney’s normal hourly rates will be presumed reasonable), incurred by
Executive as a result of, or in connection with, any such dispute or
disagreement. Nothing herein shall adversely impair or limit any rights
Executive has under the Company’s Articles of Incorporation, Bylaws and
directors’ and officers’ liability insurance policies. Notwithstanding anything
to the contrary, the obligation of the Company under this Section shall survive
any termination of this Agreement or Executive’s termination of employment.

16   Ability to Enter this Agreement. Executive represents and warrants that
neither the execution and delivery of this Agreement nor the performance of
Executive’s services hereunder will conflict with, or result in a breach of any
employment or other agreement to which Executive is a party or by which
Executive might be bound or affected. Executive further represents and warrants
that Executive has full right, power, and authority to enter into and carry out
the provisions of this Agreement.

17   Remedy at Law Inadequate. Executive acknowledges that a remedy at law for
any breach or attempted breach of the covenants described in paragraph 5 of this
Agreement will be inadequate and agrees that the Group shall be entitled to
specific performance and injunctive and other equitable relief in the case of
any such breach or attempted breach.

18   American Jobs Creation Act of 2004. This Agreement shall be construed,
administered and interpreted in accordance with a good-faith interpretation of
Section 409A of the Code and Section 885 of the American Jobs Creation Act of
2004. If the Company or Executive determines that any provision of this
Agreement is or might be inconsistent with such provisions (including any
administrative guidance issued thereunder), the parties shall make their best
efforts in good faith to agree to such amendments to this Agreement as may be
necessary or appropriate to comply with such provisions.

19   Choice of Law. This Agreement (including its validity, interpretation,
construction, and performance) shall be governed by the laws of the State of New
York, without regard to any concerning conflicts or choice of law that might
otherwise refer construction or interpretation to the substantive law of another
jurisdiction.

20   Section Headings. All headings in this Agreement are inserted for
convenience only. Headings do not constitute a part of the Agreement and may not
affect the meaning or

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    interpretation of any term or other provision of this Agreement.

21   Severability and Reformation. Each substantive provision of this Agreement
is a separate agreement, independently supported by good and adequate
consideration, and is severable from the other provisions of the Agreement. If a
court of competent jurisdiction determines that any term or provision of this
Agreement is unenforceable, then the other terms and provisions of this
Agreement shall remain in full force and effect, and the unenforceable terms or
provisions shall be equitably modified to the extent necessary to achieve the
underlying purpose in an enforceable way.

22   Whole Agreement. This Agreement reflects the entire understanding and
agreement between the Company and Executive regarding Executive’s employment.
This Agreement supersedes all prior negotiations, discussions, correspondence,
communications, understandings, and agreements, whether oral or written,
relating to Executive’s employment with the Company. The respective rights and
obligations of the parties to this Agreement shall survive the termination of
Executive’s employment to the extent necessary to give such rights and
obligations their intended effect.

23   Counterparts. This Agreement may be executed in counterparts, each of which
shall be deemed an original, but all of which together shall constitute a single
instrument.

* * *
IN WITNESS WHEREOF, the parties to this Agreement have executed this Agreement
on May 18, 2006.
CALPINE CORPORATION:

         
By:
  /s/ Robert P. May   /s/ Scott J. Davido
 
       
 
  Robert P. May   Scott J. Davido, in his individual capacity
 
  Chairman of the Board of Directors    

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EXHIBIT A

 

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Calpine Corporation
Scott Davido Compensation Summary
($MM)

     
Fixed Component:
  $1.5 million
 
   
Incentive Component:
  Based on achievement of Market Adjusted Enterprise Value (“Market AEV”)(1) and
Plan Adjusted Enterprise Value (“Plan AEV”) metrics (2)
 
  To be earned beginning at Initial Market AEV hurdle of $5.0 billion provided
that Plan AEV is greater than $5.0 billion.
 
  Increase by $80,000 for each $100 million increase in Market AEV over
$4.5 billion(3)

Plan Adjusted Enterprise Value < $5,000

                                                                               
                      Market Adjusted Enterprise Value       $3,500     $4,000  
  $4,500     $5,000     $5,500     $6,000     $6,500     $7,000     $7,500    
$8,000     $8,500     $9,000  
Minimum Emergence Bonus
  $ 1.50     $ 1.50     $ 1.50     $ 1.50     $ 1.50     $ 1.50     $ 1.50     $
1.50     $ 1.50     $ 1.50     $ 1.50     $ 1.50  
Valuation Component
    —       —       —       —       —       —       —       —       —       —  
    —       —  
% of Valuation Increase
    —       —       —       —       —       —       —       —       —       —  
    —       —  
 
                                                                       
Total Incentive Bonus
  $ 1.50     $ 1.50     $ 1.50     $ 1.50     $ 1.50     $ 1.50     $ 1.50     $
1.50     $ 1.50     $ 1.50     $ 1.50     $ 1.50                      
Plan Adjusted Enterprise Value ³ $5,000
                    Market Adjusted Enterprise Value       $3,500     $4,000    
$4,500     $5,000     $5,500     $6,000     $6,500     $7,000     $7,500    
$8,000     $8,500     $9,000  
Minimum Emergence Bonus
  $ 1.50     $ 1.50     $ 1.50     $ 1.50     $ 1.50     $ 1.50     $ 1.50     $
1.50     $ 1.50     $ 1.50     $ 1.50     $ 1.50  
Valuation Component
    —       —       —       0.40       0.80       1.20       1.60       2.00    
  2.40       2.80       3.20       3.60  
% of Valuation Increase
    —       —       —       0.08 %     0.08 %     0.08 %     0.08 %     0.08 %  
  0.08 %     0.08 %     0.08 %     0.08 %
 
                                                                       
Total Incentive Bonus
  $ 1.50     $ 1.50     $ 1.50     $ 1.90     $ 2.30     $ 2.70     $ 3.10     $
3.50     $ 3.90     $ 4.30     $ 4.70     $ 5.10  

 

(1)   Market-Based Adjusted Enterprise Value (“Market AEV”) shall be equal to:
The market value of debt that is primarily the obligation of reorganized Calpine
Corporation (“Calpine”) (i.e., debt other than all project-level debt and
guarantees thereon including, without limitation, notes payable, capital leases,
project loans, project-level preferred interests, and sale lease back
obligations (collectively, “Project-Level Debt”); plus the market value of
preferred equity at reorganized Calpine; minus cash on the balance sheet of
reorganized Calpine upon the effective date of a Plan of Reorganization (other
than any restricted cash held by direct or indirect subsidiaries of reorganized
Calpine, including but not limited to, project-level cash that is not readily
available for use by Calpine Corporation (e.g., project-level construction
accounts, project-level debt service reserves), collateral posted in favor of
trading counterparties, cash posted to collateralize letters of credit and
pre-petition asset sale proceeds in escrow); plus the market value of
reorganized Calpine’s common stock (and any other equity-linked securities
including warrants) excluding non-vested equity (including options) issued as
part of the management incentive compensation pursuant to a Plan of
Reorganization. All market prices shall be calculated as a 10-day average
beginning on the 60th trading day following the consummation date and for the
following nine (9) trading days. Prices for debt and preferred equity shall be
calculated as an average price based on AdvantageData (ADI quote), Factset,
Markit Loans (LoanX) and Bloomberg. The average market price for any given debt,
preferred or convertible security on any given day shall be equal to the average
of the trade prices for all trades recorded on that day greater than or equal to
$1 million of said security. Any corporate-level debt, equity or equity-linked
security (“Corporate-Level Securities”) for which there is no publicly quoted
price shall be valued at face value. Volume weighted-average prices for common
equity shall be determined by reference to Bloomberg’s AQR function. Market AEV
shall be further adjusted for the exclusion of any debt or other securities
issued at reorganized Calpine used to refinance Project-Level Debt.   (2)  
Plan-Based Adjusted Enterprise Value (“Plan AEV”) shall be equal to: Total
Enterprise Value, as set forth in a confirmed Plan of Reorganization and/or its
accompanying Disclosure Statement, plus cash (excluding cash escrowed from
pre-petition asset sales) which will be distributed on or around the effective
date in accordance with said Plan of Reorganization (excluding any cash raised
through any and all post-petition and exit financing transactions); minus the
book value of all Project-Level Debt. Plan AEV shall be further adjusted upward,
to include (a) cash received from asset sales consummated post-petition used to
repay any Corporate-Level Securities prior to the consummation of the Plan of
Reorganization; and (b) corporate-level cash used to repay Corporate-Level
Securities during the pendency of the chapter 11 cases (excluding any cash
raised through all pre- or post-petition financing and cash held in escrow from
pre-petition asset sales).   (3)   Equivalent to 8 bps for each incremental $100
million in AEV achieved.