SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
______________________
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended
September 30, 1994
Commission File No. 1-9874
CALIFORNIA ENERGY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2213782
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10831 Old Mill Road, Omaha, Nebraska 68154
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (402) 330-8900
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 X No
Former name, former address and former fiscal year, if changed
since last report. N/A
32,229,584 shares of Common Stock, $0.0675 par value were
outstanding as of September 30, 1994.
CALIFORNIA ENERGY COMPANY, INC.
Form 10-Q
September 30, 1994
_____________
C O N T E N T S
PART I: FINANCIAL INFORMATION Page
Item 1. Financial Statements
Independent Accountants' Report 3
Consolidated Balance Sheets, September 30, 1994
and December 31, 1993 4
Consolidated Statements of Operations for the Three
Months and Nine Months Ended September 30, 1994 and 1993 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1994 and 1993 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 2. Changes in Securities 36
Item 3. Defaults on Senior Securities 36
Item 4. Submission of Matters to a Vote of
Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 38
Exhibit Index 39
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
California Energy Company, Inc.
Omaha, Nebraska
We have reviewed the accompanying consolidated balance sheet of
California Energy Company, Inc. and subsidiaries as of September
30, 1994, and the related consolidated statements of operations for
the three-month and nine-month periods ended September 30, 1994 and
1993 and the related consolidated statements of cash flows for the
nine-month periods ended September 30, 1994 and 1993. These
financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review
of interim financial information consists principally of applying
analytical procedures to financial data and of making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to such consolidated financial statements for
them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of California
Energy Company, Inc. and subsidiaries as of December 31, 1993, and
the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended (not presented
herein), and in our report dated February 24, 1994, we expressed an
unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1993 is fairly
stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
October 19, 1994
CALIFORNIA ENERGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
________________________________
September 30 December 31
1994 1993
(unaudited)
ASSETS
Cash and short-term investments $ 316,349 $ 127,756
Joint venture cash and short-term investments 27,088 14,943
Restricted cash and short-term investments 127,380 48,105
Accounts receivable 33,901 21,658
Due from joint ventures 1,639 1,394
Properties and plants, net (Note 3) 522,268 458,974
Equipment, net of depreciation 4,699 4,540
Notes receivable - joint ventures 12,255 11,280
Other investments 11,517 10,445
Deferred charges and other assets 29,968 16,889
Total assets $1,087,064 $ 715,984
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 1,021 $ 607
Other accrued liabilities 23,357 19,866
Income taxes payable 587 4,000
Construction loans 21,079 -
Project loans 233,080 246,880
Senior Notes (Note 8) - 35,730
Senior Discount Notes (Note 4) 421,375 -
Convertible Subordinated Debentures 100,000 100,000
Deferred income taxes 24,774 18,310
Total liabilities 825,273 425,393
Deferred income 19,781 20,288
Redeemable preferred stock 62,350 58,800
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock - authorized 2,000 shares, no
par value
Common stock - authorized 60,000 shares,
par value $0.0675 per share, issued and
outstanding 32,230 and 35,446 shares at
September 30, 1994 and December 31, 1993,
respectively 2,407 2,404
Additional paid in capital 100,000 100,965
Retained earnings 136,769 111,031
Treasury stock - 3,420 and 157 common
shares, at September 30, 1994 and
December 31, 1993, respectively, at cost (59,516) (2,897)
Total stockholders' equity 179,660 211,503
Total liabilities and stockholders' equity $1,087,064 $ 715,984
The accompanying notes are an integral part of these financial statements.
CALIFORNIA ENERGY COMPANY, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
________________________________
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
(unaudited) (unaudited)
Revenues:
Sales of electricity and steam $49,498 $41,433 $117,208 $101,046
Interest and other income 9,026 4,824 21,980 12,294
Total revenues 58,524 46,257 139,188 113,340
Costs and expenses:
Plant operations 9,846 5,878 23,887 18,898
General and administration 3,216 2,359 9,536 8,596
Royalties 3,504 3,004 7,898 6,525
Depreciation and amortization 5,639 4,344 15,439 13,044
Interest expense 17,653 8,184 44,480 20,993
Less interest capitalized (2,087) (1,682) (7,518) (3,822)
Total costs and expenses 37,771 22,087 93,722 64,234
Income before income taxes 20,753 24,170 45,466 49,106
Provision for income taxes 6,340 7,493 14,067 14,295
Income before extraordinary item
and change in accounting principle 14,413 16,677 31,399 34,811
Extraordinary item (less applicable
income taxes of $945) (Note 8) - - (2,007) -
Cumulative effect of change
in accounting principle - - - 4,100
Net income 14,413 16,677 29,392 38,911
Preferred dividends
(paid in kind)* 1,275 1,179 3,711 3,429
Net income attributable to
common shares $13,138 $15,498 $25,681 $35,482
Income per share before extraordinary
item and change in accounting
principle $ .38 $ .41 $ .77 $ .81
Extraordinary item (Note 8) - - (.06) -
Cumulative effect of change in
accounting principle - - - .11
Net income per share
assuming no dilution $ 0.38 $ 0.41 $ 0.71 $ 0.92
Net income per share
assuming full dilution (Note 7) $ 0.36 $ 0.41 $ 0.70 $ 0.92
Average number of common and
common equivalent shares outstanding
assuming no dilution 34,831 38,180 36,174 38,436
The accompanying notes are an integral part of these financial statements.
* Reflects dividends on the Company's Series C Redeemable Convertible Preferred
Stock, which are payable in kind.
CALIFORNIA ENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
________________________________
Nine Months Ended
September 30
1994 1993
(unaudited)
Cash flows from operating activities:
Net income $ 29,392 $ 38,911
Adjustments to reconcile net cash flow from
operating activities:
Depreciation and amortization 15,439 13,044
Amortization of original issue discount 21,375 -
Amortization of deferred financing costs 1,421 714
Provision for deferred income taxes 6,464 1,848
Changes in other items:
Accounts receivable (12,243) (12,638)
Accounts payable and accrued liabilities 3,905 (4,906)
Deferred income (507) (657)
Income tax payable (3,413) 1,444
Other - (3)
Net cash flows from operating activities 61,833 37,757
Cash flows from investing activities:
Capital expenditures relating to existing
power plants (10,739) (9,401)
Well and resource development expenditures for
existing projects (8,508) (13,270)
Acquisition of equipment (411) (1,116)
Yuma plant (5,611) (25,530)
Foreign projects - construction in progress
and development (46,841) -
Pacific Northwest, Nevada and Utah developments (6,782) (14,933)
Transmission line deposit - 7,684
Decrease (increase) in restricted cash (79,275) 12,892
Increase in other investments and assets (4,371) (2,327)
Net cash flows from investing activities (162,538) (46,001)
Cash flows from financing activities:
Proceeds and net benefits from sale of common,
treasury, and preferred stock and exercise
of options 677 2,303
Deferred financing costs - Senior Discount Notes (11,201) -
Proceeds from issue of Senior Discount Notes 400,000 -
Defeasance of Senior Notes (35,730) -
Repayment of project loans (13,800) (8,362)
Deferred financing costs - Convertible
Subordinated Debentures - (2,500)
Proceeds from issue of Convertible Subordinated
Debentures - 100,000
Proceeds from construction loan 21,079 -
Increase in amounts due from joint ventures (1,220) (2,139)
Purchase of treasury stock (58,362) -
Net cash flows from financing activities 301,443 89,302
Net increase in cash and cash equivalents 200,738 81,058
Cash and cash equivalents at beginning of period 142,699 63,519
Cash and cash equivalents at end of period $343,437 $144,577
Supplemental disclosures:
Interest paid, net of amounts capitalized $ 14,494 $ 14,881
Income taxes paid $ 5,070 $ 1,410
The accompanying notes are an integral part of these financial statements.
CALIFORNIA ENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh data)
________________________________
1. General:
In the opinion of management of California Energy Company, Inc.
(the "Company"), the accompanying unaudited consolidated financial
statements contain all adjustments (including normal recurring
accruals) necessary to present fairly the financial position as of
September 30, 1994 and the results of operations for the three and
nine months ended September 30, 1994 and 1993, and cash flows for
the nine months ended September 30, 1994 and 1993.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, and its proportionate
share of the accounts of the partnerships and joint ventures in
which it has invested.
The results of operations for the three and nine months ended
September 30, 1994 and 1993 are not necessarily indicative of the
results to be expected for the full year.
Certain amounts in the 1993 financial statements and supporting
footnote disclosures have been reclassified to conform to the 1994
presentation. Such reclassification did not impact previously
reported net income or retained earnings.
2. Other Footnote Information:
Reference is made to the Company's most recently issued annual
report that included information necessary or useful to the
understanding of the Company's business and financial statement
presentations. In particular, the Company's significant accounting
policies and practices were presented as Note 2 to the consolidated
financial statements included in that report.
CALIFORNIA ENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh data)
________________________________
3. Properties and Plants:
Properties and plants comprise the following:
September 30 December 31
1994 1993
(unaudited)
Project costs:
Power plants and gathering systems $ 304,030 $ 246,219
Wells and resource development 171,802 162,776
475,832 408,995
Less accumulated depreciation
and amortization (85,010) (69,823)
Net facilities 390,822 339,172
Resource development in progress 421 939
Total project costs 391,243 340,111
Yuma plant - construction in progress - 41,461
Upper Mahiao plant - construction in progress 34,584 -
Mahanagdong - construction in progress 11,053 -
Other foreign project development 1,204 -
Pacific Northwest costs 45,922 41,910
Nevada and Utah properties costs 38,262 35,492
Total $ 522,268 $ 458,974
In June 1994, amounts recorded as "Yuma plant - construction in progress" were
transferred to "Power plants and gathering systems".
4. Senior Discount Notes:
In March 1994, the Company issued $400,000 of 10 1/4% Senior Discount
Notes which accrete to an aggregate principal amount of $529,640 at
maturity in 2004. The original issue discount (the difference
between $400,000 and $529,640) will be amortized from issue date
through January 15, 1997, during which time no cash interest will
be paid on the Senior Discount Notes. Commencing July 15, 1997,
cash interest on the Senior Discount Notes will be payable
semiannually on January 15 and July 15 of each year. The Senior
Discount Notes are redeemable at any time on or after January 15,
CALIFORNIA ENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh data)
__________________
4. Senior Discount Notes: (continued)
1999. The redemption prices commencing in the twelve month period
beginning January 15, 1999 (expressed in percentages of the
principal amount) are 105.125%, 103.417%, 101.708%, and 100% for
1999, 2000, 2001, and 2002, respectively, plus accrued interest
through the redemption date in each case. The Senior Discount
Notes are unsecured senior obligations of the Company.
5. Commitments and Contingencies:
In April 1994, the Company closed the financing for the 128 GMW
Upper Mahiao geothermal power project located in the Philippines.
The total project cost for the facility is approximately $218,000.
The Company will supply approximately $56,000 of equity and project
debt financing will constitute the balance of approximately
$162,000. A syndicate of international commercial banks is
providing the construction financing. The Export-Import Bank of
the U.S. ("Ex-Im Bank") is providing political risk insurance to
the commercial banks on the construction loan and will provide the
preponderance of project term financing upon satisfaction of
conditions associated with commercial operation. As of September
30, 1994, draws on the construction loan totalled $20,636, equity
investments made by a subsidiary of the Company totalled $12,712,
and the Company has invested $1,236. The Overseas Private
Investment Corporation ("OPIC") is providing political risk
insurance on the equity investment by the Company in this project.
The Upper Mahiao project has begun construction, and is expected to
be in service by July of 1996. The project is structured as a ten
year Build-Own-Transfer ("BOT"), in which the Company's subsidiary
CE Cebu Geothermal Power Company, Inc., the project company, will
be responsible for implementing construction of the geothermal
power plant and, as owner, for providing operations and maintenance
during the ten year BOT period. The electricity generated by the
Upper Mahiao geothermal power plant will be sold to the Philippine
National Oil Company - Energy Development Corporation ("PNOC-EDC"),
which is also responsible for supplying the facility with the
geothermal steam. After a ten year cooperation period, and the
CALIFORNIA ENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh data)
__________________
5. Commitments and Contingencies: (continued)
recovery by the Company of its capital investment plus incremental
return, the plant will be transferred to PNOC-EDC at no cost.
Ormat Inc. of Sparks, Nevada is the turnkey contractor for the
project.
In 1993 the Company and PNOC-EDC signed an Energy Conversion
agreement for a 180 GMW project at the Mahanagdong geothermal site
with a target completion date of July 1997. As with the Upper
Mahiao project, the Mahanagdong project is structured as a ten year
Build-Own-Transfer ("BOT"), in which the Company will be
responsible for implementing construction of the geothermal power
plant and, as owner, for providing operations and maintenance for
the ten year BOT period. The electricity generated by the
geothermal power plant will be sold to PNOC-EDC, which is also
responsible for supplying the facility with the geothermal steam.
After a ten year cooperation period, and the recovery by the
Company of its capital investment plus incremental return, the
plant will be transferred to PNOC-EDC at no cost.
The Mahanagdong project will be built, owned and operated by CE
Luzon Geothermal Power Company, a Philippine corporation, that is
expected to be owned post completion as follows: 45% by the
Company, 45% by Kiewit, and up to 10% by another industrial
company. The turnkey contractor consortium consists of Kiewit
Construction Group, Inc. (with an 80% interest) and The Ben Holt
Co., a wholly owned subsidiary of the Company (with a 20%
interest).
In August 1994, the Company completed the financing on the
Mahanagdong project with a total project cost of approximately $320
million. The capital structure consists of a term loan of $240
million and approximately $80 million in equity contributions. The
construction debt financing facility will be provided by OPIC and
a consortium of commercial lenders led by Bank of America NT&SA.
The debt provided by the commercial lenders will be insured against
political risks by the Ex-Im Bank. Ten-year term debt financing
will be provided by Ex-Im Bank (which will replace the construction
debt) and by OPIC.
CALIFORNIA ENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh data)
__________________
5. Commitments and Contingencies: (continued)
The Mahanagdong project has commenced construction and as of
September 30, 1994, the Company's proportionate share of draws on
the construction loan totalled $443, equity investments made by a
subsidiary of the Company totalled $3,899, and the Company has
invested $6,711.
The Company has made an offer (the "Offer to Purchase") to acquire
all of the outstanding shares of Magma Power Company ("Magma") for
$38.50 per share, comprised of $28.50 in cash and $10.00 in market
value of the Company's common stock. As the first step in
implementing its proposal to acquire all Magma shares, CE
Acquisition Company, Inc. (the "Purchaser"), a wholly owned
subsidiary of the Company, commenced a cash tender offer (the
"Offer") to purchase 12,400 shares, or approximately 51% of the
common stock of Magma Power Company, at a price of $38.50 net per
share to be followed by a second step merger for a combination of
cash and Company common stock, which when completed would result in
an aggregate blended consideration of $28.50 in cash and $10.00 in
market value of the Company's common stock for each share of Magma
purchased by the Company. The Offer currently is set to expire on
December 2, 1994. Magma's Board of Directors (the "Board") has
recommended that their shareholders not accept the Company's $38.50
per share Offer.
In order to facilitate consummation of its acquisition offer, the
Company is soliciting requests to call a special meeting of Magma
stockholders and has established November 7, 1994 as the record
date for its solicitation period which will also expire on December
2, 1994. The Company has stated that it intends to withdraw its
$38.50 per share acquisition proposal if it has not signed a merger
agreement with Magma or received a sufficient number of requests
from Magma stockholders to call a special meeting by December 2,
1994. The special meeting will provide Magma stockholders the
opportunity to consider and vote on the Company's special meeting
proposals which, if approved, would result in certain bylaw
amendments that would facilitate the Company's proposal and the
election of four Company nominees to Magma's Board, who would be
CALIFORNIA ENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh data)
__________________
5. Commitments and Contingencies: (continued)
committed to removing any impediments to shareholders being able to
freely choose whether to accept the Offer and approve the proposed
merger, thereby ensuring that the Offer and proposed merger get a
full and fair hearing. The Company also intends to call a special
meeting of its shareholders to approve the issuance of the
Company's stock in connection with the transaction. Kiewit, the
Company's largest shareholder, which beneficially owns approximately
43.8% of the common shares, has already approved the proposed transaction.
The Company anticipates that a substantial portion of the cash
required to purchase Magma shares and rights pursuant to the Offer
and the proposed merger will be provided through a secured bank
credit facility. The Company has received a fully underwritten
financing commitment letter which states that the lender will
provide up to $500,000 in secured bank financing in connection with
the Offer and the proposed merger. Such funds, together with a
portion of the Company's general corporate funds, will be
sufficient to pay the cash portion of the consideration for the
Offer and proposed merger and related expenses.
The commitment letter contemplates (i) a facility of up to $250,000
to capitalize the Company for the purpose of financing the Offer
and (ii) facilities of up to $500,000 for, among other things,
refinancing the tender facility and effectuating the proposed
merger.
The term of the tender facility will be 12 months, extendible for
a term of up to three years from the initial funding at the mutual
consent of the Company and the lender. The tender facility will be
a margin loan collateralized by the shares purchased pursuant to
the Offer.
The merger facility will be composed of (i) up to a 6-year
amortizing term loan ("Term Loan A") in an expected amount of up to
$500,000 less the amount of Term Loan B (as defined below) and (ii)
up to an 8-year amortizing term loan ("Term Loan B") in an expected
amount not to be less than $150,000. The merger facilities are to
CALIFORNIA ENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh data)
__________________
5. Commitments and Contingencies: (continued)
be amortized from internally generated funds and will be secured by
an assignment and pledge of Magma stock and all unencumbered assets
of Magma.
The lender's commitment to provide the facilities is subject to
certain customary conditions, including without limitation (a) a
capital investment by the Company in an amount and form
satisfactory to the lender, (b) the absence of certain material
adverse changes and (c) the lender's satisfaction with its due
diligence with respect to the Company and Magma.
The definitive documentation relating to the facilities will
contain representations, warranties, covenants, events of default
and conditions customary for transactions of this size and type.
On October 3, 1994, Magma filed a complaint entitled Magma Power
Company v. California Energy Company, Inc., Case No. CV-N-94-06160,
against the Company in the Second Judicial District Court of the
State of Nevada in and for the County of Washoe. The complaint
seeks a declaratory judgement that (i) Magma's Board properly
discharged its fiduciary obligations in adopting a poison pill and
amendments to its bylaws and, accordingly, such documents were
valid and binding, and (ii) Nevada General Corporation Law ("NGCL")
Sections 78.411 through 78.444 (the "Merger Moratorium Statute") is
valid and not in violation of the Commerce Clause and Supremacy
Clause of the United States Constitution. The Company subsequently
removed this action to the United States District Court for the
District of Nevada.
On October 17, 1994, the Company filed its answer and counterclaims
in response to Magma's complaint. The counterclaims name the
Purchaser as an additional counterclaim plaintiff and Magma's
directors as counterclaim defendants in addition to Magma. The
Company's counterclaims seek primarily: (i) a declaratory judgement
that certain actions taken by Magma, including the amendment to
Magma's bylaws purporting to preclude Magma's stockholders from
CALIFORNIA ENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh data)
__________________
5. Commitments and Contingencies: (continued)
taking action by written consent, and implementation of its poison
pill, are void and ultra vires, and constitute a breach of
fiduciary duty by Magma's Board; (ii) an injunction requiring
Magma's Board to rescind the amendment to Magma's bylaws which
purports to eliminate the power of stockholders to act by written
consent, the "golden parachute" severance agreements granted to 15
members of Magma's management and the indemnification agreements
granted to each member of Magma's Board; (iii) an injunction
enjoining the operation of the poison pill and directing Magma's
Board to redeem the poison pill rights; (iv) a declaratory
judgement that the Merger Moratorium Statute is unconstitutional
under the Supremacy Clause and the Commerce Clause of the United
States Constitution; (v) an injunction enjoining Magma's Board from
invoking the terms of the Merger Moratorium Statute or otherwise
obstructing the Offer; and (vi) an injunction requiring Magma to
correct all false and misleading statements in its Schedule 14D-9
and the amendments thereto.
On October 17, 1994, Magma filed an amended complaint, which in
addition to the relief requested in its original complaint, seeks
(i) declaratory and injunctive relief with respect to certain
purportedly false and misleading disclosures in the Company's and
the Purchaser's Schedule 14D-1 and the Offer to Purchase therein;
and (ii) declaratory and injunctive relief with respect to certain
allegedly false and misleading statements made in the Company's
preliminary Request Solicitation Statement filed with the
Commission pursuant to Section 14(a) of the Exchange Act on October
13, 1994.
On October 19, 1994, the Company and the Purchaser filed their
answer to Magma's amended complaint and amended their counterclaims
which, in addition to the relief requested in the original
counterclaims, seek an injunction requiring Magma to correct
additional false and misleading statements reflected in an
amendment to its Schedule 14D-9 and in other statements made by
Magma.
CALIFORNIA ENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh data)
__________________
5. Commitments and Contingencies: (continued)
On October 25, 1994, the Company and the Purchaser filed their
second amended counterclaims which, in addition to the relief
requested in the original and amended counterclaims, seek an
injunction requiring Magma to refrain from (i) taking actions to
damage its international development projects, including the Karaha
project, or (ii) taking other actions designed to waste corporate
assets and block the Offer and the proposed merger.
On November 3, 1994, the Company and the Purchaser filed their
third amended counterclaims which, among other things, seek a
ruling that the Control Share Statute does not apply to the Offer.
The Company intends to take any action necessary to have attempted
impediments to the offer and the proposed merger set aside.
On October 14, 1994, Ben Holt, a stockholder of Magma, and a
director of the Company, filed a complaint entitled Ben Holt v.
Magma Power Company, Case No. CV94-06432, against Magma in the
Second Judicial District Court for the State of Nevada in and for
the County of Washoe (the "Court"), alleging, among other things,
that Magma has infringed the plaintiff's right as a stockholder by
denying his statutory right under the NGCL to demand access to
Magma's stockholder list and certain related material necessary to
communicate with Magma's stockholders. The plaintiff sought an
order directing Magma to comply with the demand for the stockholder
list and related information necessary to communicate with
stockholders.
On October 25, 1994, the Court issued an order directing Magma
forthwith and without delay to turn over to Mr. Holt a complete
record or list of Magma's stockholders together with certain other
information concerning stockholders of Magma requested by Mr. Holt
in his demand letter to Magma. The Court ruled expressly that Mr.
Holt satisfied the requirements of the NGCL governing requests for
stockholder information in that he had been a stockholder of Magma
for more than six months as of the time of his demand, and had
complied with Magma's request for an affidavit concerning his
CALIFORNIA ENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh data)
__________________
5. Commitments and Contingencies: (continued)
request; that Mr. Holt's purpose for requesting stockholder
information of Magma, which was to facilitate the Company's request
for a special meeting of stockholders of Magma and otherwise to
communicate with the other stockholders of Magma concerning the
Company's proposal to acquire Magma through the Offer and the
proposed merger was a proper purpose for which to request
stockholder information; and that the public interest is served by
granting Mr. Holt's request for stockholder information.
The Yuma Cogeneration Associates ("YCA") 50 MW cogeneration power
plant commenced commercial operation pursuant to its power purchase
agreement with San Diego Gas & Electric ("SDG&E") at the end of
May, 1994. In June, 1994 SDG&E filed a complaint in U.S. District
Court seeking to be released from its power purchase agreement with
YCA. In September 1994 SDG&E dismissed its case against the
Company without payment by either party. YCA, a wholly owned
subsidiary of the Company, received all outstanding amounts due
from SDG&E.
6. Income Taxes:
On January 1, 1993, the Company adopted Statement of Financial
Accounting Standard No. 109 ("FAS 109"), Accounting for Income
Taxes. The adoption of FAS 109 changed the Company's method of
accounting for income taxes from the deferred method as required by
Accounting Principles Board No. 11 to an asset and liability
approach. Under FAS 109, the net excess deferred tax liability as
of January 1, 1993 was determined to be $4,100. This amount was
reflected in 1993 income as the cumulative effect of a change in
accounting principle. It primarily represented the recognition of
the Company's tax credit carryforwards as a deferred tax asset.
There was no cash impact to the Company upon the required adoption
of FAS 109. Under FAS 109, the effective tax rate has increased
due to the Company's tax credit carryforwards being recognized as
an asset upon the adoption of FAS 109 and unavailable to reduce the
current period's effective tax rate for computing the Company's
provision for income taxes.
CALIFORNIA ENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh data)
__________________
6. Income Taxes: (continued)
The Company's effective tax rate continues to be less than the
statutory rate primarily due to the depletion deduction and the
generation of energy tax credits in 1994. The significant
components of the deferred tax liability are the temporary
differences between the financial reporting basis and income tax
basis of the power plant and the well and resource development
costs, and in addition, the offsetting benefits of operating loss
carryforwards and investment and geothermal energy tax credits.
The income tax provision for the nine months ended September 30,
1994, is approximately 54% current tax expense and 46% deferred tax
expense.
7. Earnings Per Share
Fully diluted earnings per share assumes the conversion of the
Convertible Subordinated Debentures into common shares at a
conversion price of $22.50/share. The conversion has become
dilutive because of the significant repurchase by the Company of
the Company's common stock which has materially reduced the number
of shares outstanding and thereby increased the relative effect of
the conversion.
8. Extraordinary Item:
In conjunction with the Company's Senior Discount Note offering
(See Note 4), the 12% Senior Notes were defeased. This resulted in
an extraordinary item in the amount of $2,007, after the income tax
effect of $945. The extraordinary item represents the amount
necessary to defease the interest payments and the unamortized
portion of the deferred financing costs on the $35,730 Senior
Notes. The 1994 contingent interest component of these Senior
Notes, calculated by reference to the Company's share of available
cash flow from the Coso Project, remains undefeased and outstanding
through the end of the calculation period, December 31, 1994.
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
__________________
Results of Operations:
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial
condition and results of operations during the periods included in
the accompanying statement of operations.
For purposes of consistent financial presentation, plant capacity
factors are based upon an installed capacity rating of 88 gross
MW/80 net MW for each plant at the Coso Project. Each plant
possesses an operating margin which allows for production in excess
of the amount listed above. Utilization of this operating margin
is based upon a variety of factors and can be expected to vary
between calendar quarters, under normal operating conditions.
Sales of electricity and steam increased to $49,498 in the third
quarter of 1994 from $41,433 in the third quarter of 1993, a 19.5%
increase. This improvement was primarily due to an increase in the
Coso Project's electric kilowatt hour sales to 580.4 million kWh
from 578.2 million kWh and an increased price per kWh in accordance
with the S04 Agreements. The remaining increases are a result of
the Yuma project commencing operations in late May of 1994. For
the nine months ended September 30, sales of electricity and steam
increased to $117,208 in 1994 from $101,046 in 1993, a 16.0%
increase. Similarly, the increase was due to an increase in the
Coso Project's electric kilowatt hour sales to 1,659.4 million kWh
from 1,610.4 million kWh, the aforementioned increased price per
kWh, and the commencement of the Yuma project.
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
__________________
Results of Operations: (Continued)
The following operating data represent the aggregate installed
capacity and electricity production of the Coso Project:
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
Overall installed
capacity factor 109.5% 109.1% 105.5% 102.4%
kWh produced 580,400,000 578,200,000 1,659,400,000 1,610,400,000
Installed capacity
NMW (average) 240 240 240 240
The Navy I plant installed capacity factor was 115.5% in the third
quarter of 1994 compared to 115.1% in the third quarter of 1993.
For the nine months ended September 30, the Navy I plant installed
capacity factor was 114.6% in 1994 compared to 109.0% for the same
period in 1993. Several successful well workovers and the addition
of a new well contributed to the improved performance. The Navy II
plant installed capacity factor was 113.2% in the third quarter of
1994 compared to 106.3% in the third quarter of 1993. For the nine
months ended September 30, the Navy II plant installed capacity
factor was 103.5% in 1994 compared to 100.4% for the same period in
1993. Navy II output benefitted from gathering system improvements
completed in June of 1993. The BLM plant installed capacity factor
was 99.8% in the third quarter of 1994 compared to 106.0% in the
third quarter of 1993. For the nine months ended September 30, the
BLM plant installed capacity factor was 98.5% in 1994 compared to
97.8% for the same period in 1993.
As a result of the successful performance of the BLM H2S abatement
system, which was installed in 1992, the Navy I and Navy II Joint
Ventures obtained authority to construct ("ATC") permits for the
installation of similar H2S abatement systems in an effort to
enhance operational efficiency and improve long term reservoir
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Results of Operations: (continued)
management. Such abatement systems are expected to have an
aggregate Coso Project capital cost of approximately $11,948,
$10,845 of which has been incurred through September 30, 1994.
Completion of construction and testing of the Navy I and Navy II
abatement systems is currently expected to occur by year end of
1994. In conjunction with the ATC, the Great Basin Unified Air
Pollution Control District agreed to provide an eighteen month
variance to Navy I which allows venting of a portion of Navy I's
non-condensable gas while the abatement system is constructed and
tested.
The Coso Project's average electricity prices per kWh in 1994,
1993, and 1992, were comprised of (in cents):
Capacity
Energy and Bonus Total
Three Months Ended
September 30, 1994 11.10 4.22 15.32
June 30, 1994 10.91 1.94 12.85
March 31, 1994 10.85 .70 11.55
September 30, 1993 10.20 4.24 14.44
June 30, 1993 10.16 1.94 12.10
March 31, 1993 10.01 .74 10.75
Average Fiscal 1993 10.11 1.93* 12.04*
Average Fiscal 1992 9.23 2.10* 11.33*
* Represents annualized price per kWh. Typically, the capacity
price is significantly higher in the months June through
September.
The Yuma plant commenced commercial operation in late May pursuant
to its power purchase agreement and operated at 99.6% of its 50 net
MW plant capacity in the third quarter of 1994.
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Results of Operations: (continued)
Roosevelt Hot Springs steam field supplied 100% of customer power plant
steam requirements in the third quarter and for the nine months ended
September 30, 1994. The Company has an approximate 70% interest in the
Roosevelt Hot Springs field.
The Desert Peak power plant operated at 101.1% of its nine net megawatt
capacity in the third quarter of 1994. For the nine months ended
September 30, 1994, the Desert Peak plant capacity factor was 105.5%.
Interest and other income increased in the third quarter of 1994 to
$9,026 from $4,824 for the same period in 1993. For the nine months
ended September 30, interest and other income increased to $21,980 in
1994 from $12,294 for the same period in 1993. The increase primarily
reflects interest income on higher average cash balances from the
issuance of the Senior Discount Notes.
The Company's expenses as a percentage of sales of electricity and steam
were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
Plant operations (net of
Company's operator fees) 17.5% 11.5% 17.3% 15.4%
General and administration 6.5% 5.7% 8.1% 8.5%
Royalties 7.1% 7.3% 6.7% 6.5%
Depreciation and
amortization 11.4% 10.5% 13.2% 12.9%
Interest (less amounts
capitalized) 31.4% 15.7% 31.5% 17.0%
73.9% 50.7% 76.8% 60.3%
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Results of Operations: (continued)
Plant operations increased to $9,846 in the third quarter of 1994
from $5,878 in the third quarter of 1993, a 67.5% increase. For
the nine months ended September 30, plant operations increased to
$23,887 in 1994 from $18,898 in 1993, a 26.4% increase. While
plant operating cost at Coso actually declined, the above increases
were due to the inclusion of the plant operating costs of the Yuma
cogeneration plant which started operations in May 1994.
General and administration costs increased to $3,216 in the third
quarter of 1994 from $2,359 in the third quarter of 1993, a 36.3%
increase. For the nine months ended September 30, general and
administration costs increased to $9,536 in 1994 from $8,596 in
1993, a 10.9% increase. The increases are a result of the
increased project construction activity associated with two
projects aggregating 300 MW in the Philippines, as well as
increased project development activity associated with overseas
efforts.
Royalty costs increased to $3,504 in the third quarter of 1994 from
$3,004 in the third quarter of 1993, a 16.6% increase. For the
nine months ended September 30, royalties increased to $7,898 in
1994 from $6,525 in 1993, a 21.0% increase. The increases were due
to the increase in sales of electricity and an increase in the
effective royalty rate at BLM.
Depreciation and amortization increased to $5,639 in the third
quarter of 1994 from $4,344 in the third quarter of 1993, a 29.8%
increase. For the nine months ended September 30, depreciation and
amortization increased to $15,439 in 1994 from $13,044 in 1993, an
18.4% increase. The increase was due primarily to capital
expenditures at the Coso Project and the depreciation of the Yuma
plant.
Interest expense before amounts capitalized increased to $17,653 in
the third quarter of 1994 from $8,184 in the third quarter of 1993,
a 115.7% increase. For the nine months ended September 30,
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Results of Operations: (continued)
interest expense increased to $44,480 in 1994 from $20,993 in 1993,
a 111.9% increase. The increase was primarily due to the original
issue discount amortization expense on the Senior Discount Notes
issued in March 1994 and interest expense on the Convertible
Subordinated Debentures which were issued in June 1993, offset in
part by the defeasance of the Senior Notes in March 1994.
The provision for income taxes decreased to $6,340 in the third
quarter of 1994 from $7,493 in the third quarter of 1993, a 15.4%
decrease. For the nine months ended September 30, the provision
for income taxes decreased to $14,067 in 1994 from $14,295 in 1993,
a 1.6% decrease. The decreases are due to a lower income before
tax attributable to higher interest costs as previously discussed.
The Company's effective rate continues to be less than the expected
statutory rate primarily due to the percentage depletion deduction
and energy tax credits generated in the current year.
Income before extraordinary item and the cumulative effect of a
change in accounting principle decreased to $14,413 in the third
quarter of 1994 from $16,677 in the third quarter of 1993, a 13.6%
decrease. Net income attributable to common shares in the third
quarter of 1994 decreased to $13,138 or 38 cents per share from
$15,498 or 41 cents per share in the third quarter of 1993, a 15.2%
decrease. Net income excluding the effect of the Senior Discount
Notes was approximately $16,487 or 47 cents per share for the third
quarter of 1994. For the nine months ended September 30, income
before extraordinary item and the cumulative effect of a change in
accounting principle decreased to $31,399 or 77 cents per share
from $34,811 or 81 cents per share, a 9.8% decrease. Net income
attributable to common shares for the nine months ended September
30, decreased to $25,681 or 71 cents per share from $35,482 or 92
cents per share, a 27.6% decrease. Net income excluding the effect
of the Senior Discount Notes was approximately $34,602 or 95 cents
per share for the nine months ended September 30, 1994.
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Liquidity and Capital Resources:
The Company's cash and investments were $316,349 at September 30,
1994 as compared to $127,756 at December 31, 1993. In addition,
the Company's share of Coso Project retained cash and investments
in project control accounts at September 30, 1994 and December 31,
1993 was $27,088 and $14,943, respectively. Distributions out of
the project control account are made monthly to the Company for
operation and maintenance and capital costs and semiannually to
each Coso Joint Venture partner for profit sharing under a
prescribed calculation subject to mutual agreement by the partners.
In addition, the Company recorded separately restricted cash and
short-term investments of $127,380 and $48,105 at September 30,
1994 and December 31, 1993, respectively. The restricted balances
were comprised primarily of amounts deposited in restricted
accounts from which the Company will source its equity contribution
requirements relating to the Upper Mahiao and Mahanagdong projects
and of its proportionate share of Coso Project cash reserves for a
debt service reserve fund. The Coso Project established these
reserves in conjunction with the refinancing of its previous bank
debt.
In March 1994, the Company issued $400,000 of 10 1/4% Senior Discount
Notes which accrete to an aggregate principal amount of $529,640 at
maturity in 2004. The original issue discount (the difference
between $400,000 and $529,640) will be amortized from issue date
through January 15, 1997, during which time no cash interest will
be paid on the Senior Discount Notes. Commencing July 15, 1997,
cash interest on the Senior Discount Notes will be payable
semiannually on January 15 and July 15 of each year. The Senior
Discount Notes are redeemable at any time on or after January 15,
1999. The redemption prices commencing in the twelve month period
beginning January 15, 1999 (expressed in percentages of the
principal amount) are 105.125%, 103.417%, 101.708%, and 100% for
1999, 2000, 2001, and 2002, respectively, plus accrued interest
through the redemption date in each case. The Senior Discount
Notes are unsecured senior obligations of the Company.
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Liquidity and Capital Resources: (continued)
The Company's Senior Notes in the principal amount of $35,730 which
were due in March 1995, together with the fixed 12% interest due
thereon, were defeased in the first quarter of 1994 in conjunction
with the issuance of the Senior Discount Notes. The 1994
contingent interest component of these Senior Notes, calculated by
reference to the Company's share of available cash flow from the
Coso Project, remains undefeased and outstanding through the end of
the calculation period, December 31, 1994.
In June of 1993, the Company issued $100,000 principal amount of 5%
Convertible Subordinated Debentures ("Debentures") due July 31,
2000. The Debentures are convertible into shares of the Company's
common stock at any time prior to redemption or maturity at a
conversion price of $22.50 per share, subject to adjustment in
certain circumstances. Interest on the Debentures is payable semi-
annually in arrears on July 31 and January 31 of each year, and
commenced on July 31, 1993. The Debentures may be redeemed for
cash at any time on or after July 31, 1996 at the option of the
Company. The redemption prices commencing in the twelve month
period beginning July 31, 1996 (expressed in percentages of the
principal amount) are 102%, 101%, 100% and 100% for 1996, 1997,
1998 and 1999, respectively. The Debentures are unsecured general
obligations of the Company and subordinated to all senior
indebtedness of the Company.
In December 1992, the Company entered into an agreement with
Community Energy Alternatives Incorporated ("CEA") to purchase
CEA's interest in the Coso Project for $9,800. The terms of the
agreement granted the Company's Coso Project Joint Venture Partner
an option to purchase the CEA interest for a price which provided
the Company with a 17% per annum return for the period the Company
owned the CEA interest. In April 1994, the Coso Project Joint
Venture Partner purchased the CEA interest from the Company for the
defined price.
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Liquidity and Capital Resources: (continued)
In May 1994, pursuant to a special antidilution provision of the
1991 Stock Purchase Agreement between the Company and Kiewit Energy
Company, the Company increased Kiewit Energy Company's existing
option (granted in 1991) to purchase 3 million shares at $12 per
share by an additional 289,163 shares as a final adjustment under
such provision.
Proceeds from options for shares of common and treasury stock
exercised in the nine months ended September 30, 1994 aggregated
approximately $677.
As of September 30, 1994 the Company has repurchased 3,514 shares
of its common stock at a cost of $61,259. This repurchase provides
shares for issuance under the Company's employee stock option and
share purchase plans and other outstanding convertible securities.
The shares may also be used for any future convertible securities
or employee benefit plans.
The Company is actively seeking to develop, construct, own and
operate new power projects utilizing geothermal and other
technologies, both domestically and internationally, the completion
of any of which is subject to substantial risk. Development can
require the Company to expend significant sums for preliminary
engineering, field development, permitting, legal and other
expenses in preparation for competitive bids which the Company may
not win or before it can be determined whether a project is
feasible, economically attractive or capable of being financed.
Successful development is contingent upon, among other things,
negotiation of construction, fuel supply and power sales contracts
with other project participants on terms satisfactory to the
Company, and receipt of required governmental permits and consents.
Further, there can be no assurance that the Company will obtain
access to the substantial debt and equity capital required to
develop and construct electric power projects or to refinance
projects for which the Company has provided initial construction
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Liquidity and Capital Resources: (continued)
financing. The Company's future growth is dependent, in large
part, upon the demand for significant amounts of additional
electrical generating capacity and the Company's ability to obtain
contracts to supply portions of this capacity. There can be no
assurance that development efforts on any particular project, or
the Company's efforts generally, will be successful.
The Company believes that the international independent power
market holds the majority of new opportunities for financially
attractive private power development in the next several years.
The financing and development of projects outside the United States
entail significant political and financial risks (including,
without limitation, uncertainties associated with first time
privatization efforts in the countries involved, currency exchange
rate fluctuations, currency repatriation restrictions, political
instability, civil unrest and expropriation) and other structuring
issues that have the potential to cause substantial delays or
material impairment of value to the project being developed, which
the Company may not be fully capable of insuring against. The
uncertainty of the legal environment in certain foreign countries
in which the Company may develop or acquire projects could make it
more difficult for the Company to enforce its rights under
agreements relating to such projects. In addition, the laws and
regulations of certain countries may limit the ability of the
Company to hold a majority interest in some of the projects that
it may develop or acquire. The Company's international projects
may, in certain cases, be terminated by a government.
In April 1994, the Company closed the financing for the 128 GMW
Upper Mahiao geothermal power project located in the Philippines.
The total project cost for the facility is approximately $218,000.
The Company will supply approximately $56,000 of equity and project
debt financing will constitute the balance of approximately
$162,000. A syndicate of international commercial banks is
providing the construction financing. The Export-Import Bank of
the U.S. ("Ex-Im Bank") is providing political risk insurance to
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Liquidity and Capital Resources: (continued)
the commercial banks on the construction loan and will provide the
preponderance of project term financing upon satisfaction of
conditions associated with commercial operation. As of September
30, 1994, draws on the construction loan totalled $20,636, equity
investments made by a subsidiary of the Company totalled $12,712, and
the Company has invested $1,236. The Overseas Private Investment
Corporation ("OPIC") is providing political risk insurance on the
equity investment by the Company in this project. The Upper Mahiao
project has begun construction, and is expected to be in service by
July of 1996. The project is structured as a ten year Build-Own-Transfer
("BOT"), in which the Company's subsidiary CE Cebu Geothermal Power
Company, Inc., the project company, will be responsible for implementing
construction of the geothermal power plant and, as owner, for providing
operations and maintenance during the ten year BOT period. The
electricity generated by the Upper Mahiao geothermal power plant
will be sold to the Philippine National Oil Company - Energy Development
Corporation ("PNOC-EDC"), which is also responsible for supplying the
facility with the geothermal steam. After a ten year cooperation period,
and the recovery by the Company of its capital investment plus incremental
return, the plant will be transferred to PNOC-EDC at no cost.
Ormat Inc. of Sparks, Nevada is the turnkey contractor for the
project.
In 1993 the Company and PNOC-EDC signed an Energy Conversion
agreement for a 180 GMW project at the Mahanagdong geothermal site
with a target completion date of July 1997. As with the Upper
Mahiao project, the Mahanagdong project is structured as a ten year
Build-Own-Transfer ("BOT"), in which the Company will be
responsible for implementing construction of the geothermal power
plant and, as owner for providing operations and maintenance for
the ten year BOT period. The electricity generated by the
geothermal power plant will be sold to PNOC-EDC, which is also
responsible for supplying the facility with the geothermal steam.
After a ten year cooperation period, and the recovery by the
Company of its capital investment plus incremental return, the
plant will be transferred to PNOC-EDC at no cost.
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Liquidity and Capital Resources: (continued)
The Mahanagdong project will be built, owned and operated by CE
Luzon Geothermal Power Company, a Philippine corporation, that is
expected to be owned post completion as follows: 45% by the
Company, 45% by Kiewit, and up to 10% by another industrial
company. The turnkey contractor consortium consists of Kiewit
Construction Group, Inc. (with an 80% interest) and The Ben Holt
Co., Inc., a wholly owned subsidiary of the Company (with a 20%
interest).
In August 1994, the Company completed the financing on the
Mahanagdong project with a total project cost of approximately $320
million. The capital structure consists of a term loan of $240
million and approximately $80 million in equity contributions. The
construction debt financing facility will be provided by OPIC and
a consortium of commercial lenders led by Bank of America NT&SA.
The debt provided by the commercial lenders will be insured against
political risks by Ex-Im Bank. Ten-year term debt financing will
be provided by Ex-Im Bank (which will replace the construction
debt) and by OPIC.
The Mahanagdong project has commenced construction and as of
September 30, 1994, the Company's proportionate share of draws on
the construction loan totalled $443, equity investments made by a
subsidiary of the Company totalled $3,899, and the Company has
invested $6,711.
The Company has made an offer (the "Offer to Purchase") to acquire
all of the outstanding shares of Magma Power Company ("Magma") for
$38.50 per share, comprised of $28.50 in cash and $10.00 in market
value of the Company's common stock. As the first step in
implementing its proposal to acquire all Magma shares, CE
Acquisition Company, Inc., a wholly owned subsidiary of (the
"Purchaser") the Company, commenced a cash tender offer (the
"Offer") to purchase 12,400 shares, or approximately 51% of the
common stock of Magma Power Company, at a price of $38.50 net per
share to be followed by a second step merger for a combination of
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Liquidity and Capital Resources: (continued)
cash and Company common stock, which when completed would result in
an aggregate blended consideration of $28.50 in cash and $10.00 in
market value of the Company's common stock for each share of Magma
purchased by the Company. The Offer currently is set to expire on
December 2, 1994. Magma's Board of Directors has recommended that
their shareholders not accept the Company's $38.50 per share Offer.
In order to facilitate consummation of its acquisition offer, the
Company is soliciting requests to call a special meeting of Magma
stockholders and has established November 7, 1994 as the record
date for its solicitation period which will also expire on December
2, 1994. The Company has stated that it intends to withdraw its
$38.50 per share acquisition proposal if it has not signed a merger
agreement with Magma or received a sufficient number of requests
from Magma stockholders to call a special meeting by December 2,
1994. The special meeting will provide Magma stockholders the
opportunity to consider and vote on the Company's special meeting
proposals which, if approved, would result in certain bylaw
amendments that would facilitate the Company's proposal and the
election of four Company nominees to Magma's Board, who would be
committed to removing any impediments to shareholders being able to
freely choose whether to accept the Offer and approve the proposed
merger, thereby ensuring that the Offer and proposed merger get a
full and fair hearing. The Company also intends to call a special
meeting of its shareholders to approve the issuance of the
Company's stock in connection with the transaction. Kiewit, the
Company's largest shareholder, which beneficially owns approxmately
43.8% of the common shares, has already approved the proposed transaction.
The Company anticipates that a substantial portion of the cash
required to purchase Magma shares and rights pursuant to the Offer
and the proposed merger will be provided through a secured bank
credit facility. The Company has received a fully underwritten
financing commitment letter which states that the lender will
provide up to $500,000 in secured bank financing in connection with
the Offer and the proposed merger. Such funds, together with a
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Liquidity and Capital Resources: (continued)
portion of the Company's general corporate funds, will be
sufficient to pay the cash portion of the consideration for the
Offer and proposed merger and related expenses.
The commitment letter contemplates (i) a facility of up to $250,000
to capitalize the Company for the purpose of financing the Offer
and (ii) facilities of up to $500,000 for, among other things,
refinancing the tender facility and effectuating the proposed
merger.
The term of the tender facility will be 12 months, extendible for
a term of up to three years from the initial funding at the mutual
consent of the Company and the lender. The tender facility will be
a margin loan collateralized by the shares purchased pursuant to
the Offer.
The merger facility will be composed of (i) up to a 6-year
amortizing term loan ("Term Loan A") in an expected amount of up to
$500,000 less the amount of Term Loan B (as defined below) and (ii)
up to an 8-year amortizing term loan ("Term Loan B") in an expected
amount not to be less than $150,000. The merger facilities are to
be amortized from internally generated funds and will be secured by
an assignment and pledge of Magma stock and all unencumbered assets
of Magma.
The lender's commitment to provide the facilities is subject to
certain customary conditions, including without limitation (a) a
capital investment by the Company in an amount and form
satisfactory to the lender, (b) the absence of certain material
adverse changes and (c) the lender's satisfaction with its due
diligence with respect to the Company and Magma.
The definitive documentation relating to the facilities will
contain representations, warranties, covenants, events of default
and conditions customary for transactions of this size and type.
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Liquidity and Capital Resources: (continued)
On October 3, 1994, Magma filed a complaint entitled Magma Power
Company v. California Energy Company, Inc., Case No. CV-N-94-06160,
against the Company in the Second Judicial District Court of the
State of Nevada in and for the County of Washoe. The complaint
seeks a declaratory judgement that (i) Magma's Board properly
discharged its fiduciary obligations in adopting a poison pill and
amendments to the bylaws and, accordingly, such documents were
valid and binding, and (ii) Nevada General Corporations Law
("NGCL") Sections 78.411 through 78.444 (the "Merger Moratorium
Statute") is valid and not in violation of the Commerce Clause and
Supremacy Clause of the United States Constitution. The Company
subsequently removed this action to the United States District
Court for the District of Nevada.
On October 17, 1994, the Company filed its answer and counterclaims
in response to Magma's complaint. The counterclaims name the
Purchaser as an additional counterclaim plaintiff and Magma's
directors as counterclaim defendants in addition to Magma. The
Company's counterclaims seek primarily: (i) a declaratory judgement
that certain actions taken by Magma, including the amendment to
Magma's bylaws purporting to preclude Magma's stockholders from
taking action by written consent, and implementation of its poison
pill, are void and ultra vires, and constitute a breach of
fiduciary duty by Magma's Board; (ii) an injunction requiring
Magma's Board to rescind the amendment to Magma's bylaws which
purports to eliminate the power of stockholders to act by written
consent, the "golden parachute" severance agreements granted to 15
members of Magma's management and the indemnification agreements
granted to each member of Magma's Board; (iii) an injunction
enjoining the operation of the poison pill and directing Magma's
Board to redeem the poison pill rights; (iv) a declaratory
judgement that the Merger Moratorium Statute is unconstitutional
under the Supremacy Clause and the Commerce Clause of the United
States Constitution; (v) an injunction enjoining Magma's Board from
invoking the terms of the Merger Moratorium Statute or otherwise
obstructing the Offer; and (vi) an injunction requiring Magma to
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Liquidity and Capital Resources: (continued)
correct all false and misleading statements in its Schedule 14D-9
and the amendments thereto.
On October 17, 1994, Magma filed an amended complaint, which in
addition to the relief requested in its original complaint, seeks
(i) declaratory and injunctive relief with respect to certain
purportedly false and misleading disclosures in the Company's and
the Purchaser's Schedule 14D-1 and the Offer to Purchase therein;
and (ii) declaratory and injunctive relief with respect to certain
allegedly false and misleading statements made in the Company's
preliminary Request Solicitation Statement filed with the
Commission pursuant to Section 14(a) of the Exchange Act on October
13, 1994.
On October 19, 1994, the Company and the Purchaser filed their
answer to Magma's amended complaint and amended their counterclaims
which, in addition to the relief requested in the original
counterclaims, seek an injunction requiring Magma to correct
additional false and misleading statements reflected in an
amendment to its Schedule 14D-9 and in other statements made by
Magma.
On October 25, 1994, the Company and the Purchaser filed their
second amended counterclaims which, in addition to the relief
requested in the original and amended counterclaims, seek an
injunction requiring Magma to refrain from (i) taking actions to
damage its international development projects, including the Karaha
project, or (ii) taking other actions designed to waste corporate
assets and block the Offer and the proposed merger.
On November 3, 1994, the Company and the Purchaser filed their
third amended counterclaims which, among other things, seek a
ruling that the Control Share Statute does not apply to the Offer.
The Company intends to take any action necessary to have attempted
impediments to the offer and the proposed merger set aside.
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Liquidity and Capital Resources: (continued)
On October 14, 1994, Ben Holt, a stockholder of Magma, and a
director of the Company, filed a complaint entitled Ben Holt v.
Magma Power Company, Case No. CV94-06432, against Magma in the
Second Judicial District Court for the State of Nevada in and for
the County of Washoe (the "Court"), alleging, among other things,
that Magma has infringed the plaintiff's right as a stockholder by
denying his statutory right under the NGCL to demand access to
Magma's stockholder list and certain related material necessary to
communicate with Magma's stockholders. The plaintiff sought an
order directing Magma to comply with the demand for the stockholder
list and related information necessary to communicate with
stockholders.
On October 25, 1994, the Court issued an order directing Magma
forthwith and without delay to turn over to Mr. Holt a complete
record or list of Magma's stockholders together with certain other
information concerning stockholders of Magma requested by Mr. Holt
in his demand letter to Magma. The Court ruled expressly that Mr.
Holt satisfied the requirements of the NGCL governing requests for
stockholder information in that he had been a stockholder of Magma
for more than six months as of the time of his demand, and had
complied with Magma's request for an affidavit concerning his
request; that Mr. Holt's purpose for requesting stockholder
information of Magma, which was to facilitate the Company's request
for a special meeting of stockholders of Magma and otherwise to
communicate with the other stockholders of Magma concerning the
Company's proposal to acquire Magma through the offer and the
proposed merger was a proper purpose for which to request
stockholder information; and that the public interest is served by
granting Mr. Holt's request for stockholder information.
The Yuma Cogeneration Associates ("YCA") 50 MW cogeneration power
plant commenced commercial operation pursuant to its power purchase
agreement with San Diego Gas & Electric ("SDG&E") at the end of
May, 1994. In June, 1994 SDG&E filed a complaint in U.S. District
CALIFORNIA ENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh data)
___________________
Liquidity and Capital Resources: (continued)
Court seeking to be released from its power purchase agreement with
YCA. In September 1994 SDG&E dismissed its case against the
Company without payment by either party. YCA, a wholly owned
subsidiary of the Company, received all outstanding amounts due
from SDG&E.<PAGE>
CALIFORNIA ENERGY COMPANY, INC.
PART II - OTHER INFORMATION
Item 1 - Legal proceedings.
See Note 5 to the 1993 Annual Consolidated Financial
Statements. See Notes to the Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994.
Item 2 - Changes in Securities.
Not applicable.
Item 3 - Defaults on Senior Securities.
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5 - Other Information.
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 11 - Calculation of earnings per share.
Exhibit 15 - Awareness letter of Independent Accountants.
(b) Reports on Form 8-K:
During the quarter ended September 30, 1994, the Company filed
the following:
CALIFORNIA ENERGY COMPANY, INC.
PART II - OTHER INFORMATION
(continued)
(i) Form 8-K dated August 15, 1994 reporting the close of
financing for the 180 MW Mahanagdong geothermal power
project located on the island of Leyte in the
Philippines. The Export-Import Bank of the U.S. ("Ex-
Im Bank") is the project term lender, with the Overseas
Private Investment Corporation ("OPIC") providing
political risk insurance on the equity investment by
the Company.
(ii) Form 8-K dated September 19, 1994 reporting that the
Company, Bonneville Power Administration ("BPA") and
Eugene Water & Electric Board ("EWEB") executed the
final power purchase agreement for a 30 MW geothermal
pilot project planned to be constructed at the Newberry
site near Bend, Oregon. BPA will purchase 20MW and
EWEB will purchase 10MW from the facility under the
terms of the 50 year purchase contracts.
(iii) Form 8-K dated September 19, 1994 reporting that the
Company had transmitted a letter to the Chairman and
the President and Chief Executive Officer of Magma
Power Company proposing to acquire Magma Power for $35
per share, consisting of $25 per share in cash and $10
in market value per share of the Company's common
stock.
(iv) Form 8-K dated September 28, 1994 reported that San
Diego Gas & Electric Company voluntarily dismissed with
prejudice a lawsuit against Yuma Cogeneration
Associates, a subsidiary of the Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CALIFORNIA ENERGY COMPANY, INC.
/s/ John G. Sylvia
Date: November 14, 1994
John G. Sylvia
Senior Vice President and
Chief Financial Officer
/s/ Gregory E. Abel
Gregory E. Abel
Vice President, Controller and
Chief Accounting Officer
EXHIBIT INDEX
Exhibit Page
No. No.
11 Calculation of Earnings Per Share 40
15 Awareness Letter of Independent Accountants 41
CALIFORNIA ENERGY COMPANY, INC. EXHIBIT 11
CALCULATION OF EARNINGS PER SHARE IN ACCORDANCE
WITH INTERPRETIVE RELEASE NO. 34-9083
(dollars in thousands, except per share amounts)
___________________
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Actual weighted average
shares outstanding for the period 32,452,314 35,460,056 33,606,006 35,411,548
Dilutive stock options and warrants
using average market prices 2,378,937 2,720,167 2,568,173 3,024,387
Total number of shares based on
shares outstanding and the
assumption that dilutive stock
options and warrants will be
exercised at average stock market
prices 34,831,251 38,180,223 36,174,179 38,435,935
Additional dilutive stock options
and warrants using ending market
price and assuming conversion of
convertible debt* 4,630,631 162,727 4,444,444 -
Total shares based on shares out-
standing and the assumption that
dilutive stock options and warrants
will be exercised at ending market
price if more dilutive 39,461,882 38,342,950 40,618,623 38,435,935
Income before extraordinary item and
change in accounting principle $ 14,413 $ 16,677 $ 31,399 $ 34,811
Extraordinary item - - (2,007) -
Cumulative effect of change in
accounting principle - - - 4,100
Net income 14,413 16,677 29,392 38,911
Less: Series C preferred stock
dividends 1,275 1,179 3,711 3,429
Net income available for common
shares $ 13,138 $ 15,498 $ 25,681 $ 35,482
Primary earnings per share before
extraordinary item and change in
accounting principle $ .38 $ .41 $ .77 $ .81
Extraordinary item per share - - (.06) -
Cumulative effect of change in
accounting principle per share - - - .11
Primary earnings per share $ .38 $ .41 $ .71 $ .92
Fully diluted earnings per share
based on SEC interpretive release
No. 34-9083** $ .36 $ .41 $ .70 $ .92
</TABLE>
*The ending market price on September 30, 1994 and 1993 was lower than the
average market price for the nine-month period ended September 30, 1994 and
1993. Accordingly, inclusion of an adjustment for stock options would be
antidilutive and, therefore, contrary to paragraph 40 of APB Opinion 15. The
repurchase of Company common stock has reduced the number of shares outstanding
and has necessitated the inclusion of the Debentures in the fully diluted
earnings per share calculation for the quarter ended September 30, 1994 and for
the nine-month period ended September 30, 1994.
**The net income available for common shares for the quarter ended September
30, 1994 and nine months ended September 30, 1994 was increased by the
interest expense associated with the convertible debt of $887 and $2,620,
respectively.
Exhibit 15
California Energy Company, Inc.
Omaha, Nebraska
We have made a review, in accordance with standards established by
the American Institute of Certified Public Accountants, of the
unaudited interim financial information of California Energy
Company, Inc. for the three and nine month periods ended September
30, 1994, as indicated in our report dated October 19, 1994;
because we did not perform an audit, we expressed no opinion on
that information.
We are aware that our report referred to above, which is included
in your Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, is incorporated by reference in Registration
Statements No. 33-41152 and No. 33-52147 on Form S-8 and
Registration Statement No. 35-51363 on Form S-3.
We also are aware that the aforementioned report, pursuant to Rule
436(c) under the Securities Act, is not considered a part of a
Registration Statement prepared or certified by an accountant or a
report prepared or certified by an accountant within the meaning of
Section 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
October 19, 1994
