When California-based power company Calpine Corp.'s finances came under pressure in 2003, it came to view its Houston-based E&P subsidiary, Calpine Natural Gas LP, as a cash cow. As the president of Calpine Natural Gas, Bill Berilgen was surrounded by experienced E&P personnel and sitting on large, legacy assets with barely enough allocated cash to keep from losing leases, let alone fund development. After two years and many presentations to Calpine management, Berilgen finally found a way out. Investment-banking firm Friedman Billings Ramsey proposed a 144A stock offering to monetize the value of the E&P business unit and exit. In July 2005, the formerly cash-strapped E&P subsidiary, which had become noncore relative to Calpine's power business, became Rosetta Resources Inc. With new access to capital, Rosetta began turning its fortune around. During its first six months of operation, it replaced 127% of production while drilling 29 wells with an overall success rate of 82%. Today, it has proved reserves of 2.5 million barrels of oil and 363 billion cubic feet of gas, plans 188 wells in 2006 and has identified 560 additional low-risk drilling locations on its existing acreage. With its current inventory of prospects, Rosetta president and chief executive Berilgen says the company doesn't need to do any acquisitions. But with cash finally available, he is pleased that the company could. Here, Berilgen explains the name of this born-again producer, how mistakes can be full of lessons and why it's a good time to be at Rosetta. Investor How did you choose the name Rosetta Resources? Berilgen It's based on the Rosetta Stone, which in archaeology is probably one of the most important discoveries of all time. It was created in the second century B.C. in Egypt, but the beautiful thing about it was it was written in three scripts. One of these is Greek, which allowed for deciphering the other two: ancient hieroglyphics and demotic Egyptian. It wasn't discovered until 1799, so for 2,000 years, no one could decipher hieroglyphics. When they discovered this stone, they broke the code. The name Rosetta symbolizes discovery. We're in the oil and gas business and our goal is to unlock some of the secrets of the Earth, so there is an interesting parallel between the two. Investor How did you conceive the idea to put together funding and break away from Calpine? Berilgen For at least two years we didn't get sufficient allocated cash to develop our assets. Calpine viewed us as a noncore business unit, and we were just basically inventorying our opportunities. All we could do was try to maintain our leases so we didn't lose what we had. At the same time, Calpine required that we sell various assets to meet their cash needs. We tried many concepts with Calpine as far as breaking away. I have a lot of respect for a lot of the people at Calpine; they just got into some hard times. I tried to spin off much earlier. I also tried bringing in other investors, while continuing to sell our gas production to Calpine. They were reluctant to let go of the franchise, but they also couldn't allocate capital to grow the business. I kept telling them they couldn't have it both ways. I was convinced it would all go down the tube because we were going to start losing acreage, and we were going to start losing people. In 2005, we finally came up with a way that, if the right time came, with Calpine's approval, we could spin the business out. It took several tries and initially Calpine would not agree to do it, but finally in early 2005, Friedman Billings Ramsey (FBR) was able to present an approach that was a win-win for everybody. Investor What made the last attempt successful? Berilgen I think it was the timing. Calpine was ready to exit this business. FBR also came up with this 144A concept where, within 60 days, we could get this deal done and get the money to Calpine and allow them to exit the business. That intrigued them and they set an aggressive price target we were able to achieve. Investor How did the 144A stock offering work? Berilgen It's almost like a public offering, but to private investors. This was the largest private placement FBR had ever done. We raised more than $800 million, and we got some bank debt, so the total deal was more than $1 billion. The interesting part is we did all that in less than 60 days. To raise that kind of money in that time frame-we were intent on meeting Calpine's aggressive pricing goals. Investor What interested investors? Berilgen There were several factors. One was definitely the asset quality. These are legacy-type assets in California and South Texas. We've had them for a long time and our team is very familiar with them. They could see they were underdeveloped because of capital constraints and the lack of people. We have more than 560 low-risk locations today to drill. There aren't many companies our size with that kind of inventory and the 83% success ratio we have. Most of the deals investors are presented with are acquisition-type opportunities where they haven't seen the assets for more than a few weeks, so there's some risk involved with that type of approach. We've acquired properties we have operated for seven years, so we are very familiar with them. Investor Were there other prospective buyers? Berilgen Only Calpine really knows, but the chief financial officer at the time told me the day this deal was announced was the busiest phone day of his business career. Investor What are your plans now? Berilgen We have a very healthy budget for 2006 of a little under $200 million. We have a good inventory, so we don't need to be out there begging for new deals, although we'll look at new ideas near or on our properties. But we don't have to do a deal. We have enough ideas to spend our money on right now. Investor Do you plan to divest of any of your assets? Berilgen We really don't have any cats and dogs. We sold out of Canada a few years ago, and we sold some Rocky Mountain assets, but we are going to rebuild our position in the Rockies because we still think it's an area of significant undiscovered reserves and we have the expertise. Our core areas of focus will be California, South Texas and the Rockies. Investor Which area has the highest growth potential? Berilgen California. We own 100% of the Rio Vista Field, which is the largest gas field in California. We have a number of opportunities out there. It offers the biggest bang for the buck that we have. Investor What is your biggest challenge? Berilgen Equipment. It's getting better, but it's just not fast enough for me. We're just not getting all the rigs that we would like to get. We were not able to sign any drilling contracts while we were at Calpine, so we got a late start in the business of getting these rigs in place. We have added people since we became Rosetta; we're very strong right now technically. So staffing is not an issue; it's just a matter of getting all the rigs we need. Investor How many employees came from Calpine? Berilgen We had about 90 employees at that time and we have added close to 20 since then. These are loyal people, let me tell you. The business was booming, job offers were there every day, and they stuck with me. Now our task is to build the company. Investor What prepared you for this opportunity with Rosetta? Berilgen I've been an engineer most of my career. I was a CEO for about two and a half years at Sheridan Energy, which was focused on northern California and the Gulf Coast and based in Houston. I believe that prepared me to understand the public markets, even though Sheridan was a smaller company. I still look at myself as an engineer. I look at a lot of the deals myself. I've learned from other people's mistakes a little bit, so I don't repeat their mistakes. We've also learned from Calpine quite a bit. You don't want to be levered, and you want to keep your balance sheet strong. Prices may be here today, but for any kind of dip that comes along, you want to be cash-rich so you can take advantage of others that have levered up too much. Investor What debt-to-equity ratio do you target for Rosetta? Berilgen We don't want to have a ratio higher than 40% debt. Investor What is your forecast for gas prices? Berilgen When you think about it, we had the warmest winter in history here and in Canada, and with that, our gas prices are down to $7.50. I'm very bullish on gas. I just don't see how gas will go below these numbers, but everybody has a different opinion. I feel very confident that, with a very hot summer and a cold winter next year, prices will be back up. Investor Anything else? Berilgen Well, I'm very fortunate this late in my career. I've been a petroleum engineer for 36 years, and this is the most exciting and challenging job I've ever had. I'm working with quality people and it's a good time for our industry, and with hard work we at Rosetta have an opportunity to build a great company.

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