As filed with the Securities and Exchange Commission on January 6, 1995
Registration No. 33-57053
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 1 to
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
CALIFORNIA ENERGY COMPANY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 4911 94-2213782
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
---------------
10831 Old Mill Road, Omaha, Nebraska 68154 (402) 330-8900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
STEVEN A. McARTHUR, ESQ.
Senior Vice President, General Counsel
and Secretary
California Energy Company, Inc.
10831 Old Mill Road
Omaha, Nebraska 68154
(402) 330-8900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copy to:
PETER J. HANLON, ESQ.
MICHAEL A. SCHWARTZ, ESQ.
Willkie Farr & Gallagher
153 East 53rd Street
New York, NY 10022-4669
(212) 821-8000
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective and
all other conditions to the merger (the "Merger") of a wholly owned subsidiary
of the Registrant with and into Magma Power Company ("Magma") pursuant to the
Merger Agreement described in the enclosed Information Statement/Prospectus
have been satisfied or waived.
If the securities being registered on this Form are to be offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Offering Registration
Securities to be Registered Registered (1) per Share Price (2) Fee (2)
- --------------------------- -------------- -------------- ------------------- -------------
<S> <C> <C> <C> <C>
Common Stock, $0.0675 par
value per share (including
preferred stock purchase
rights)(3) 17,700,000 Not applicable Not applicable $80,639.96
</TABLE>
- ---------------
(1) Represents the estimated maximum number of shares of Common
Stock, $0.0675 par value per share ("Common Stock"), of the Registrant issuable
to holders of shares of Common Stock, par value $0.10 per share, of Magma (the
"Shares") in the Merger.
(2) Estimated pursuant to Rule 457(c) and (f)(1) and (3) of the
Securities Act of 1933, as amended, and solely for purposes of calculating the
registration fee in accordance with Rule 457(f). The registration fee was
computed on the basis of (i) the market value of 11,442,915 Shares
($427,678,948.10) to be exchanged in connection with the Merger (the market
value of these Shares was calculated using the average of the high and low
prices per Share on the Nasdaq National Market on December 20, 1994) and (ii)
payment by the Registrant in the Merger of $193,823,077.50 in cash. The
resulting value of the securities to be received by the Registrant is
$233,855,870.60. Previously paid.
(3) Prior to the occurrence of certain events, the preferred stock
purchase rights will not be evidenced separately from the shares of Common
Stock.
---------------
<PAGE>
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
<PAGE>
CALIFORNIA ENERGY COMPANY, INC.
Cross-Reference Sheet Showing Locations in the Information Statement/
Prospectus of the Responses to the Items of Form S-4
(Pursuant to Item 501 of Regulation S-K)
<TABLE>
<CAPTION>
Form S-4
Item Number and Caption Location in Prospectus
<S> <C>
A. Information About the Transaction
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus Forepart of the Registration Statement;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus . . . . . . . . . . . . . . Inside Front and Outside Back Cover Pages of
Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information. . . . . . . . . Outside and Inside Front Cover Page of Prospectus;
Summary; Certain Investment Considerations; Selected
Historical and Pro Forma Financial Information
4. Terms of the Transaction . . . . . . Summary; Certain Investment Considerations; Special
Factors; The Merger Agreement
5. Pro Forma Financial Information. . . Summary; Selected Historical and Pro Forma Financial
Information
6. Material Contacts with the Company Being
Acquired . . . . . . . . . . . . . . . Summary; Certain Investment Considerations; Special
Factors
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters Not Applicable
8. Interests of Named Experts and Counsel Legal Matters; Experts
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities . . . . Not Applicable
B. Information About the Registrant
10. Information with Respect to S-3 Registrants Not Applicable
11. Incorporation of Certain Information by
Reference. . . . . . . . . . . . . . . Not Applicable
12. Information with Respect to S-2 or S-3
Registrants. . . . . . . . . . . . . . Not Applicable
13. Incorporation of Certain Information by
Reference. . . . . . . . . . . . . . . Not Applicable
14. Information with Respect to Registrants Other Than
S-3 or S-2 Registrants . . . . . . . . Business of CECI and Magma and Related Information;
Selected Historical Consolidated Financial and
Operating Data of CECI; CECI Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Market Prices of and Dividends on Capital
Stock of CECI and Related Stockholder Matters
C. Information About the Company Being Acquired
15. Information with Respect to S-3 Companies Not Applicable
16. Information with Respect to S-2 or S-3 Companies Not Applicable
17. Information with Respect to Companies Other Than
S-3 or S-2 Companies . . . . . . . . . Business of CECI and Magma and Related Information;
Selected Historical Consolidated Financial and Operating
Data of Magma; Magma Management's Discussion and Analysis
of Financial Condition and Results of Operations; Market
Prices of and Dividends on Capital Stock of Magma and
Related Stockholder Matters
D. Voting and Management Information
18. Information if Proxies, Consents or Authorizations
are to be Solicited. . . . . . . . . . Not Applicable
19. Information if Proxies, Consents or Authorizations
are not to be Solicited or in an Exchange Offer Summary; General Information; Special Factors; CECI
Management Information; Magma Management Information
</TABLE>
<PAGE>
As filed with the Securities and Exchange Commission on January 6, 1995
PRELIMINARY INFORMATION STATEMENT
MAGMA POWER COMPANY
4365 Executive Drive
Suite 900
San Diego, California 92121
Dear Fellow Stockholders:
You are cordially invited to attend the Special Meeting of Stockholders
of Magma Power Company ("Magma") to be held on February 21, 1995, at 10:00
a.m., Nebraska time, at the Red Lion Hotel, 1616 Dodge Street, in Omaha,
Nebraska. At this important meeting, Magma stockholders will consider and vote
upon a proposal to approve the Agreement and Plan of Merger, dated as of
December 5, 1994 (the "Merger Agreement"), among Magma, California Energy
Company, Inc. ("CECI") and CE Acquisition Company, Inc., a wholly owned
subsidiary of CECI ("CE Sub"), pursuant to which CE Sub will be merged with and
into Magma (the "Merger").
As you know, the Merger is the second and final step in the acquisition
of Magma by CECI pursuant to the terms of the Merger Agreement. The first step
was a tender offer (the "Offer") by CE Sub pursuant to which CE Sub acquired
12,400,000 shares of Magma common stock for $39 per share in cash (representing
approximately 51% of the issued and outstanding Magma common stock).
Upon consummation of the Merger, each share of Magma common stock will
be converted into the right to receive, at CECI's election (which election
shall be made no later than five business days prior to the Special Meeting),
either (i) an amount of cash determined such that the blended consideration
paid by CECI in the Offer and the Merger would be $38.75 per share or (ii) cash
and CECI common stock having an aggregate market value, based on an average
closing price for the CECI common stock and subject to a collar provision in
the case of CECI common stock, equal to $39 per share. If CECI elects the
latter option, the precise amount of cash and number of shares of CECI common
stock will be determined such that the consideration paid by CE Sub in both the
Offer and the Merger for each share of Magma common stock will consist, on a
blended basis, of $28.50 per share in cash and $10.50 per share in market value
of CECI common stock, based on the average closing price of CECI common stock
and subject to a collar provision. The "average closing price" means the
average closing price of CECI common stock during the 15 consecutive trading
days ending on the fifth business day prior to the effective time of the
Merger. The "collar provision" provides that if the average closing price
exceeds $18.73, the average closing price will be deemed to be $18.73, and if
the average closing price is less than $14.27, the average closing price will
be deemed to be $14.27. Goldman, Sachs & Co., Magma's financial advisor, has
rendered its opinion, dated December 5, 1994, to Magma's Board of Directors
that the consideration to be received by the holders of Magma common stock in
the Offer and the Merger, taken as a unitary transaction, is fair to the
holders of Magma common stock receiving such consideration (other than CECI and
its affiliates).
As a result of completion of the Offer and the purchase of shares of
Magma common stock pursuant thereto, CE Sub owns and has the right to vote at
the Special Meeting sufficient shares to approve the Merger Agreement without
the affirmative vote of any other stockholder, thereby assuring the approval of
the Merger Agreement.
The accompanying information statement/prospectus explains in detail
the terms of the Merger and the CECI common stock to be issued, if any.
Although you are not being asked for a proxy and are requested not to send a
proxy, please read the information statement/prospectus carefully.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE
BEST INTERESTS OF, MAGMA AND ITS STOCKHOLDERS. THE BOARD UNANIMOUSLY APPROVED
(WITH TWO DIRECTORS ABSENT) THE TERMS OF THE MERGER PURSUANT TO THE MERGER
AGREEMENT.
As soon as practicable after the effectiveness of the Merger,
we will send you instructions for surrendering Magma share certificates and a
letter of transmittal to be used for this purpose. You should not submit your
share certificates for exchange until you have received such instructions and
the letter of transmittal.
Sincerely,
Chairman of the Board
<PAGE>
PRELIMINARY INFORMATION STATEMENT
MAGMA POWER COMPANY
4365 Executive Drive
Suite 900
San Diego, California 92121
----------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
---------------------------
WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.
---------------------------
A Special Meeting of Stockholders of Magma Power Company, a Nevada
corporation ("Magma"), will be held on February 21, 1995, at 10:00 a.m.,
Nebraska time, at the Red Lion Hotel, 1616 Dodge Street, in Omaha, Nebraska,
for the following purposes:
1. To consider and vote upon a proposal to approve and adopt
an Agreement and Plan of Merger, dated as of December 5, 1994 (the "Merger
Agreement"), among Magma, California Energy Company, Inc. ("CECI") and CE
Acquisition Corporation ("CE Sub"), a wholly owned subsidiary of CECI, a copy
of which is attached as Annex A to the Information Statement/Prospectus
accompanying this Notice, pursuant to which, among other things, (a) CE Sub
will be merged with and into Magma, (b) each outstanding share of Magma common
stock, par value $0.10 per share ("Shares"), will be converted into the right
to receive, at CECI's election (which election shall be made no later than five
business days prior to the Special Meeting), either (i) the All Cash Component
Amount (as defined below), net in cash, without interest thereon or (ii) both
(A) the Mixed Cash Component Amount (as defined below), net in cash, without
interest thereon, and (B) the number of fully paid and nonassessable shares of
common stock, par value $0.0675 per share, of CECI ("CECI Common Stock") equal
to the quotient of (I) $39 less (II) the Mixed Cash Component Amount divided by
the Average Closing Price (as defined below). The "Mixed Cash Component
Amount" shall mean an amount equal to the quotient of (A) (x) $28.50 multiplied
by the number of Shares outstanding at the Effective Time (as defined in the
Merger Agreement) less (y) $39 multiplied by the number of Shares owned by CECI
and any of its affiliates immediately prior to the Effective Time, divided by
(B) the number of Shares outstanding at the Effective Time (other than Shares
owned by CECI and any of its affiliates). The "All Cash Component Amount"
shall mean an amount equal to the quotient of (A) (x) $38.75 multiplied by the
number of Shares outstanding at the Effective Time less (y) $39 multiplied by
the number of Shares owned by CECI and any of its affiliates immediately prior
to the Effective Time, divided by (B) the number of Shares outstanding at the
Effective Time (other than Shares owned by CECI and any of its affiliates).
The "Average Closing Price" shall mean the average closing price of CECI Common
Stock on the New York Stock Exchange during the 15 consecutive trading days
ending on the fifth business day prior to the Effective Time; provided,
however, that if such average closing price exceeds $18.73, the Average Closing
Price shall be deemed to be $18.73, and if such average closing price is less
than $14.27, the Average Closing Price shall be deemed to be $14.27.
2. To transact such other business as may properly come before
the meeting or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on January __,
1995 as the record date for the determination of the holders of Magma's common
stock entitled to notice of, and to vote at, the meeting. Your attention is
directed to the accompanying Information Statement/Prospectus.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING.
By Order of the Board of Directors
Secretary
Dated: January __, 1995
<PAGE>
SUBJECT TO COMPLETION, JANUARY 6, 1995
PRELIMINARY INFORMATION STATEMENT
INFORMATION STATEMENT/PROSPECTUS
------------------
PROSPECTUS
for
CALIFORNIA ENERGY COMPANY, INC.
-----------------
INFORMATION STATEMENT
for
MAGMA POWER COMPANY
Special Meeting of Stockholders
Meeting To Be Held February 21, 1995
------------------
WE ARE NOT ASKING FOR A PROXY AND YOU ARE
REQUESTED NOT TO SEND US A PROXY
------------------
This Information Statement/Prospectus is furnished to holders of record
on January __, 1995 (the "Magma Record Date") of Magma common stock, par value
$0.10 per share ("Share"), in connection with the Special Meeting of
Stockholders of Magma to be held on February 21, 1995, and at any and all
adjournments or postponements thereof (the "Magma Special Meeting"). At the
Magma Special Meeting, the stockholders of Magma will consider and vote upon
the approval and adoption of the Agreement and Plan of Merger, dated as of
December 5, 1994 (the "Merger Agreement"), among Magma, California Energy
Company, Inc., a Delaware corporation ("CECI"), and CE Acquisition Company,
Inc., a wholly owned subsidiary of CECI and a Delaware corporation ("CE Sub").
If the Merger Agreement is approved and the Merger is consummated, (i) each
outstanding Share will be converted into the right to receive, at CECI's
election (which election shall be made no later than five business days prior
to the Magma Special Meeting), either (i) the All Cash Component Amount (as
defined below), net in cash, without interest thereon or (ii) both (A) the
Mixed Cash Component Amount (as defined below), net in cash, without interest
thereon, and (B) the number of fully paid and nonassessable shares of common
stock, par value $0.0675 per share, of CECI ("CECI Common Stock") equal to the
quotient of (I) $39 less (II) the Mixed Cash Component Amount divided by the
Average Closing Price (as defined below) (the All Cash Component Amount or
(ii)(A) and (ii)(B), collectively, as applicable, being the "Merger
Consideration"). The "Mixed Cash Component Amount" shall mean an amount equal
to the quotient of (A) (x) $28.50 multiplied by the number of Shares
outstanding at the Effective Time (as defined below) less (y) $39 multiplied by
the number of Shares owned by CECI and any of its affiliates immediately prior
to the Effective Time, divided by (B) the number of Shares outstanding at the
Effective Time (other than Shares owned by CECI and any of its affiliates). The
"All Cash Component Amount" shall mean an amount equal to the quotient of (A)
(x) $38.75 multiplied by the number of Shares outstanding at the Effective Time
less (y) $39 multiplied by the number of Shares owned by CECI and any of its
affiliates immediately prior to the Effective Time, divided by (B) the number
of Shares outstanding at the Effective Time (other than Shares owned by CECI
and any of its affiliates). The "Average Closing Price" shall mean the average
closing price of CECI Common Stock on the New York Stock Exchange ("NYSE")
during the 15 consecutive trading days ending on the fifth business day prior
to the Effective Time; provided, however, that, for purposes of the
calculation, if such average closing price exceeds $18.73, the Average Closing
Price shall be deemed to be $18.73, and if such average closing price is less
than $14.27, the Average Closing Price shall be deemed to be $14.27 (such
proviso being referred to herein as the "Collar Provision").
The foregoing formula for determining the consideration to be paid in
the Merger was established so that (i) if CECI elects to pay the Merger
Consideration with a combination of cash and CECI Common Stock, the
consideration paid by CECI in the tender offer (the "Offer") by CE Sub pursuant
to which CE Sub acquired 12,400,000 Shares for $39 per Share in cash
(representing approximately 51% of the issued and outstanding Shares) and the
Merger will consist, on a blended basis, of $28.50 per Share in cash and $10.50
per Share in market value of CECI Common Stock, based on the Average Closing
Price and subject to the Collar Provision, and (ii) if CECI elects to pay the
Merger Consideration solely in cash, the blended consideration paid by CECI in
the Offer and the Merger would be $38.75 per Share. The consideration paid in
the Offer, including the terms of the Collar Provision, was negotiated on an
arms' length basis between CECI and Magma. The purpose of the Collar Provision
is to limit the number of shares of CECI Common Stock required to be issued in
the Merger if the Average Closing Price is less than $14.27 and to establish a
minimum number of shares of CECI Common Stock required to be issued in the
Merger if the Average Closing Price exceeds $18.73.
This Information Statement/Prospectus constitutes the Prospectus of
CECI with respect to up to 17,700,000 shares of CECI Common Stock to be issued
in connection with the Merger, if CECI elects to pay the Merger Consideration
with a combination of cash and CECI Common Stock. On January 6, 1995, CECI
filed with the Securities and Exchange Commission (the "Commission") a
Registration Statement on Form S-3 pursuant to the Securities Act of 1933 (the
"Securities Act") for the purpose of registering shares of CECI Common Stock
that may be issued in an underwritten public offering in order to enable CECI
to pay the Merger Consideration solely in cash if it elects to do so. On
January __, 1995, the last reported sales price of CECI Common Stock on the
NYSE was $_____.
Holders of Shares outstanding at the close of business on the Magma
Record Date are entitled to notice of, and to vote at, the Magma Special
Meeting, but Shares can be voted at the meeting only if the record holder is
present or represented by proxy.
<PAGE>
Approval and adoption of the Merger Agreement at the Magma Special
Meeting requires the affirmative vote of the holders of a majority of the
outstanding Shares entitled to vote thereon. For purposes of determining
whether the Merger Agreement has received the required number of votes for
approval, abstentions will be included in the vote totals with the result that
an abstention has the same effect as a negative vote. As a result of
completion of the Offer pursuant to which CE Sub acquired 12,400,000 Shares for
$39.00 per Share in cash (representing approximately 51% of the issued and
outstanding Shares), CE Sub owns a sufficient number of Shares to approve the
Merger without the affirmative vote of any other stockholder. Accordingly,
approval and adoption of the Merger Agreement at the Special Meeting is
assured.
STOCKHOLDERS OF MAGMA ARE NOT BEING ASKED FOR A PROXY AND ARE REQUESTED
NOT TO SEND MAGMA A PROXY.
All information contained herein with respect to Magma has been
provided by Magma. All information contained herein with respect to CECI and
CE Sub has been provided by CECI.
_________________________________
SEE "CERTAIN INVESTMENT CONSIDERATIONS" AND "SPECIAL FACTORS" FOR A
DISCUSSION OF CERTAIN SIGNIFICANT FACTORS RELATING TO THE MERGER.
_________________________________
No person has been authorized to give any information or to make any
representation not contained in, or incorporated by reference in, this
Information Statement/Prospectus, and, if given or made, such information or
representation should not be relied upon as having been authorized. Under the
rules and regulations of the Commission pursuant to the Securities Act, the
proposal to approve the Merger Agreement constitutes an offer of CECI Common
Stock to the holders of Shares. The delivery of this Information
Statement/Prospectus does not constitute an offer to sell, or the solicitation
of an offer to purchase, the securities offered hereby in any jurisdiction
where such offer would be unlawful. Neither the delivery of this Information
Statement/Prospectus nor the issuance of any securities hereunder shall under
any circumstances create any implication that there has been no change in the
information regarding Magma or CECI set forth herein since the date hereof or
incorporated by reference since the date hereof.
This Information Statement/Prospectus is first being mailed to the
stockholders of Magma on or about January __, 1995.
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS PASSED UPON THE FAIRNESS OR MERITS OF THIS
TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN
THIS INFORMATION STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
The date of this Information Statement/Prospectus is January , 1995.
AVAILABLE INFORMATION
CECI has filed with the Commission a Registration Statement on Form S-4
(the "Registration Statement"), of which this Information Statement/Prospectus
is a part, under the Securities Act, with respect to certain shares of CECI
Common Stock. CECI and Magma have filed with the Commission a Rule 13e-3
Transaction Statement (including any amendments thereto, the "Schedule 13E-3")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
with respect to the Merger. As permitted by the rules and regulations of the
Commission, this Information Statement/Prospectus omits certain information
contained in the Registration Statement and the Schedule 13E-3. For such
information reference is made to the Registration Statement and the exhibits
thereto and the Schedule 13E-3 and the exhibits thereto. Each summary in this
Information Statement/Prospectus of information included in the Registration
Statement and the Schedule 13E-3 or any exhibits thereto is qualified in its
entirety by reference to such information or exhibit. Magma and CECI are
subject to the informational requirements of the Exchange Act, and in
accordance therewith each files reports, proxy statements and other information
with the Commission. The Registration Statement and the Schedule 13E-3, as
well as reports, proxy statements and other information filed by Magma and CECI
with the Commission pursuant to the informational requirements of the Exchange
Act, may be inspected and copied at the public reference facilities maintained
by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the following Regional Offices of the Commission: Midwest Regional
Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and New York Regional Office, 14th Floor, Seven World Trade Center, New
York, New York 10048. Copies of such materials can be obtained at prescribed
rates from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. In addition, material filed by
CECI can be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005, at the offices of the Pacific Stock Exchange
at 301 Pine Street, San Francisco, California 94104 and 233 South Beaudry
Avenue, Los Angeles, California 90012 and at the offices of the London Stock
Exchange at International Stock Exchange, Throgmorton Street, EC2N 1HP, London,
England, on which the shares of CECI Common Stock are listed. Material filed
by Magma can be inspected at the offices of the National Association of
Securities Dealers, Inc. 1735 K Street, N.W., Washington, D.C. 20006.
<PAGE>
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 4
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Parties to the Merger. . . . . . . . . . . . . . . . . . . 9
Time, Place and Date of Magma Special Meeting; Record Date 10
Terms of Merger; Merger Consideration. . . . . . . . . . . 10
Certain Investment Considerations. . . . . . . . . . . . . 11
Recommendation of the Board of Directors of Magma. . . . . 12
Opinions of Financial Advisors . . . . . . . . . . . . . . 12
Required Vote. . . . . . . . . . . . . . . . . . . . . . . 12
Interests of Certain Persons in the Merger . . . . . . . . 12
Stock Exchange Listing . . . . . . . . . . . . . . . . . . 12
Regulatory Approvals . . . . . . . . . . . . . . . . . . . 13
Accounting Treatment . . . . . . . . . . . . . . . . . . . 13
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . 13
Market Prices of CECI Common Stock . . . . . . . . . . . . 13
Market Prices of Magma Common Stock. . . . . . . . . . . . 14
CAPITALIZATION OF CECI . . . . . . . . . . . . . . . . . . . . . . 15
Merger Consideration Consisting of a Combination of
Cash and CECI Common Stock . . . . . . . . . . . . . . . 15
Merger Consideration Consisting of All Cash. . . . . . . . 17
COMPARISON OF CERTAIN UNAUDITED DATA . . . . . . . . . . . . . . . 18
Merger Consideration Consisting of a Combination of
Cash and CECI Common Stock. . . . . . . . . . . . . . . . 18
Merger Consideration Consisting of All Cash. . . . . . . . 20
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
OF CECI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
OF MAGMA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
CERTAIN INVESTMENT CONSIDERATIONS. . . . . . . . . . . . . . . . . 25
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 29
Purpose of Special Meetings. . . . . . . . . . . . . . . . 29
Record Date; Voting Rights . . . . . . . . . . . . . . . . 29
Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Required Vote. . . . . . . . . . . . . . . . . . . . . . . 30
SPECIAL FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . 30
Background of the Merger . . . . . . . . . . . . . . . . . 30
Purpose and Structure of the Merger. . . . . . . . . . . . 33
Recommendation of the Board of Directors of Magma;
Reasons for the Merger; Fairness of the Offer and
the Merger . . . . . . . . . . . . . . . . . . . . . . . 33
Opinion of Magma's Financial Advisor . . . . . . . . . . . 35
Opinion of CECI's Financial Advisor. . . . . . . . . . . . 38
Financing of Merger Consideration. . . . . . . . . . . . . 40
Certain Effects of the Merger: Operations After the Merger 42
Federal Income Tax Consequences. . . . . . . . . . . . . . 43
Federal Securities Law Consequences. . . . . . . . . . . . 44
Accounting Treatment . . . . . . . . . . . . . . . . . . . 44
Stock Exchange Listing . . . . . . . . . . . . . . . . . . 44
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . 44
Expenses of the Transaction. . . . . . . . . . . . . . . . 45
THE MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . 45
General. . . . . . . . . . . . . . . . . . . . . . . . . . 45
The Merger . . . . . . . . . . . . . . . . . . . . . . . . 45
Effective Time . . . . . . . . . . . . . . . . . . . . . . 46
Terms of the Merger. . . . . . . . . . . . . . . . . . . . 46
Acquisition Designees. . . . . . . . . . . . . . . . . . . 47
Surrender and Payment. . . . . . . . . . . . . . . . . . . 48
Fractional Shares. . . . . . . . . . . . . . . . . . . . . 48
Conditions to Consummation of the Merger . . . . . . . . . 48
Representations and Warranties . . . . . . . . . . . . . . 49
Conduct of Business by Magma and CECI Pending the Merger . 49
Indemnification. . . . . . . . . . . . . . . . . . . . . . 51
Termination; Fees and Expenses . . . . . . . . . . . . . . 51
Amendment. . . . . . . . . . . . . . . . . . . . . . . . . 52
MARKET PRICES OF AND DIVIDENDS ON CAPITAL STOCK OF CECI. . . . . . 53
MARKET PRICES OF AND DIVIDENDS ON CAPITAL STOCK OF MAGMA . . . . . 55
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION. . . . . . 56
Selected Historical Consolidated Financial and Operating
Data of CECI. . . . . . . . . . . . . . . . . . . . . . . 56
Selected Historical Consolidated Financial and
Operating Data of Magma . . . . . . . . . . . . . . . . . 58
Pro Forma Unaudited Condensed Combined Financial Data. . . 60
Pro Forma Unaudited Condensed Combined Balance Sheet
(Merger Consideration Consisting of a Combination of Cash
and CECI Common Stock). . . . . . . . . . . . . . . . . . 61
Pro Forma Unaudited Condensed Combined Statements of
Earnings (Merger Consideration Consisting of a
Combination of Cash and CECI Common Stock). . . . . . . . 62
Notes To Pro Forma Unaudited Condensed Combined
Financial Data (Merger Consideration Consisting of a
<PAGE>
Combination of Cash and CECI Common Stock) . . . . . . . 63
Pro Forma Unaudited Condensed Combined Balance Sheet
(Merger Consideration Consisting of All Cash) . . . . . . 66
Pro Forma Unaudited Condensed Combined Statements of
Earnings (Merger Consideration Consisting of All Cash) . 67
Notes To Pro Forma Unaudited Condensed Combined Financial
Data (Merger Consideration Consisting of All Cash) . . .. 68
BUSINESS OF CECI AND MAGMA AND RELATED INFORMATION . . . . . . . . 70
General. . . . . . . . . . . . . . . . . . . . . . . . . . 70
International Projects . . . . . . . . . . . . . . . . . . 75
Domestic Projects. . . . . . . . . . . . . . . . . . . . . 76
International Projects -- Discussion . . . . . . . . . . . 77
Domestic Projects -- Discussion. . . . . . . . . . . . . . 83
Regulatory and Environmental Matters . . . . . . . . . . . 89
Employees. . . . . . . . . . . . . . . . . . . . . . . . . 91
Properties . . . . . . . . . . . . . . . . . . . . . . . . 91
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 92
CECI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . 93
General. . . . . . . . . . . . . . . . . . . . . . . . . . 93
Results of Operations Through September 30, 1994 . . . . . 93
Results of Operations for Three Years Ended December 31,
1993, 1992, and 1991. . . . . . . . . . . . . . . . . . . 96
Liquidity and Capital Resources Through September 30, 1994 . 100
Liquidity and Capital Resources Through December 31, 1993. . 102
Adoption of Financial Accounting Standard No. 109. . . . . . 105
MAGMA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . 106
Results of Operations: Third Quarter 1994 Compared to Third
Quarter 1993. . . . . . . . . . . . . . . . . . . . . . . . 106
Nine Months Ended September 30, 1994 Compared to Nine
Months Ended September 30, 1993 . . . . . . . . . . . . . . 107
Results of Operations: 1993 Compared to 1992 . . . . . . . . 109
Results of Operations: 1992 Compared to 1991. . . . . . . . 112
Liquidity and Capital Resources. . . . . . . . . . . . . . . 114
Seasonality. . . . . . . . . . . . . . . . . . . . . . . . . 116
Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . 116
Future Rates . . . . . . . . . . . . . . . . . . . . . . . . 116
CECI MANAGEMENT INFORMATION. . . . . . . . . . . . . . . . . . . . . 117
Certain Biographical Information Regarding Officers and
Directors of CECI . . . . . . . . . . . . . . . . . . . . . 117
The CECI Board And Its Committees. . . . . . . . . . . . . . 120
CECI Compensation Committee Report . . . . . . . . . . . . . 121
Summary Compensation Table . . . . . . . . . . . . . . . . . 123
Option Grants in Last Fiscal Year. . . . . . . . . . . . . . 124
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values. . . . . . . . . . . . . 124
Description of Amended and Restated 1986 Stock Option Plan . 125
1994 Stock Employee Stock Purchase Plan. . . . . . . . . . . 126
Termination of Employment Arrangements . . . . . . . . . . . 127
Certain Transactions and Relationships . . . . . . . . . . . 127
MAGMA MANAGEMENT INFORMATION . . . . . . . . . . . . . . . . . . . . 129
Certain Biographical Information Regarding Officers and
Directors of Magma . . . . . . . . . . . . . . . . . . . . 129
The Magma Board Committees . . . . . . . . . . . . . . . . . 130
Compensation of Directors. . . . . . . . . . . . . . . . . . 131
Family Relationships . . . . . . . . . . . . . . . . . . . . 132
Summary Compensation Table . . . . . . . . . . . . . . . . . 133
Option Grant Table . . . . . . . . . . . . . . . . . . . . . 135
Magma Benefit Plans. . . . . . . . . . . . . . . . . . . . . 136
Employment Contracts and Termination of Employment and
Change-in-Control Arrangements. . . . . . . . . . . . . . . 137
Magma Compensation Committee Report on Executive Compensation 138
Compensation Committee Interlocks and Insider Participation. 139
Certain Relationships and Related Transactions . . . . . . . 140
DESCRIPTION OF CECI CAPITAL STOCK. . . . . . . . . . . . . . . . . . 142
CECI Common Stock. . . . . . . . . . . . . . . . . . . . . . 142
CECI Preferred Stock . . . . . . . . . . . . . . . . . . . . 143
DESCRIPTION OF MAGMA CAPITAL STOCK . . . . . . . . . . . . . . . . . 143
The Shares . . . . . . . . . . . . . . . . . . . . . . . . . 143
Magma Preferred Stock. . . . . . . . . . . . . . . . . . . . 143
COMPARISON OF STOCKHOLDER RIGHTS . . . . . . . . . . . . . . . . . . 144
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
CECI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
MAGMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
STOCKHOLDER PROPOSALS. . . . . . . . . . . . . . . . . . . . . . . . 154
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . F-1
<PAGE>
LIST OF ANNEXES
Annex A Agreement and Plan of Merger
Annex B Opinion of Goldman, Sachs & Co.
Annex C Opinion of Gleacher & Co. Inc.
SUMMARY
The following is a brief summary of the more detailed information
contained in this Information Statement/Prospectus ("Information Statement")
with respect to the Merger Agreement attached hereto as Annex A and the
transactions contemplated thereby. This Summary is not intended to be complete
and is qualified in its entirety by the more detailed information contained
elsewhere in this Information Statement, the Annexes hereto and other documents
referred to in this Information Statement. Terms used but not defined in this
Summary have the meanings ascribed to them elsewhere in this Information
Statement. Cross references in this Summary are to the captions of sections of
this Information Statement.
Stockholders of Magma should read carefully this Information Statement
and the Annexes hereto in their entirety.
Parties to the Merger
CECI and CE Sub. CECI, together with its subsidiaries, is primarily
engaged in the exploration for and development of geothermal resources and the
development, ownership and operation of environmentally responsible independent
power production facilities worldwide utilizing geothermal resources or other
energy sources, such as hydroelectric, natural gas, oil and coal. CECI was an
early participant in the domestic independent power market and is now one of
the largest geothermal power producers in the United States. CECI is also
actively pursuing opportunities in the international independent power market.
For the year ended December 31, 1993 and the nine months ended September 30,
1994, CECI had revenues of $149.3 million and $139.2 million, respectively, and
net income of $47.2 million and $29.4 million, respectively. As of September
30, 1994, CECI had cash and short-term investments of $316.3 million.
Kiewit Energy Company ("Kiewit Energy"), a wholly owned subsidiary of
Peter Kiewit Sons', Inc. ("PKS"), is an approximate 43% stockholder (on a fully
diluted basis) in CECI. PKS, a Delaware corporation, is a large employee-owned
company which had approximately $2.2 billion in revenues in 1993 from its
interests in construction, mining, energy and telecommunications. PKS is one
of the largest construction companies in North America and has been in the
construction business since 1884. PKS is a joint venture participant in a
number of CECI's international private power projects.
The principal executive offices of CECI and CE Sub are located at 10831
Old Mill Road, Omaha, Nebraska 68154 and their telephone number is (402) 330-
8900. CE Sub is a wholly owned subsidiary of CECI and has not conducted any
business except in connection with the Offer. CECI and CE Sub were
incorporated in 1971 and 1994, respectively, under the laws of the State of
Delaware. The principal executive offices of PKS are located at 1000 Kiewit
Plaza, Omaha, Nebraska 68131, and its telephone number is (402) 342-2052. PKS
was incorporated in 1941 under the laws of the State of Delaware.
Magma. Magma is principally engaged in the generation of electricity
from geothermal resources, and in the acquisition of, exploration for and
development of geothermal resources. For the year ended December 31, 1993 and
the nine months ended September 30, 1994, Magma had revenues of $167.1 million
and $146.1 million, respectively, and net income of $52.1 million and $46.8
million, respectively.
Magma was incorporated in 1981 under the laws of the State of Nevada.
The principal executive office of Magma is located at 4365 Executive Drive,
Suite 900, San Diego, California 92121, and its telephone number is (619) 622-
7800.
Time, Place and Date of Magma Special Meeting; Record Date
The Magma Special Meeting will be held at 10:00 a.m., Nebraska time, on
February 21, 1995 at the Red Lion Hotel, 1616 Dodge Street, in Omaha, Nebraska.
Only holders of Shares of record at the close of business on January __, 1995,
the Magma Record Date, are entitled to vote at the Magma Special Meeting or any
adjournment or postponement thereof.
Terms of Merger; Merger Consideration
The following description of the Merger Agreement does not purport to
be complete and is qualified in its entirety by reference to the Merger
Agreement, a copy of which is attached hereto as Annex A and incorporated
herein by reference. Stockholders of Magma are urged to read the Merger
Agreement in its entirety.
General. CECI, CE Sub and Magma have entered into the Merger
Agreement, providing for, among other things, the Offer and the Merger.
Pursuant to the Offer, on January 10, 1995, CE Sub purchased 12,400,000 Shares
at a price of $39 per Share in cash. Pursuant to the Merger Agreement, CE Sub
and Magma will, as soon as practicable following consummation of the Offer,
consummate the Merger.
<PAGE>
Merger Consideration. Upon the effectiveness of the Merger, each
outstanding Share (other than Shares held by CECI, CE Sub or any other direct
or indirect subsidiary of CECI and Shares held in the treasury of Magma) will
be converted into the right to receive, at CECI's election (which election
shall be made no later than five business days prior to the Magma Special
Meeting), either (i) the All Cash Component Amount, net in cash, without
interest thereon or (ii) both (A) the Mixed Cash Component Amount, net in cash,
without interest thereon, and (B) the number of fully paid and nonassessable
shares of CECI Common Stock equal to the quotient of (I) $39 less (II) the
Mixed Cash Component Amount divided by the Average Closing Price (the All Cash
Component Amount or (ii)(A) and (ii)(B), collectively, as applicable, being the
"Merger Consideration").
The foregoing formula for determining the consideration to be paid in
the Merger was established so that (i) if CECI elects to pay the Merger
Consideration with a combination of cash and CECI Common Stock, the
consideration paid by CECI in the Offer and the Merger will consist, on a
blended basis, of $28.50 per Share in cash and $10.50 per Share in market value
of CECI Common Stock, based on the Average Closing Price and subject to the
Collar Provision, and (ii) if CECI elects to pay the Merger Consideration
solely in cash, the blended consideration paid by CECI in the Offer and the
Merger would be $38.75 per Share. The consideration paid in the Offer,
including the terms of the Collar Provision, was negotiated on an arms' length
basis between CECI and Magma. The purpose of the Collar Provision is to limit
the number of shares of CECI Common Stock required to be issued in the Merger
if the Average Closing Price is less than $14.27 and to establish a minimum
number of shares of CECI Common Stock required to be issued in the Merger if
the Average Closing Price exceeds $18.73.
If CECI elects to pay the Merger Consideration with a combination of
cash and CECI Common Stock, CECI estimates that approximately $710,900,000 will
be required to effectuate the Merger, to refinance bank borrowings incurred in
connection with the Offer and to pay related fees and expenses. If CECI elects
to pay the Merger Consideration solely in cash, approximately $957,400,000 will
be required to complete the Merger. Approximately one-half of whichever amount
is required will be provided under secured bank credit facilities (the "Merger
Facilities") with Credit Suisse pursuant to which Credit Suisse will provide,
on specified terms and subject to customary conditions, up to $500,000,000 in
secured bank financing. Such funds, together with a capital contribution by
CECI from CECI's general corporate funds and, if CECI elects to pay the Merger
Consideration solely in cash, the net proceeds of a public offering of CECI
Common Stock will be sufficient to pay the Merger Consideration, to refinance
bank borrowings incurred in connection with the Offer and to pay related fees
and expenses.
Termination. The Merger Agreement provides that it may be terminated
before the Effective Time in the following circumstances: (a) by mutual consent
of the Board of Directors of CECI (the "CECI Board") and the Board of Directors
of Magma (the "Magma Board"); or (b) by Magma or CECI if the Effective Time
shall not have occurred on or prior to September 30, 1995; or (c) by either
CECI or Magma if a court of competent jurisdiction or governmental, regulatory
or administrative agency or commission shall have issued an order, decree or
ruling or taken any other action (which order, decree or ruling the parties
hereto shall use their best efforts to lift), in each case permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated
by the Merger Agreement and such order, decree, ruling or other action shall
have become final and nonappealable; or (d) by CECI if (i) the Magma Board
withdraws, modifies or changes its recommendation of the Merger Agreement or
any of the transactions contemplated thereby or shall have resolved to do any
of the foregoing or (ii) the Magma Board recommends to the holders of Shares
any proposal with respect to a merger, consolidation, share exchange or similar
transaction involving Magma or any of its subsidiaries, other than the
transactions contemplated by the Merger Agreement; or (e) by CECI if, without
Magma's consent, any person has acquired beneficial ownership or the right to
acquire beneficial ownership of or any "group" (as defined under Section 13(d)
of the Exchange Act and the rules and regulations promulgated thereunder) has
been formed which beneficially owns, or has the right to acquire beneficial
ownership of, more than 10% of the Shares; or (f) by Magma or CECI if (i) a
corporation, partnership, person or other entity or group shall have made a
bona fide offer that the Magma Board determines in its good faith judgment and
in the exercise of its fiduciary duties, after consultation with and based upon
the advice of its financial and legal advisors, is more favorable to Magma's
stockholders than the Offer and the Merger or any person (including, without
limitation, Magma or any affiliate thereof), other than CECI or any affiliate
of CECI, shall have become the beneficial owner of more than 50% of the then
outstanding Shares; or (g) by either CECI or Magma if the other party shall
have breached the Merger Agreement in any material respect and such breach
continues for a period of ten days after the receipt of notice of the breach
from the nonbreaching party.
Termination Fee for CECI. The Merger Agreement provides that if it is
terminated pursuant to clauses (d) or (f) or terminated by CECI pursuant to
clause (g) of the preceding paragraph, Magma will be required to pay CECI a
termination fee of $8,000,000 plus CECI's actual documented out-of-pocket
expenses incurred since September 13, 1994 in connection with the Merger
Agreement and the transactions contemplated thereby, including, without
limitation, legal and professional fees and expenses.
Certain Investment Considerations
Holders of Shares, in reaching a decision regarding the proposal to
approve and adopt the Merger Agreement (which contains an option on the part of
CECI to pay a portion of the Merger Consideration in shares of CECI Common
Stock), should consider carefully certain factors set forth herein under the
heading "Certain Investment Considerations." Factors to be considered relating
<PAGE>
to CECI and Magma include the following: (i) the potential for fluctuation of
value of the Merger Consideration; (ii) development uncertainty; (iii)
development uncertainty outside the United States; (iv) exploration,
development and operation uncertainties of geothermal energy resources; (v)
competition; (vi) present dependence on a large customer; impact of avoided
cost pricing; contract risks; (vii) leverage; (viii) benefits of the Magma
Acquisition; (ix) impact of environmental and other regulations; (x) shares of
CECI Common Stock eligible for future sale; and (xi) interests of certain
persons in the Merger.
Recommendation of the Board of Directors of Magma
On December 5, 1994, the Magma Board unanimously approved (with two
directors absent) the Merger Agreement and the transactions contemplated
thereby and determined that each of the Offer and the Merger is fair to, and in
the best interests of, the stockholders of Magma. The Magma Board had also
recommended that all holders of Shares accept the Offer and tender their Shares
pursuant to the Offer. See "SPECIAL FACTORS -- Recommendation of the Board of
Directors of Magma; Reasons for the Merger; Fairness of the Offer and the
Merger."
Opinions of Financial Advisors
On December 5, 1994, Goldman Sachs delivered its oral opinion (which
was subsequently confirmed in writing) to the Magma Board that, as of December
5, 1994, the consideration to be received by the holders of the Shares in the
Offer and the Merger, taken as a unitary transaction, was fair to the holders
of Shares receiving such Consideration (other than CECI and its affiliates). A
copy of the written opinion of Goldman Sachs, dated December 9, 1994, which
sets forth a description of the assumptions made, matters considered and limits
of its review, is attached to this Information Statement as Annex B. See
"SPECIAL FACTORS -- Opinion of Magma's Financial Adviser."
On December 6, 1994, Gleacher & Co. Inc. ("Gleacher") delivered its
written opinion to the CECI Board that the consideration to be paid by CECI
pursuant to the Offer and the Merger is fair to CECI from a financial point of
view. A copy of the written opinion of Gleacher, dated December 6, 1994, which
sets forth a description of the assumptions made, matters considered and limits
of its review, is attached to this Information Statement as Annex C. See
"SPECIAL FACTORS -- Opinion of CECI's Financial Adviser."
Required Vote
An affirmative vote approving and adopting the Merger Agreement at the
Magma Special Meeting by the holders of a majority of the outstanding Shares
entitled to vote thereon is required to consummate the Merger. As a result of
the completion of the Offer pursuant to which CE Sub acquired 12,400,000 Shares
for $39.00 per Share in cash (representing approximately 51% of the issued and
outstanding Shares), CE Sub owns a sufficient number of Shares to approve the
Merger without the affirmative vote of any other stockholder. Accordingly,
approval and adoption of the Merger Agreement at the Magma Special Meeting is
assured.
Interests of Certain Persons in the Merger
In considering the recommendation of the Magma Board with respect to
the Offer, stockholders should be aware that certain members of Magma's
management and the Magma Board have certain interests in the Merger that are in
addition to the interests of Magma stockholders generally. See "CERTAIN
INVESTMENT CONSIDERATIONS."
Stock Exchange Listing
It is a condition to the Merger that the shares of CECI Common Stock to
be issued pursuant to the Merger be authorized for listing on the NYSE.
Application will be made to list the CECI Common Stock to be issued pursuant to
the Merger on such exchange.
Regulatory Approvals
CECI, CE Sub and Magma know of no federal or state regulatory
requirements that must be complied with or approvals that must be obtained in
order to consummate the Merger, other than the filing of the Certificate of
Merger or the Merger Agreement with the Secretary of State of Nevada and the
Secretary of State of Delaware.
Accounting Treatment
The Merger will be accounted for under the purchase method of
accounting.
Dissenters' Rights
Holders of Shares do not have the right to dissent from the Merger.
See "SPECIAL FACTORS -- Dissenters' Rights."
Certain Federal Income Tax Consequences
The conversion of Shares into the Merger Consideration will be a
taxable transaction for federal income tax purposes and may also be taxable
under applicable state, local and other tax laws. For federal income tax
purposes, a holder of Shares will generally recognize gain or loss upon the
Merger in an amount equal to the difference between the fair market value of
the Merger Consideration and the holder's adjusted tax basis in such Shares.
See "SPECIAL FACTORS--Federal Income Tax Consequences."
<PAGE>
Market Prices of CECI Common Stock
CECI Common Stock is listed on the NYSE under the symbol "CE." CECI
Common Stock is also listed on the Pacific Stock Exchange ("PSE") and the
London Stock Exchange ("LSE"). The following table sets forth the quarterly
high and low last reported sales price of the CECI Common Stock, as reported on
the NYSE Composite Tape, based on published financial sources, for the fiscal
quarters indicated.
**
High Low
Fiscal Year Ended December 31, 1993:
First Quarter $21.50 $16.50
Second Quarter 20.13 17.25
Third Quarter 18.38 16.00
Fourth Quarter 20.13 18.13
Fiscal Year Ended December 31, 1994:
First Quarter $19.25 $17.13
Second Quarter 18.13 16.00
Third Quarter 17.75 16.00
Fourth Quarter 17.13 15.25
Fiscal Year Ending December 31, 1995:
First Quarter (through January 5) $16.25 $15.38
**
On September 19, 1994, the day of CECI's issuance of its press release
announcing the transmission of a letter to Magma containing a proposal to
acquire Magma in a transaction in which stockholders would receive cash and
shares of CECI Common Stock having a combined cash and market value of $35 per
share, the last reported sale price for CECI Common Stock was $16.875. On
December 2, 1994, the last full trading day prior to the announcement that the
Merger Agreement had been executed, the last reported sale price for CECI
Common Stock was $16.50. On January 5, 1995, the last full trading day for
which quotations were available at the time of printing of this Information
Statement, the last reported sale price for CECI Common Stock was $16.13.
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT QUOTATIONS FOR THE CECI COMMON STOCK.
Market Prices of Magma Common Stock
The Shares are quoted on the Nasdaq National Market ("NNM") under the
symbol "MGMA." The following table sets forth the quarterly high and low last
reported sales price of Shares as reported by the NNM, based on published
financial sources, for the fiscal quarters indicated.
**
High Low
Fiscal Year Ended December 31, 1993:
First Quarter $40.00 $30.75
Second Quarter 41.50 30.75
Third Quarter 39.00 29.75
Fourth Quarter 40.50 30.00
Fiscal Year Ended December 31, 1994:
First Quarter $35.25 $30.75
Second Quarter 33.25 28.00
Third Quarter 35.25 26.50
Fourth Quarter 37.50 34.25
Fiscal Year Ending December 31, 1995:
First Quarter (through January 5) $37.88 $37.50
**
On September 19, 1994, the day of CECI's issuance of its press release
announcing the transmission of a letter to Magma containing a proposal to
acquire Magma in a transaction in which holders of Shares would receive cash
and shares of CECI Common Stock having a combined cash and market value of $35
per Share, the last reported sale price on the NNM was $27.50. On December 2,
1994, the last full trading day prior to the announcement that the Merger
Agreement had been executed, the last reported sale price for Shares was
$35.50. On January 5, 1995, the last full trading day for which quotations
were available at the time of printing of this Information Statement, the last
reported sale price for the Shares was $37.88. HOLDERS OF SHARES ARE URGED TO
OBTAIN CURRENT QUOTATIONS FOR THE SHARES.
<PAGE>
CAPITALIZATION OF CECI
Merger Consideration Consisting of a Combination of Cash and CECI Common Stock
The following table sets forth the consolidated capitalizations of CECI
and Magma at September 30, 1994 and as adjusted to reflect the purchase by CE
Sub of all the Shares and the issuance as a part of the Merger Consideration of
shares of CECI Common Stock. The following table should be read in conjunction
with the other pro forma financial information contained in this Information
Statement and the consolidated financial statements and notes thereto of CECI
and Magma.
**
<TABLE>
<CAPTION>
At September 30, 1994
Pro Forma Pro Forma
CECI Magma Adjustments Combined
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Debt:
Construction loans. . . . . $ 21,079 $ -- $ -- $ 21,079
Project loans . 233,080 188,969 -- 422,049
Senior discount notes 421,375 -- -- 421,375
Convertible subordinated debenture 100,000 -- -- 100,000
Other long term liabilities -- 12,354 500,000 512,354
775,534 201,323 500,000 1,476,857
Redeemable preferred stock 62,350 -- -- 62,350
Stockholders' Equity:
CECI preferred stock -- Series A of no
par value; authorized 2,000 shares -- -- -- --
CECI Common Stock of $0.0675 par
value; authorized 60,000 shares; Issued
32,230 shares -- actual; 47,529
shares -- as adjusted(1). . . 2,407 -- 802 3,209
Magma common stock of $0.10 par value;
authorized 30,000 shares; 24,043 issued -- 2,401 (2,401) --
Additional paid in capital 100,000 142,765 49,350 292,115
Unrealized gain from marketable securities -- (677) 677 --
Retained earnings 136,769 250,797 (250,797) 136,769
Less treasury stock - 3,420 shares at cost (59,516) -- 59,516 --
Total stockholders' equity 179,660 395,286 (142,853) 432,093
$1,017,544 $596,609 $357,147 $1,971,300
</TABLE>
- ---------------
(1) There is pending before the stockholders of CECI a proposal to increase
the number of authorized shares of CECI Common Stock to 80,000,000. Issued
shares (actual and as adjusted) do not include (i) 9,435,229 shares of CECI
Common Stock reserved for issuance upon the exercise of presently outstanding
stock options; (ii) 4,444,444 shares of CECI Common Stock issuable upon the
conversion of CECI's 5% Convertible Subordinated Debentures due July 31, 2000;
and (iii) 3,393,197 shares of CECI Common Stock issuable upon conversion of the
1,247 issued and outstanding shares of CECI's Series C Exchangeable Redeemable
Preferred Stock.
The accompanying notes to the pro forma unaudited condensed combined
financial data are an integral part of these statements.**
<PAGE>
Merger Consideration Consisting of All Cash
The following table sets forth the consolidated capitalizations of CECI
and Magma at September 30, 1994 and as adjusted to reflect the purchase by CE
Sub of all the Shares for cash and the sale to the public of shares of CECI
Common Stock offered pursuant to a separate prospectus filed with the
Commission. The following table should be read in conjunction with the other
pro forma financial information contained in this Information Statement and the
consolidated financial statements and notes thereto of CECI and Magma.
<TABLE>
<CAPTION>
At September 30, 1994
Pro Forma Pro Forma
CECI Magma Adjustments Combined
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Debt:
Construction loans $ 21,079 $ -- $ -- $ 21,079
Project loans 233,080 188,969 -- 422,049
Senior discount notes 421,375 -- -- 421,375
Convertible subordinated debenture 100,000 -- -- 100,000
Other long term liabilities -- 12,354 500,000 512,354
----------- ---------- ----------- ----------
775,534 201,323 500,000 1,476,857
Redeemable preferred stock 62,350 -- -- 62,350
Stockholders' Equity:
CECI preferred stock - Series A of no
par value; authorized 2,000 shares -- -- -- --
CECI Common Stock of $0.0675 par
value; authorized 60,000 shares; Issued
32,230 shares - actual; 48,897
shares - as adjusted(1). . . 2,407 -- 894 3,301
Magma common stock of $0.10 par value;
authorized 30,000 shares; 24,043 issued -- 2,401 (2,401) --
Additional paid in capital 100,000 142,765 63,492 306,374
Unrealized gain from marketable securities -- (677) 677 --
Retained earnings 136,769 250,797 (250,797) 136,769
Less treasury stock - 3,420 shares at cost (59,516) -- 59,516 --
Total stockholders' equity 179,660 395,286 (128,619) 446,327
----------- ---------- ----------- ----------
$1,017,544 $596,609 $371,381 $1,985,534
=========== ========== =========== ==========
</TABLE>
- ---------------
(1) There is pending before the stockholders of CECI a proposal to increase
the number of authorized shares of CECI Common Stock to 80,000,000. Issued
shares (actual and as adjusted) do not include (i) 9,435,229 shares of CECI
Common Stock reserved for issuance upon the exercise of presently outstanding
stock options; (ii) 4,444,444 shares of CECI Common Stock issuable upon the
conversion of CECI's 5% Convertible Subordinated Debentures due July 31, 2000;
and (iii) 3,393,197 shares of CECI Common Stock issuable upon conversion of the
1,247 issued and outstanding shares of CECI's Series C Exchangeable Redeemable
Preferred Stock.
The accompanying notes to the pro forma unaudited condensed combined
financial data are an integral part of these statements.
COMPARISON OF CERTAIN UNAUDITED DATA
Merger Consideration Consisting of a Combination of Cash and CECI Common Stock
The following table contains certain unaudited comparative data related
to common stockholders' equity, cash dividends declared, and revenues and
earnings (i) on a historical basis for CECI and Magma, (ii) on a pro forma
combined basis of CECI to reflect the Merger and (iii) on an equivalent pro
forma basis per Share assuming that each Share is converted into cash and 1.337
shares of CECI Common Stock. Such information is based upon the acquisition of
Magma being accounted for under the purchase method of accounting. The
information shown below should be read in conjunction with the consolidated
historical financial statements and notes thereto of CECI and Magma, and the
selected historical and pro forma financial data, including the notes thereto,
appearing elsewhere in this Information Statement. See "SELECTED HISTORICAL
AND PRO FORMA FINANCIAL INFORMATION -- Pro Forma Unaudited Condensed Combined
Financial Data."
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CECI MAGMA ADJUSTMENT COMBINED
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating Data:
(Year Ended December 31, 1993)
Total revenue $ 149,253 $167,138 $ (10,547) $ 305,844
Net income from continuing
operations available to common
<PAGE>
shareholders. . . . . $ 38,444 $ 52,135 $ (47,745) $ 42,834
Net income from continuing
operations available to common
shareholders per common share
Assuming no dilution $1.00 $2.17 $-- $0.80
Assuming full dilution $1.00 $2.17 $-- $0.79
Weighted average number of
common shares 38,485 24,063 -- 53,784
Dividends per share -- -- -- --
Operating Data:
(Nine Months Ended September 30, 1994)
Total revenue $ 139,188 $146,104 $ (7,910) $ 277,382
Net income from continuing
operations available to common
shareholders. . . . . $ 27,688 $ 46,843 $ (35,808) $ 38,723
Net income from continuing
operations available to
common shareholders per
common share
Assuming no dilution $0.77 $1.95 $-- $0.75
Assuming full dilution $0.76 $1.95 $-- $0.73
Weighted average number ofcommon shares 36,174 24,017 -- 51,473
Dividends per share -- -- -- --
Balance Sheet Data:
(September 30, 1994)
Total assets $1,087,064 $630,422 $ 515,147 $ 2,232,633
Total indebtedness 775,534 201,323 500,000 1,476,857
Redeemable preferred stock 62,350 __ __ 62,350
Common stockholders' equity 179,660 395,286 (142,853) 432,093
Book value per common share 5.57 16.44 __ 9.09
<CAPTION>
Year Ended Nine Months Ended
December 31, 1993 September 30, 1994
<S> <C> <C>
Pro Forma Combined Equivalent Per
Share Data:(1)
Earnings per equivalent share
from continuing operations
Assuming no dilution $1.07 $1.00
Assuming full dilution $1.06 $0.98
Dividends per equivalent share -- --
Book value per equivalent share
at September 30, 1994 $12.15
</TABLE>
- ---------------
(1) Magma stockholders receiving common stock equivalents of CECI as displayed
above will also receive a portion of their consideration in cash, which can be
reinvested.
<PAGE>
Merger Consideration Consisting of All Cash
The following table contains certain unaudited comparative data related
to common stockholders' equity, cash dividends declared, and revenues and
earnings (i) on a historical basis for CECI and Magma, and (ii) on a pro forma
combined basis of CECI to reflect the Merger. Such information is based upon
the acquisition of Magma being accounted for under the purchase method of
accounting. The information shown below should be read in conjunction with the
consolidated historical financial statements and notes thereto of CECI and
Magma, and the selected historical and pro forma financial data, including the
notes thereto, appearing elsewhere in this Information Statement. See
"SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION -- Pro Forma Unaudited
Condensed Combined Financial Data."
<TABLE><CAPTION>
Pro Forma Pro Forma
CECI Magma Adjustment Combined
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating Data:
(Year Ended December 31, 1993)
Total revenue $ 149,253 $167,138 $ (9,535) $ 306,856
Net income from continuing
operations available to common
shareholders. . . . . $ 38,444 $ 52,135 $ (46,982) $ 43,597
Net income from continuing
operations available to common
shareholders per common share
Assuming no dilution $1.00 $2.17 $- $0.79
Assuming full dilution $1.00 $2.17 $- $0.78
Weighted average number of
common shares 38,485 24,063 - 55,152
Dividends per share - - - -
Operating Data:
(Nine Months Ended September 30, 1994)
Total revenue $ 139,188 $146,104 $ (7,151) $ 278,141
Net income from continuing
operations available to common
shareholders. . . . . $ 27,688 $ 46,843 $ (35,236) $ 39,295
Net income from continuing
operations available to
common shareholders per
common share
Assuming no dilution $0.77 $1.95 $- $0.74
Assuming full dilution $0.76 $1.95 $- $0.73
Weighted average number of
common shares 36,174 24,017 - 52,841
Dividends per share - - - -
Balance Sheet Data:
(September 30, 1994)
Total assets . . . . . $1,087,064 $630,422 $529,381 $2,246,867
Total indebtedness . . 775,534 20,323 500,000 1,476,857
Redeemable preferred stock 62,350 - - 62,350
Common stockholders' equity 179,660 395,286 (128,619) 446,327
Book value per common share 5.57 16.44 - 9.13
</TABLE>
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND
OPERATING DATA OF CECI
The following table sets forth selected historical consolidated
financial and operating data, which should be read in conjunction with "CECI'S
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO" and "CECI MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The
unaudited consolidated financial statements of CECI as of and for the nine
months ended September 30, 1993 and 1994 reflect all adjustments necessary, in
the opinion of CECI's management (consisting only of normal recurring
adjustments), for a fair presentation of such financial data. The selected
consolidated data as of and for each of the five years in the period ended
December 31, 1993 have been derived from the audited historical consolidated
financial statements of CECI.
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
1989 1990 1991 1992 1993 1993 1994
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales of electricity $43,010 $89,026 $104,155 $115,087 $129,861 $99,398 $115,357
Sales of steam - - 2,029 2,255 2,198 1,648 1,851
Interest and other income 5,386 7,787 9,379 10,187 17,194 12,294 21,980
Total revenue 48,396 96,813 115,563 127,529 149,253 113,340 139,188
Plant operations, general and
administrative and royalties 13,615 37,412 41,506 45,183 46,794 34,019 41,321
Income before depreciation,
amortization, interest, income
taxes, extraordinary item and
cumulative effect of change in
accounting principle (1) 34,781 59,401 74,057 82,346 102,459 79,321 97,867
Depreciation and amortization 6,605 13,372 14,752 16,754 17,812 13,044 15,439
Interest expense, net of
capitalized interest . . . . 15,125 30,464 24,439 14,860 23,389 17,171 36,962
Provision for income taxes 2,715 3,522 8,284 11,922 18,184 14,295 14,067
Income before extraordinary item
and cumulative effect of change
in accounting principle (1) 10,336 12,043 26,582 38,810 43,074 34,811 31,399
Extraordinary item-refinancing (2) - - - (4,991) - - (2,007)
Cumulative effect of change in
accounting principle (3) - - - - 4,100 4,100 -
Net income (1) . 10,336 12,043 26,582 33,819 47,174 38,911 29,392
Preferred dividends (paid in kind) - - - 4,275 4,630 3,429 3,711
Net income available to common
stockholders . . . . . $10,336 $12,043 $26,582 $29,544 $42,544 $35,482 $25,681
======= ======= ======= ======= ======= ======= =======
Income per share before
extraordinary item and cumulative
effect of change in accounting
principle (1)
Assuming no dilution $0.38 $0.44 $0.75 $0.92 $1.00 $0.81 $0.77
Assuming full dilution(4) 0.38 0.44 0.75 0.92 1.00 0.81 0.76
Extraordinary item per share (2) - - - (0.13) - - (0.06)
Cumulative effect of change in
accounting principle per
share (3) - - - - 0.11 0.11 -
<PAGE>
<CAPTION> Nine Months
Year Ended December 31, Ended September 30,
1989 1990 1991 1992 1993 1993 1994
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
(continued):
Net income per share
Assuming no dilution $0.38 $0.44 $0.75 $0.79 $1.11 $0.92 $0.71
Assuming full dilution (4) 0.38 0.44 0.75 0.79 1.11 0.92 0.70
Weighted average shares
outstanding (5). . . . 27,019 27,254 35,471 37,495 38,485 38,436 36,174
Capital expenditures 124,749 32,514 68,377 32,446 87,191 64,250 78,892
<CAPTION>
December 31, September 30,
1989 1990 1991 1992 1993 1993 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Property-power plant, net $302,514 $321,303 $373,948 $389,646 $458,974 $440,527 $522,268
Total assets 349,282 393,853 517,994 580,550 715,984 710,659 1,087,064
Total debt 260,120 270,738 257,038 299,334 382,610 390,972 775,534
Preferred stock -- 4,705 54,705 54,350 58,800 57,650 62,350
Stockholders' equity 42,163 55,088 143,128 168,764 211,503 206,675 179,660
</TABLE>
______________
(1) The Navy I Plant commenced operation prior to 1989 and the BLM and Navy II
Plants commenced commercial operation in February 1989 and January 1990,
respectively. The Desert Peak, Nevada facility and the Roosevelt Hot Springs,
Utah steam field were acquired in March and January 1991, respectively.
(2) The refinancing of CECI's three largest domestic projects located at the
Naval Air Weapons Station at China Lake, California (collectively, the "Coso
Project") resulted in an extraordinary item in 1992 in the amount of $5.0
million, after the tax effect of $1.5 million. The defeasance of the Senior
Notes resulted in an extraordinary item in 1994 in the amount of $2.0 million,
after the tax effect of $1.0 million.
(3) On January 1, 1993, CECI adopted Statement of Financial Accounting Standard
No. 109, "Accounting for Income Taxes" ("SFAS 109"), which resulted in a
cumulative adjustment to net income of $4.1 million in 1993.
(4) Fully diluted earnings per share reflects the dilutive effect of
convertible subordinated debentures as if they were converted at the beginning
of the reporting period.
(5) The number of shares outstanding is calculated by using the treasury stock
method.
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA OF MAGMA
<TABLE>
<S> <C>
The selected financial data set forth below with respect to Magma's statements of operations for each of the five years in
the period ended December 31, 1993 and the balance sheets of Magma as of December 31, 1989 through 1993 are derived from the
consolidated financial statements of Magma that have been audited by Coopers & Lybrand, independent certified public accountants.
The selected financial data set forth below with respect to Magma's statements of operations for the nine-month period ended
September 30, 1994 and 1993 and, with respect to the balance sheet of Magma as of September 30, 1994, have been derived from the
unaudited consolidated financial statements of Magma, which, in the opinion of management, reflect all adjustments necessary
(consisting only of normal recurring adjustments) for a fair presentation of such financial data.
The selected financial data set forth below should be read in conjunction with "MAGMA'S CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO" and "MAGMA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", appearing
elsewhere in this Information Statement.
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
1989 1990 1991 1992 1993 1993 1994
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues $63,103 $ 85,599 $94,891 $108,966 $167,138 $124,781 $146,104
Operating revenues(1) 56,743 76,893 84,135 100,313 162,943 121,146 142,238
Income from operations 26,892 36,694 41,204 49,667 74,913 57,957 67,915
Income before cumulative
effect of accounting change 22,295 30,166 33,941 36,358 52,135 39,469 46,843
Cumulative effect of change
in accounting for income taxes - - - 17,833(2) - - -
Net income. . 22,295 30,166 33,941 54,191 52,135 39,469 46,843
Return on revenues 35.3% 35.2% 35.8% 33.4%(3) 31.2% 31.6% 32.1%
Capital expenditures $43,762 $ 7,054 $15,711 $ 12,043 $ 8,434 $ 5,718 $ 8,854
Return on average
stockholders' equity 16.1% 17.6% 16.2% 14.3%(3) 16.4% 13.0% 12.5%
Weighted average shares
outstanding. . 21,999 22,898 23,611 22,936 24,063 24,037 24,017
Income before cumulative effect
of accounting change per
common share
Assuming no dilution $1.01 $1.32 $1.44 $1.59 $2.17 $1.64 $ 1.95
Assuming full dilution(4) 0.96 1.32 1.44 1.52 2.17 1.64 1.95
Income per common share
Assuming no dilution 1.01 1.32 1.44 23.6(2) 2.17 1.64 1.95
Assuming full dilution(4) 0.96 1.32 1.44 2.27(2) 2.17 1.64 1.95
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
1989 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Balance Sheet Data:
Property, plant and
equipment, net . $124,062(5) $120,125 $118,541 $113,922 $265,215 $256,561
Exploration and development
costs, net . . . 46,681 44,782 48,644 52,001 107,069 104,271
Total assets 282,624 325,131 353,788 396,650 611,311 630,422
Long-term obligations(6) 98,212 99,297 89,808 87,339 200,509 164,313
Total debt(7) 100,517 102,842 97,541 96,126 226,008 188,969
Stockholders' equity 150,142 192,626 226,872 282,260 351,918 395,286
</TABLE>
_______________
(1) Excludes interest and other income.
(2) The cumulative effect of Magma's adoption of SFAS 109 increased net income
by $17,833, or $.77 per share. See Note 11, Provision for Income Taxes,
accompanying the consolidated financial statements for the year ended December
31, 1992 for Magma incorporated by reference in its Annual Report on Form 10-K
for the year ended December 31, 1993.
(3) Excludes the impact of cumulative effect of change in accounting for income
taxes.
(4) Fully diluted earnings per share reflects the dilative effect of stock
options and warrants at the end of the reporting period.
(5) Projects in progress reclassified to appropriate asset classification.
(6) Consists of the noncurrent portion of long-term loans payable and other
long-term liabilities.
(7) Represents loans payable, including the current portion of long-term loans
payable.
<PAGE>
CERTAIN INVESTMENT CONSIDERATIONS
If CECI elects to pay the Merger Consideration with a combination of
cash and CECI Common Stock, holders of Shares will become stockholders of CECI.
Holders of Shares should consider carefully all of the information contained
this Information Statement, including the following:
Potential for Fluctuation of Value of Merger Consideration. Pursuant
to the Merger Agreement, holders of Shares will only be able to determine the
number of shares of CECI Common Stock they will receive on the fifth business
day prior to the Special Meeting. The stock price of CECI Common Stock on the
fifth business day prior to the Special Meeting may vary significantly from the
price on the date of execution of the Merger Agreement, the date hereof or the
Effective Time. These variances may be due to changes in the business,
operations and prospects of CECI or Magma, general market and economic
conditions, and other factors. Accordingly, CECI Common Stock may trade at
values which, combined with the Mixed Cash Component Amount, results in the
holders of Shares receiving an amount lower in value than $39.00. The Collar
Provision also may have an impact on the value of the Merger Consideration at
the Effective Time. The Collar Provision limits the number of shares of CECI
Common Stock required to be issued in the Merger if the Average Closing Price
is less than $14.27. Thus, if the Average Closing Price falls below $14.27,
holders of Shares would receive an aggregate of CECI Common Stock and cash with
a value of less than $39.00.
Development Uncertainty. CECI 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. CECI has in development or under
construction projects representing several times the MW's of those currently in
operation. Development can require CECI to expend significant sums for
preliminary engineering, permitting, legal and other expenses in preparation
for competitive bids which CECI may not win or before it can be determined
whether a project is feasible, economically attractive or capable of being
financed. Successful development and construction is contingent upon, among
other things, negotiation and implementation of engineering, construction, fuel
supply and power sales contracts with other project participants on terms
satisfactory to CECI, and receipt of required governmental permits and
consents. Further, there can be no assurance that CECI, which will continue to
be substantially leveraged upon completion of the Merger, will obtain access to
the substantial debt and equity capital required to continue to develop and
construct electric power projects or to refinance projects. The future growth
of CECI is dependent, in large part, upon the demand for significant amounts of
additional electrical generating capacity and its ability to obtain contracts
to supply portions of this capacity. There can be no assurance that
development efforts on any particular project, or CECI's efforts generally,
will be successful.
Development Uncertainty Outside the United States. CECI believes that
the international independent power market holds the majority of new
opportunities for financially attractive private power development in the next
several years. CECI currently has three projects under construction outside
the United States representing an aggregate capacity of 500 MW of electric
generating capacity of which CECI's net ownership interest is 409 MW. 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 in
respect of or material impairment of the value of the project being developed,
which CECI may not be capable of fully insuring against. The uncertainty of
the legal environment in certain foreign countries in which CECI may develop or
acquire projects could make it more difficult for CECI to enforce its rights
under agreements relating to such projects. In addition, the laws and
regulations of certain countries may limit the ability of CECI to hold a
majority interest in some of the projects that it may develop or acquire.
CECI's international projects may, in certain cases, be terminated by the
applicable foreign governments.
Exploration, Development and Operation Uncertainties of Geothermal
Energy Resources. Geothermal exploration, development and operations are
subject to uncertainties similar to those typically associated with oil and gas
exploration and development, including dry holes and uncontrolled releases.
Because of the geological complexities of geothermal reservoirs, the geographic
area and sustainable output of geothermal reservoirs can only be estimated and
cannot be definitively established. There is, accordingly, a risk of an
unexpected decline in the capacity of geothermal wells, and a risk of
geothermal reservoirs not being sufficient for sustained generation of the
electrical power capacity desired. In addition, while CECI's existing power
generating systems are built to withstand relatively significant levels of
seismic disturbance and CECI seeks appropriate insurance protection, geothermal
power production poses unusual risks of seismic activity. Accordingly, there
can no assurance that earthquake, property damage or business interruption
insurance will be adequate to cover all potential losses sustained in the event
of serious seismic disturbances or that such insurance will be available on
commercially reasonable terms.
The success of a geothermal project depends on the quality of the
geothermal resource and operational factors relating to the extraction of the
geothermal fluids involved in such project. The quality of a geothermal
resource is affected by a number of factors, including the size of the
reservoir, the temperature and pressure of the geothermal fluids in such
reservoir, the depth and capacity of the production and injection wells, the
<PAGE>
amount of dissolved solids and noncondensible gases contained in such
geothermal fluids, and the permeability of the subsurface rock formations
containing such geothermal resource, including the presence, extent and
location of fractures in such rocks. The quality of a geothermal resource may
decline as a result of a number of factors, including the intrusion of lower-
temperature fluid into the producing zone. An incorrect estimate by CECI of
the quality of geothermal resource, or a decline in such quality, could have a
material adverse effect on CECI's results of operations.
In addition, both the cost of operations and the operating performance
of geothermal power plants may be adversely affected by a variety of operating
factors. Production and injection wells require frequent maintenance or
replacement. Corrosion caused by high-temperature and high-salinity geothermal
fluids may compel the replacement or repair of certain equipment, vessels or
pipelines. New production and injection wells may be required for the
maintenance of current operating levels, thereby requiring substantial capital
expenditures.
Competition. While CECI will be the largest independent geothermal
power company in the world upon the consummation of the Merger, the independent
international power production market is characterized by numerous strong and
capable competitors, many of which have more extensive and more diversified
developmental or operating experience (including international experience) and
greater financial resources than CECI. Many of these competitors also compete
in the domestic market. Further, in recent years, the domestic power
production industry has been characterized by strong and increasing competition
with respect to the industry's efforts to obtain new power sales agreements,
which has contributed to a reduction in prices offered by utilities. In this
regard, many utilities often engage in "competitive bid" solicitations to
satisfy new capacity demands. In the domestic market, the Energy Policy Act of
1992 is expected to increase competition.
Present Dependence on Large Customer; Impact of Avoided Cost Pricing;
Contract Risks. CECI relies on long-term power purchase "Standard Offer No. 4"
contracts (each, an "SO4 Agreement") with a single customer, Southern
California Edison Company ("SCE"), to generate substantially all of its
operating revenues. Any material failure by SCE to fulfill its contractual
obligations under any of such contracts is likely to have a material adverse
effect on CECI's results of operations.
Each SO4 Agreement provides for both Known Geothermal Resource Area
Projects (as hereinafter described) capacity payments and energy payments
ranging from a term of 20 to 30 years. During the first ten years of the term
of each SO4 Agreement, energy payments are based on a pre-set schedule.
Thereafter, while the basis for the capacity payment remains the same, the
required energy payment is SCE's then-current published avoided cost of energy
("Avoided Cost of Energy"), as determined by the California Public Utility
Commission ("CPUC"). The initial ten-year period expires in August 1997 for
the CECI's Navy I Project, March 1999 for its BLM Project and January 2000 for
its Navy II Project. Such ten-year period expires in 1996 with respect to one
of its Salton Sea Known Geothermal Resource Area Projects (as hereinafter
described), in 1999 for three of its Salton Sea Known Geothermal Resource Area
Projects and in 2000 for the remaining two Salton Sea Known Geothermal Resource
Area Projects that operate under SO4 Agreements.
Estimates of SCE's Avoided Cost of Energy vary substantially in any
given year. CECI cannot predict the likely level of Avoided Cost of Energy
prices under its SO4 Agreements with SCE at the expiration of the fixed price
periods. SCE's Avoided Cost of Energy as determined by the CPUC is currently
substantially below the current energy prices under CECI's respective SO4
Agreements and is expected to remain so. For example, for , 1994,
the time period-weighted average of SCE's Avoided Cost of Energy
was cents
per Kwh, compared to time period-weighted average 1994 selling prices for
energy of approximately cents and cents
per Kwh, respectively, for CECI and
Magma, respectively. Thus, the revenues generated by each of CECI's facilities
operating under SO4 Agreements are likely to decline significantly after the
expiration of the fixed-price period.
Leverage. Following completion of the Merger, CECI will continue to be
substantially leveraged. As of September 30, 1994, CECI's total consolidated
indebtedness was $775.5 million, its total consolidated assets were $1,087.1
million and its stockholders' equity was $179.7 million. At such date, on a
pro forma basis, after giving effect to the completion of the Merger (if CECI
elects to pay the Merger Consideration solely in cash), CECI's total
consolidated indebtedness would have been $1,476.9 million, its total
consolidated assets would have been $2,232.6 million and its stockholders'
equity would have been $432.1 million. See "CAPITALIZATION OF CECI" and
"SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION -- Pro Forma Unaudited
Condensed Combined Financial Data."
Benefits of the Magma Acquisition. While CECI believes that there will
be significant benefits from the Merger, there can be no assurance that CECI
will be able to achieve any of the anticipated benefits of the Merger.
Impact of Environmental and Other Regulations. CECI is subject to a
number of environmental laws and regulations affecting many aspects of its
present and future operations, including the disposal of various forms of
waste, the construction or permitting of new facilities and the drilling and
operation of new wells. Such laws and regulations generally require CECI to
obtain and comply with a wide variety of licenses, permits and other approvals.
Although CECI does not currently expect the enactment of changes in applicable
environmental laws or regulations which would have a material adverse effect on
its business, the implementation of regulatory changes imposing more
comprehensive or stringent requirements on CECI, thereby resulting in increased
compliance costs, could have a material adverse effect on its results of
operations. In addition, regulatory compliance for the construction of new
<PAGE>
facilities is a costly and time-consuming process, and intricate and rapidly
changing environmental regulations may require major expenditures for
permitting and create the risk of expensive delays or material impairment of
project value if projects cannot function as planned due to changing regulatory
requirements or local opposition.
Shares of Common Stock Eligible for Future Sale. Pursuant to CECI's
Amended and Restated 1986 Stock Option Plan (the "1986 Plan"), as of September
30, 1994, CECI had outstanding various options to its officers, directors and
employees for the purchase of 3,371,075 shares of CECI Common Stock, of which
all of the shares of CECI Common Stock issuable upon exercise of said options
have been registered pursuant to registration statements on Form S-8, and, as
and when fully vested, are available for immediate resale. Also as of
September 30, 1994, there were additional options outstanding to purchase
6,064,154 shares of CECI Common Stock, 5,789,163 of which were granted to PKS.
As of September 30, 1994, PKS has demand and piggyback registration rights with
respect to approximately 8,971,912 shares of CECI Common Stock (and any shares
of CECI Common Stock subsequently held by PKS), all options to purchase shares
of CECI Common Stock (and the shares issuable upon the exercise of such
options), and 3,393,197 shares of CECI Common Stock issuable upon conversion of
the 1,247 shares of CECI's Series C Preferred Stock, held by PKS (or upon
conversion of CECI's Exchangeable Subordinated Debentures if issued upon the
exchange of the Series C Preferred Stock). In addition, 4,444,444 shares of
CECI Common Stock have been reserved for issuance pursuant to the conversion of
the Debentures. CECI cannot predict the effect that possible future sales of
any substantial number of shares of CECI Common Stock could have on the market
price of the CECI Common Stock.
Interests of Certain Persons in the Merger. In considering the
recommendation of the Magma Board with respect to the Merger Agreement and the
transactions contemplated thereby, holders of Shares should be aware that
certain members of Magma's management and the Magma Board have certain
interests in the Merger that are in addition to the interests of Magma
stockholders generally. The Magma Board was aware of these interests when it
considered and approved the Merger and the Merger Agreement.
In November 1993, the Compensation Committee of the Magma Board (the
"Compensation Committee") determined that, in order to attract and retain key
executives of Magma, from time to time it would be in Magma's best interests to
enter into "change in control" agreements with key executives. The
Compensation Committee authorized Magma to enter into such agreements, subject
to the following parameters:
(A) provision for up to two times base and bonus salary;
(B) accelerated vesting of options; and
(C) continuation of health and insurance benefits.
Each of the items referred to in (A) through (C) would be triggered by
a Change in Control (as defined below) of Magma followed by termination of the
relevant officer's employment by Magma within a specified period, other than
for cause, disability or retirement.
On September 15, 1994, Magma entered into such change in control
agreements with each of its six current executive officers (Paul M. Pankratz,
Chairman of the Board, Ralph W. Boeker, President and Chief Executive Officer,
Jon R. Peele, Executive Vice President, General Counsel and Secretary, Kenneth
Kerr, Senior Vice President--Commercial Development, Trond Aschehoug, Vice
President--North American Operations, and Wallace C. Dieckmann, Vice President
and Chief Financial Officer) ("Agreement I") and with nine other officers (Tom
Hinrichs, Vice President--Government Affairs, David Olsen, Vice President--
Marketing, Jim Runchey, Vice President--Human Resources and Administration,
Russ Tenney, Vice President--Asian Operations, Steven Jaye, Vice President--
Legal Affairs, Mark Robinson, Vice President--Business Development, Paul Zapf,
Corporate Controller, Joe Asiala, Director--Resource Development and
Management, and Jim Turner, Director--Engineering and Technology) ("Agreement
II").
The agreements provide for certain severance payments to those officers
in the event of the termination of their employment following a Change in
Control of Magma, consistent with the enabling resolutions passed by the
Compensation Committee in the fall of 1993. Each agreement has a term expiring
on December 31, 1997, renewable at the end of such term if mutually agreed to
by the officer and Magma.
Agreement I provides that if the officer's employment is terminated by
Magma for any reason other than for Cause, Disability or Retirement (as such
terms are defined in Agreement I) or by the officer for Good Reason (as such
term is defined in Agreement I) within two years following a Change of Control
(as defined below), (i) Magma will pay the officer, within 30 days of the date
of termination, a cash payment (the "Severance Payment") equal to 200% of the
sum (the "Sum") of (A) the officer's base salary for the twelve months
immediately preceding the Change in Control and (B) the officer's entire
targeted bonus payable under Magma's Management Incentive Bonus Plan or other
executive bonus plan then in effect and (ii) all Magma deferred shares or
similar Magma securities and all options to purchase Magma securities then held
by the officer shall immediately vest. Magma will continue to provide the
officer and his or her dependents group life and health insurance benefits
substantially the same as those in effect prior to the Change of Control,
increased to the extent that such benefits are increased following the Change
of Control, for 24 months following the officer's date of termination. In the
event that any payments or benefits under the agreement would not be deductible
(in whole or in part) by Magma as a result of the application of Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code"), the Severance
Payment will be reduced until no portion of the Severance Payment and benefits
is not deductible as a result of Section 280G of the Code.
<PAGE>
Agreement II provides the same level of payments and benefits as
provided in Agreement I except that the Severance Payment shall equal 100% of
the applicable Sum and that health insurance benefits shall be provided for 12
months following a Change of Control.
A "Change of Control" shall be deemed to have occurred (i) in the event
of the acquisition by any person, together with its affiliates, of beneficial
ownership of capital stock of Magma possessing 30% or more of the combined
voting power of the Shares, (ii) if within any two-year period, the majority of
the members of the Magma Board were to be comprised of individuals other than
those who were members at the beginning of such period, unless the members
elected during such period were approved by a majority of the Magma Board in
office immediately prior to the beginning of such period, (iii) if all or
substantially all of Magma's assets are sold as an entirety to any person or
related group of persons or (iv) if Magma is merged with or into another
corporation or another corporation is merged into Magma with the effect that
immediately after such transaction the shareholders of Magma immediately prior
to such transaction hold less than a majority in interest of the total voting
power entitled to vote in the election of directors, managers or trustees of
the entity surviving such transaction.
At a regular scheduled Board of Directors meeting held on September 20,
1994, the Compensation Committee authorized a change of the definition of "Good
Reason" in these agreements, the effect of which would allow a covered
executive to resign for "Good Reason" if, after a Change of Control, the
executive were required to relocate more than 50 miles from his then current
place of employment.
GENERAL INFORMATION
This Information Statement is furnished to stockholders of Magma in
connection with the Magma Special Meeting. The Magma Special Meeting will be
held on February 21, 1995, at 10:00 a.m., Nebraska time, at the Red Lion Hotel,
1616 Dodge Street, in Omaha, Nebraska. This Information Statement is first
being mailed to its respective stockholders on or about January __, 1995.
Purpose of Special Meetings
The stockholders of Magma will be asked to consider and vote upon the
Merger Agreement at the Magma Special Meeting. The Magma Special Meeting also
will be held for the purpose of transacting such other business, if any, as may
be incidental to the conduct of such meeting as may properly come before it.
Record Date; Voting Rights
The Magma Board of Directors has fixed the close of business on January
__, 1995 as the Magma Record Date for determining holders entitled to notice of
and to vote at the Magma Special Meeting.
As of the Magma Record Date, there were ____ Shares issued and
outstanding, entitling the holder thereof to one vote. Neither Magma nor CECI
knows of any matters other than as described in the Notice of Special Meeting
that are to come before the Magma Special Meeting.
Quorum
The presence in person or by properly executed proxy of holders of a
majority of the votes entitled to be cast at the Magma Special Meeting is
necessary to constitute a quorum at the Magma Special Meeting. As a result of
the completion of the Offer and the purchase of Shares pursuant thereto, CE Sub
owns a sufficient number of Shares to constitute a quorum at the Magma Special
Meeting.
Required Vote
An affirmative vote approving and adopting the Merger Agreement at the
Magma Special Meeting by the holders of a majority of the outstanding Shares
entitled to vote thereon is required to consummate the Merger. As a result of
the completion of the Offer and the purchase of Shares pursuant thereto, CE Sub
owns a sufficient number of Shares to approve the Merger without the
affirmative vote of any other stockholder. Accordingly, approval and adoption
of the Merger Agreement at the Special Meeting is assured.
SPECIAL FACTORS
Background of the Merger
In May 1991, representatives of CECI and Magma entered into discussions
and meetings to explore the possibility of combining the companies, and the two
companies exchanged certain information concerning their respective businesses
for the purpose of considering such a business combination or other acquisition
transaction. At the end of May 1991, the discussions were terminated as a
result of the inability of the parties to reach agreement concerning price and
certain other terms.
In September 1991, a number of conversations between CECI's
representatives and persons believed by CECI to be Magma's representatives were
held regarding a possible merger of Magma with and into CECI. Based upon those
conversations, on September 26, 1991, after receiving the approval of CECI's
Executive Committee, CECI transmitted a proposed letter of intent to Magma. The
proposed letter of intent contemplated a consensual merger of Magma with and
into CECI. Pursuant to the proposed merger, each outstanding Share would have
been exchanged for approximately two shares of CECI Common Stock in a
transaction accounted for on a pooling of interests basis. Such a transaction
<PAGE>
would have represented a value of $30.25 for each Share (approximately a 20%
premium to the then-prevailing market price) based upon the then current market
values of the respective companies' common stocks. After its receipt of the
proposed letter of intent, Magma advised CECI that Magma had no interest in
pursuing the proposed pooling of interests combination transaction.
In August 1993, David L. Sokol, the Chairman, Chief Executive Officer
and President of CECI, contacted Paul M. Pankratz, then Chairman and Chief
Executive Officer of Magma in order to propose a meeting to discuss various
matters of mutual interest. At a meeting in San Diego in September 1993, Mr.
Sokol and Steven A. McArthur, Senior Vice President, General Counsel and
Secretary of CECI, and Mr. Pankratz, Ralph W. Boeker, President of Magma, and
Jon R. Peele, Executive Vice President and General Counsel of Magma, discussed
principally the possibility of joint venturing or other cooperation in respect
of certain pending power development projects in the Philippines and the
possible sharing of legal costs and information in respect of certain domestic
regulatory proceedings in which the companies had a common interest. During the
course of those discussions, Mr. Sokol suggested to Magma's management that
such potential cost savings were illustrative of certain of the synergies that
a combination of the companies could achieve. However, no agreements or
understandings were reached between CECI and Magma as a result of these
discussions. In addition, at that meeting CECI suggested to Magma that it
consider utilizing PKS as Magma's general contractor in respect of Magma's
pending projects in the Philippines. Magma's management agreed to meet with PKS
regarding its possible role as a contractor in the Philippines. The meeting
between Magma and PKS was held in the fall of 1993, but no agreements or
understandings were reached with PKS and no further discussions were held in
respect of such matters.
In January 1994, Mr. Sokol again contacted Mr. Pankratz by telephone in
an effort to resume the foregoing discussions and, at Mr. Pankratz's
suggestion, Mr. Sokol was asked to contact Mr. Boeker, the President and
recently appointed Chief Executive Officer of Magma, to discuss these matters
further. In an April 1994 telephone conversation between Mr. Sokol and Mr.
Boeker, the possibility of cooperation with respect to international joint
ventures between the companies and other possible synergies between the
companies were again generally discussed, but no agreements or understandings
were reached.
On or about June 20, 1994, Mr. Sokol contacted Mr. Boeker and proposed
a meeting between members of management of the two companies to discuss the
possible combination of CECI and Magma.
On August 9, 1994, Mr. Sokol was advised that Mr. Boeker had declined a
scheduled August 11 meeting, and that Magma's decision to cancel was due to,
among other things, the desire of Magma's management to dedicate their full
attention to the pending financing of Magma's Malitbog project in the
Philippines.
On September 15, 1994, Mr. Sokol contacted a member of the Magma Board,
in an effort to determine whether Magma had a serious interest in discussing a
negotiated combination of the companies within a time frame that would
recognize CECI's desire to make certain decisions regarding the strategic
direction it wished to pursue in the changing global marketplace. The director
stated that he was aware of certain of the past discussions between the
companies, but would ask Magma 's management to respond directly to Mr. Sokol's
inquiry.
Later that same day, Messrs. Pankratz and Boeker called Mr. Sokol and
advised him that the closing of the financing for Magma's Malitbog project was
not expected to occur until November 1994 and suggested that they would not be
interested in meeting with Mr. Sokol until that time. Mr. Sokol stated that
CECI was considering a number of strategic alternatives, including a possible
combination with Magma, and that CECI's strategic planning had reached a stage
where a prompt decision concerning entering into negotiations regarding any
possible combination with Magma was required. Mr. Sokol further stated his
belief that it was unnecessary to wait until after the closing of the Malitbog
financing because CECI was prepared to negotiate in good faith on a basis that
would value Magma as though such financing had closed. Messrs. Boeker and
Pankratz reiterated that they would agree to meet only after the Malitbog
closing and Mr. Sokol concluded the call by reiterating CECI's need to act upon
certain of its strategic alternatives on a prompt basis.
On September 19, 1994, Mr. Sokol wrote to Messrs. Pankratz and Boeker
proposing to acquire all outstanding Shares for $35 per Share comprised of
$25.00 in cash and $10.00 in market value of CECI Common Stock (the "Initial
Proposal"). On September 20, 1994, Mr. Pankratz responded that the Magma Board
would consider the proposal and respond after completion of its evaluation.
During the week of September 19, 1994, representatives of CECI
contacted management of The Dow Chemical Company ("Dow"), the beneficial owner
of approximately 21% of the Shares, to determine Dow's reaction to CECI's
proposal of September 19, 1994. The CECI representatives were told Dow was
evaluating such proposal. During the week of September 26, 1994, CECI's
financial representatives contacted management of Dow to inquire as to the
circumstances surrounding a recent sale by Dow of 857,143 Shares for $28.25 per
Share and an associated option agreement to acquire such Shares at the same
price, which Dow had reported in filings with the Commission, and in particular
whether any impediments existed to Dow's ability to freely dispose of such
Shares and whether any structural changes to CECI's merger proposal would be
helpful in this regard. Dow reported that it was considering such issues in the
context of CECI's proposal.
On September 28, 1994, after telephone discussions between CECI's
financial advisors and Magma's financial advisors regarding CECI's request to
arrange a meeting between the parties, Messrs. Sokol and McArthur, together
<PAGE>
with representatives from CECI's financial advisors, met with representatives
from Magma's financial advisor in order to introduce CECI and to further
elaborate and answer questions with respect to the details of CECI's proposal.
CECI provided the representatives from Magma's financial advisors with a letter
to Messrs. Pankratz and Boeker and copies of a draft merger agreement.
On October 3, 1994, Magma's financial advisors informed CECI's
financial advisors that the Magma Board had authorized Magma to enter into a
"poison pill" Rights Plan (the "Rights Agreement") at its Board meeting which
concluded on such date, but that the Magma Board had also authorized Magma's
financial advisors to meet with CECI's financial advisors as soon as possible
and, accordingly, a meeting was scheduled for the morning of October 4, 1994.
CECI subsequently learned through press reports that Magma had amended its
Bylaws to require that stockholder action occur only at a regular or special
meeting of stockholders rather than by way of a written consent solicitation
and that Magma also had filed a complaint against CECI seeking a declaratory
judgment that (i) the Magma Board had properly discharged its fiduciary duties
in adopting the Rights Agreement and an amendment to Magma's Bylaws and,
accordingly, such agreement and amendment were valid and binding, and (ii) the
Merger Moratorium Statute (as defined below) is valid and not in violation of
the Commerce Clause and Supremacy Clause of the United States Constitution.
On October 4, 1994, at the meeting between CECI's financial advisors
and Magma's financial advisors, Magma's financial advisors summarized the
actions taken at the Magma Board meeting held on October 2, 1994 and October 3,
1994, and indicated that although the Magma Board had not rejected CECI's
proposal, the Magma Board would prefer that CECI withdraw its merger proposal.
Magma's financial advisors then indicated that the Magma Board believed that
CECI's proposed price was too low and referenced Magma's future opportunities
but declined to provide any specific information or financial analysis
indicating what price the Magma Board would consider favorably with respect to
a sale of Magma or as to why CECI's proposed price did not correctly value
Magma's businesses.
In light of the defensive actions taken by Magma, on October 6, 1994 CE
Sub commenced a cash tender offer for 12,400,000 Shares at $35 per Share (the
"Previous Offer").
On October 11, 1994, Magma filed with the Commission a
Solicitation/Recommendation Statement on Schedule 14D-9 (the "Previous Schedule
14D-9") pursuant to the Exchange Act, which included the recommendation of the
Magma Board reached at its October 10, 1994 meeting that Magma's stockholders
reject the Previous Offer.
On October 13, 1994, CECI announced the filing of a preliminary proxy
statement with the Commission pursuant to the Exchange Act in order to solicit
written requests from Magma's stockholders for the call of a Special Meeting of
Magma's stockholders (the "Requested Special Meeting"). The purpose of the
Requested Special Meeting was to provide Magma's stockholders the opportunity
to consider and vote on CECI's proposals which, if approved, would help
facilitate consummation of the Previous Offer.
On October 21, 1994, CE Sub increased the price per Share to be paid in
the Previous Offer to $38.50 per Share (the "Revised Previous Offer"). On
October 31, 1994, CECI learned that the Magma Board had resolved at its meeting
of that date to recommend that its stockholders reject the Revised Previous
Offer.
On November 1, 1994, CECI announced that it had put its best offer on
the table and that it intended to withdraw its acquisition proposal if it had
not signed a merger agreement with Magma or received sufficient written
requests to call the Requested Special Meeting by December 2, 1994. Throughout
November 1994, CECI solicited written consents for the call of the Requested
Special Meeting, which solicitation was actively opposed by Magma.
As of the close of business on December 2, 1994, CECI had neither
entered into a merger agreement with Magma nor received sufficient written
requests to call the Requested Special Meeting. Consequently, CECI announced by
press release, and Mr. Sokol placed telephone calls to Messrs. Pankratz and
Boeker and to a representative of Dow to advise them, that CECI had withdrawn
its acquisition proposal and had terminated the Revised Previous Offer. As a
result of these telephone conversations, and follow up telephone conversations
among the parties and their advisors, CECI and Magma arranged to meet the
following day in New York to explore the possibility of a negotiated
acquisition of Magma by CECI.
From December 3, 1994 through the morning of December 5, 1994,
representatives of CECI and Magma, together with their legal and financial
advisors, met to negotiate the terms of a proposed acquisition of Magma by
CECI. The Magma's Board met to consider and approve the Merger Agreement and
the transactions contemplated thereby on December 4 and 5, 1994. Following
continued negotiations regarding the definitive agreements, the Merger
Agreement was signed on the morning of December 5, 1994.
On January __, 1995, CECI consummated the Offer and purchased
12,400,000 Shares pursuant thereto. Pursuant to the Merger Agreement, nine
members of the 11 member Magma Board resigned and six nominees of CECI and CE
Sub were elected to fill such vacancies. Accordingly, as of the date hereof,
CECI and CE Sub have designated a majority of the Magma Board.
Purpose and Structure of the Merger
CECI and CE Sub's purpose for entering into the Merger Agreement and
consummating the Offer and the Merger is to acquire the entire equity interest
in Magma because CECI believes that combining the businesses of CECI and Magma
will provide an excellent strategic fit due to synergies and other benefits
<PAGE>
which will result from combining the operations of Magma and CECI pursuant to
the Merger Agreement and will strengthen the combined companies' competitive
position in the increasingly challenging business environment and global
markets in which they operate. See "SPECIAL FACTORS--Recommendation of the
Board of Directors of Magma; Reasons for the Merger; Fairness of the Offer and
the Merger." The Merger is structured as a merger because it ensures that CECI
will acquire beneficial ownership of 100% of the equity of Magma in a single
transaction. CECI's acquisition of the Shares owned by the holders of the
Shares other than CECI and its subsidiaries will enable CECI to realize the
benefits and bear the risks of complete ownership of Magma including the
opportunity to (i) facilitate inter-company activity between Magma and CECI,
(ii) permit combinations of management and other resources of CECI and Magma,
including, among other things, the consolidation and rationalization of Magma's
business and operating structure with a view to improving operations and
reducing expenses of Magma and CECI (see "--Certain Effects of the Merger;
Operations After the Merger"), (iii) enable Magma's management (or any
successors thereto) to devote itself to building long-term values for Magma
without concern that such efforts may adversely affect short-term results and
the market price of the Shares, and (iv) eliminate the need for Magma to comply
with the reporting requirements of the Exchange Act, to maintain separately
audited financial statements and to maintain its current listing on the NNM.
In addition, CECI believes that if Magma were to continue to have public
stockholders, Magma would require more management time and attention than it
would as a wholly owned subsidiary of CECI.
The Merger will be effected by causing CE Sub to merge with and into
Magma. As a result, Magma will be the corporation surviving the Merger and
will become a wholly owned subsidiary of CECI after the Effective Time.
Recommendation of the Board of Directors of Magma; Reasons for the Merger;
Fairness of the Offer and the Merger
Magma. On December 5, 1994, the Magma Board unanimously approved (with
two directors absent) the Merger Agreement and the transactions contemplated
thereby and determined that each of the Offer and the Merger is fair to, and in
the best interests of, the stockholders of Magma. The Magma Board had
recommended that all holders of Shares accept the Offer and tender their Shares
pursuant to the Offer.
In reaching its determinations and recommendations with respect to the
Merger Agreement and the transactions contemplated thereby, the Magma Board
took into account numerous factors discussed at its December 4 and 5, 1994
board meetings, including, among other things, the following:
(i) The improvement to the terms and conditions of the
Revised Previous Offer, including, without limitation, (A) the increase in the
blended average per Share consideration offered from a $28.50 in cash and
$10.00 in CECI Stock to, at the option of CECI, either $28.50 in cash and
$10.50 in CECI Common Stock of $38.75 in cash and (B) the reduction in the
number and scope of conditions precedent to the Offer;
(ii) The Magma Board's familiarity with the financial
condition and future prospects of Magma including the prospects of Magma were
it to remain independent;
(iii) The presentation of Goldman Sachs at the December 4 and
5, 1994 meetings and the oral opinion of Goldman Sachs (which was subsequently
confirmed in writing) to the Magma Board that, as of December 5, 1994, the
consideration to be received by the holders of the Shares in the Offer and the
Merger, taken as a unitary transaction, was fair to the holders of Shares
receiving such consideration (other than CECI and its affiliates). The full
text of the written opinion, dated December 9, 1994, which confirms the
December 5th oral opinion of Goldman Sachs and sets forth the assumptions made,
the matters considered and the limitations on the review undertaken by Goldman
Sachs, is attached as Annex B hereto and is incorporated herein by reference.
Such opinion should be read carefully in its entirety by holders of Shares in
conjunction with the foregoing matters.
(iv) The Magma Board's belief that the reasonably likely
alternatives were unlikely to provide values to the stockholders of Magma
superior to the Offer, which belief was based on, among other things, the
report of management and Goldman Sachs with respect to the status of the
contacts and discussions that had been undertaken based upon the Magma Board's
resolution on October 28, 1994 to explore all alternatives available to further
the best interests of Magma's stockholders;
(v) The provision of the Merger Agreement permitting Magma
to terminate the Merger Agreement if any person shall have a bona fide offer
that the Magma Board determines in its good faith judgment and in the exercise
of its fiduciary duties is more favorable to Magma's stockholders than the
Merger;
(vi) The provision of the Merger Agreement prohibiting the
solicitation by Magma of other proposals and the termination provisions of the
Merger Agreement providing that CECI and CECI Sub could be entitled to receive
a fee of $8,000,000, as well as reimbursement of all out-of-pocket fees and
expenses actually incurred by them or on their behalf in connection with the
Previous Offer, the Offer, the Merger and the transactions contemplated by the
Merger Agreement under certain circumstances (see "THE MERGER AGREEMENT").
After consulting with its legal and financial advisors, among other things, the
Magma Board concluded that, in view of the other provisions of the Merger
Agreement and the Magma Board's view with respect to possible alternatives, it
was in the best interests of the Magma stockholders to accept these provisions
in order to induce CECI to execute the Merger Agreement;
(vii) The provisions of the Merger Agreement providing that
<PAGE>
Magma would be entitled to receive a fee of $8,000,000 under certain
circumstances (see "THE MERGER AGREEMENT"); and
(viii) The Magma Board's confidence that the highest offer had
been received from CECI.
The Magma Board considered each of the factors listed above during the
course of its deliberations and negotiations prior to entering into the Merger
Agreement. The Magma Board evaluated the factors listed above in light of
their knowledge of the business and operations of Magma and their business
judgment. In view of the wide variety of factors considered in connection with
the evaluation of the Offer and the Merger, the Magma Board did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in making their determination.
The Magma Board approved the Merger as part of its recommendations to
the stockholders of Magma that they tender their shares to CECI pursuant to the
Offer. Since the terms of the Merger were disclosed to the Magma stockholders
at the time they made their decision to tender their Shares, Magma's
unaffiliated stockholders in effect selected the Merger by virtue of tendering
into the Offer.
CECI. CECI believes the consideration paid in the Offer and the
Merger, taken together, is fair to the stockholders of Magma. CECI's belief is
based upon the fact that the terms of the Offer and the Merger Agreement were
the product of arm's length negotiations between CECI, Magma and their
respective financial and legal advisors and were approved by the Magma Board at
a time when neither CECI nor its affiliates was a member of the Magma Board,
that the Magma Board received a fairness opinion from Goldman Sachs, that a
substantial majority of the holders of Shares executed requests for the call of
the Requested Special Meeting, and that the Magma Board believed that the
reasonably likely alternatives to the Offer and the Merger were unlikely to
provide values to the stockholders of Magma superior to the Offer. While the
Merger does not require the approval of a majority of the unaffiliated
stockholders of Magma, CECI believes that the Merger is procedurally fair to
the stockholders of Magma for the reasons set forth above. In addition, as the
terms of the Merger were disclosed to the stockholders of Magma at the time
they made their decision to tender their Shares pursuant to the Offer, Magma's
unaffiliated stockholders in effect selected the Merger by virtue of tendering
into the Offer.
Opinion of Magma's Financial Advisor
The Magma Board retained Goldman Sachs as Magma's exclusive financial
advisor in connection with the Initial Proposal and the ensuing related events,
including the Offer and the Merger. Goldman Sachs is an internationally
recognized investment banking firm and is continually engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. The Magma Board selected Goldman Sachs to act as
Magma's exclusive financial advisor based on Goldman Sachs' familiarity with
Magma and Goldman Sachs' substantial experience in mergers and acquisitions and
in securities valuation generally. No limitations were imposed by the Magma
Board upon Goldman Sachs with respect to the investigations made or procedures
followed by Goldman Sachs in rendering its opinion.
On December 5, 1994, Goldman Sachs delivered its oral opinion (which
was subsequently confirmed in writing) to the Magma Board that, as of December
5, 1994, the Consideration (as defined below) to be received by the holders of
the Shares in the Offer and the Merger, taken as a unitary transaction, was
fair to the holders of Shares receiving such Consideration (other than CECI and
its affiliates). For purposes of Goldman Sachs' opinion, the term
"Consideration" means the consideration to be received by the holders of Shares
in the Offer and the Merger, taken as a unitary transaction (regardless of the
payment option chosen by CECI with respect to the Merger as discussed under the
caption "THE MERGER AGREEMENT -- Terms of the Merger"). The full text of the
written opinion, dated December 9, 1994, which confirms Goldman Sachs' December
5, 1994 oral opinion and sets forth the assumptions made, the matters
considered and the limitations on the review taken by Goldman Sachs, is
attached to this Information Statement as Annex B and is incorporated herein by
reference. Holders of Shares are urged to and should read such opinion in its
entirety.
In connection with its opinion, Goldman Sachs reviewed, among other
things, the Merger Agreement; Annual Reports to Stockholders and Annual Reports
on Form 10-K of Magma and CECI for the five years ended December 31, 1993;
certain interim reports to stockholders and Quarterly Reports on Form 10-Q of
Magma and CECI; certain other communications from Magma and CECI to their
respective stockholders; certain internal financial analyses and forecasts for
Magma prepared by the management of Magma; and certain internal financial
analyses and forecasts for Magma and CECI prepared by the management of CECI.
Goldman Sachs also held discussions with members of the senior managements of
each of Magma and CECI regarding the past and current business operations,
financial condition and future prospects of their respective companies and as
combined in the contemplated Merger. Goldman Sachs reviewed the reported price
and trading activity for both the Shares and the CECI Common Stock, compared
certain financial and stock market information for Magma and CECI,
respectively, with similar information for certain other companies the
securities of which are publicly traded, reviewed the financial terms of
certain recent business combinations in the independent power production
industry specifically and in other industries generally and considered such
other information, held such other discussions and performed such other studies
and analyses as it considered appropriate.
Goldman Sachs relied without independent verification upon the accuracy
<PAGE>
and completeness of all of the financial and other information reviewed by it
for purposes of its opinion. In addition, Goldman Sachs did not make an
independent evaluation or appraisal of the assets and liabilities of Magma or
CECI or any of their respective subsidiaries and was not furnished with any
such evaluation or appraisal.
The terms of the engagement of Goldman Sachs by Magma are set forth in
a letter agreement dated September 26, 1994 between Goldman Sachs and Magma
(the "Goldman Engagement Letter"). Pursuant to the terms of the Goldman
Engagement Letter, Magma has agreed to pay Goldman Sachs (a) an initial fee of
$850,000, (b) a transaction fee in the event of any transaction in which at
least 50% of the outstanding Shares are acquired, or all or substantially all
of the assets of Magma are transferred, equal to 0.4% of the aggregate value of
such transaction up to $35.00 per share, plus 1.666% of the aggregate value of
such transaction in excess of $35.00 per share up to $38.00 per share, plus
2.5% of the aggregate value of such transaction in excess of $38.00 per share
and (c) a financial advisory fee to the extent no transaction of the type
described in clause (b) above has been consummated equal to 0.4% of the market
value of Magma's outstanding shares as determined on September 20, 1994,
payable in four equal installments due December 31, 1994, March 31, 1995, June
30, 1995 and September 30, 1995, so long as Magma is independent as of any date
such payment is due; provided, however, that such financial advisory fee shall
equal (i) $850,000 in the event that Magma rejected the Initial Proposal by
October 10, 1994, and CECI subsequently withdraws such proposal on or before
the end of the fifth business day following the date of such rejection or (ii)
$1,700,000 in the event that Magma rejected the Initial Proposal by October 10,
1994, and CECI subsequently withdraws such proposal after the fifth business
day following such rejection but on or before the end of the fifteenth business
day following such rejection. The fees paid pursuant to clauses (a) and (c)
above shall be creditable against any fees payable pursuant to clause (b)
above.
Magma has also agreed to reimburse Goldman Sachs for its out-of-pocket
expenses, including all fees and disbursements of counsel, and to indemnify
Goldman Sachs and certain related persons against certain liabilities in
connection with its engagement, including certain liabilities under the federal
securities laws. Goldman Sachs provides a full range of financial, advisory
and brokerage services and in the course of its normal trading activities may
from time to time effect transactions and hold positions in the securities or
options on securities of Magma and/or CECI for its own account and for the
accounts of its customers. In the course of its trading activities prior to
its retention by Magma in connection with the Initial Proposal, Goldman Sachs
accumulated a long position of 60,100 Shares.
The following is a summary of certain financial analyses utilized by
Goldman Sachs in connection with providing its opinion to the Magma Board on
December 5, 1994 and does not purport to be a complete description of the
analyses performed by Goldman Sachs.
Financial Statement Analysis. Goldman Sachs reviewed and analyzed
selected historical and forecasted income statement, balance sheet and cash
flow information for each of Magma and CECI.
Stock Trading Analysis. Goldman Sachs reviewed and analyzed the
historical trading prices and volumes for the common stock of Magma and of CECI
during the trailing five and three year periods, respectively, for trading
prices and volumes. In addition, Goldman Sachs compared such trading prices to
the Standard & Poor's 400 Index and an index of selected companies within the
independent power production industry (including The AES Corporation, Destec
Energy, Inc., KENETECH Corporation and Sithe Energies, Inc.) for the period
commencing January 1994.
Selected Company Analysis. Goldman Sachs reviewed and compared certain
actual and estimated financial, operating and stock market information of
Magma, CECI and selected companies in the independent power production industry
including The AES Corporation, Destec Energy, Inc., KENETECH Corporation and
Sithe Energies, Inc.
Discounted Cash Flow Analysis. Goldman Sachs estimated the net present
value of Magma as a going concern based on estimates of future project cash
flows and the likelihood of successful project development where appropriate,
all as provided by Magma management. Goldman Sachs performed a variety of
sensitivity analyses on such cash flow information based upon a variety of
factors, including utility avoided costs and discount rates.
Pro Forma Analyses. Goldman Sachs reviewed certain forecasted
financial information prepared by the respective managements of Magma and CECI
for their respective companies as well as certain pro forma financial
information for the combined entity prepared by CECI management. Goldman
Sachs' pro forma analysis was based primarily on the foregoing information. In
conducting its analysis, Goldman Sachs assumed that the option to pay the All
Cash Component Amount was not exercised by CECI in the Merger. Further, in
conducting its analysis with respect to information provided by Magma and CECI
managements' for their respective companies, Goldman Sachs also assumed that
synergies from the Merger aggregated in the amount of $5 million. In addition,
Goldman Sachs evaluated the pro forma information for the combined entity as
provided by CECI management (including certain other assumptions made therein).
The foregoing analyses indicated that earnings per share for the pro forma
combined entity would be higher as compared with forecasted earnings per share
for CECI as a stand alone entity.
Goldman Sachs also reviewed the value of the Consideration to be
received by the holders of the Shares on a per Share basis assuming (i) that
all outstanding Shares were tendered in the Offer, (ii) that the option to pay
the All Cash Component Amount was not exercised by CECI in the Merger, and
(iii) a range of market prices for CECI Common Stock between $10 per share to
<PAGE>
$20 per share. The foregoing analysis indicated that the value of the
Consideration had a range between $35.86 per Share (if CECI Common Stock traded
at $10 per share) and $39.71 per Share (if CECI Common Stock traded at $20 per
share).
Selected Transactions Analysis. Goldman Sachs reviewed and analyzed
certain information relating to selected transactions within the independent
power production industry since January 1, 1988.
Other Analyses. Goldman Sachs reviewed selected investment research
reports on, and earnings estimates for, CECI and Magma and analyzed available
information regarding the ownership of Shares and CECI Common Stock. Goldman
Sachs also considered the status of discussions with certain third parties
which may have had a potential interest in entering into a business combination
transaction or a strategic alliance with Magma.
General. As described above, certain of the analyses performed by
Goldman Sachs relied on estimates of future financial performance provided by
the managements of CECI and Magma, including certain financial forecasts for
the pro forma combined entity resulting from the Merger prepared by the
management of CECI and, in the Discounted Cash Flow Analysis, estimates
regarding the likelihood of successful project development as provided by Magma
management relating to Magma's IPP projects.
The foregoing summary does not purport to be a complete description of
the analyses performed by Goldman Sachs. The preparation of a fairness opinion
is a complex process and is not necessarily susceptible to partial analysis or
summary description. Selecting portions of the analyses or of the summary set
forth above, without considering the analysis as a whole, could create an
incomplete view of the processes underlying Goldman Sachs' opinion. In
arriving at its fairness determination, Goldman Sachs considered the results of
all such analyses. The analyses were prepared solely for purposes of Goldman
Sachs' providing its opinion to Magma's Board of Directors as to the fairness
of the Consideration to the holders of Shares (other than CECI and its
affiliates), and do not purport to be appraisals or necessarily reflect the
prices at which Magma or its securities actually may be sold. Analyses based
upon forecasts of future results are not necessarily indicative of actual
future results, which may be significantly more or less favorable than
suggested by such analyses.
Opinion of CECI's Financial Advisor
On December 6, 1994, Gleacher delivered its written opinion to the CECI
Board (the "Gleacher Opinion") to the effect that, as of December 6, 1994, and
based upon the assumptions made, matters considered and limits of the review,
as set forth in the Gleacher Opinion, the Consideration (as defined below) to
be paid by CECI pursuant to the Offer and the Merger is fair to CECI from a
financial point of view. For purposes of the Gleacher Opinion, the term
"Consideration" means the consideration paid by CECI pursuant to the Offer
together with, at CECI's option, either (i) $39.00 per Share in a combination
of cash and a number of shares of CECI Common Stock to be determined in
accordance with the Merger Agreement, or (ii) $38.50 per Share in cash, in
either case to be paid by CECI pursuant to the Merger Agreement.
A copy of the Gleacher Opinion, which sets forth the assumptions made,
matters considered and the limits of the review by Gleacher, is attached to the
Information Statement/Prospectus as Annex C. The Gleacher Opinion is directed
only to the fairness of the Consideration to be paid by CECI from a financial
point of view. The summary of the Gleacher Opinion set forth in the
Information Statement/Prospectus is qualified in its entirety by reference to
the full text of such Opinion.
In arriving at its opinion, Gleacher, among other things, (i) reviewed
the audited financial statements and public Commission filings for the three
most recent fiscal years and interim periods to date of Magma and CECI (the
"SEC Reports"); (ii) on an operating and trading basis, compared financial
information relating to Magma's businesses with published financial information
concerning certain companies whose businesses Gleacher deemed to be reasonably
similar, in whole or in part, to those of Magma; (iii) analyzed the market
prices and trading characteristics of the Shares and the CECI Common Stock for
recent periods to date; (iv) conducted discussions with members of senior
management of CECI concerning its businesses and prospects; (v) reviewed
certain financial forecasts for Magma and CECI, and projections of expected
cost savings in a business combination (together, the "Projections"), in each
case as prepared by CECI; (vi) based on the Projections, performed a discounted
cash flow analysis of Magma including the expected cost savings arising from a
business combination; (vii) based on the Projections, analyzed the pro forma
financial effects to CECI of the proposed business combination; (viii) assumed
without independent investigation that no material contingent liability exists
with respect to Magma or CECI which is not disclosed in the SEC Reports; (ix)
reviewed the Merger Agreement and related transaction documentation; and (x)
reviewed certain other financial studies, performed such other analyses and
took into account certain other matters as deemed appropriate.
Gleacher relied upon the accuracy and completeness of all information
supplied or otherwise made available to it by CECI, and did not independently
verify such information or make or obtain an independent evaluation or
appraisal of the assets of CECI or Magma. With respect to the Projections,
Gleacher assumed without independent investigation that the Projections were
reasonably prepared by CECI, and were generated on bases reflecting the best
currently available estimates and judgments of CECI's management as to the
expected future financial performance of CECI or Magma, as the case may be.
The Gleacher Opinion was based upon prevailing market conditions and other
circumstances and conditions as they existed as of the date of the Gleacher
Opinion.
<PAGE>
In arriving at the Gleacher Opinion and making its presentation to the
CECI Board at the meeting held on December 6, 1994, Gleacher considered and
discussed certain financial analyses and other factors. In connection with its
presentation, Gleacher provided the CECI Board with a summary of valuation
results obtained by using several different valuation methods as well as other
materials concerning Magma (the "Gleacher Report"), the material portions of
which are summarized below.
Purchase Price Multiples. Gleacher compared the Consideration to be
paid by CECI assuming that the All Cash Component was exercised by CECI to the
price per Share as of the close of business the day before the Offer commenced
(resulting in an implied premium to Magma stockholders of approximately 41%)
and the average closing price per Share during the six-month period before the
Offer commenced (resulting in an implied premium to Magma stockholders of
approximately 30%). Gleacher also calculated the value of such Consideration
as a multiple of (i) Magma's trailing twelve-month earnings before interest and
taxes (10.5x), (ii) net income (14.6x), (iii) book value (2.4x), and (iv)
projected net income for 1994 (15.5x) and 1995 (14.4x).
Discounted Cash Flow Analysis. Gleacher performed two discounted cash
flow analyses of Magma based upon (i) estimates of financial performance as
prepared by CECI for each of Magma's power projects in operation, financed and
in construction, excluding any other projects under development and (ii)
estimates of financial performance as prepared by Magma for each of Magma's
power projects including (a) certain projects under development and (b)
benefits of a specific technology expected to be implemented. Using these
projections, Gleacher discounted to the present (i) the projected stream of
proportionate cash flows through year 2012 and (ii) the projected terminal
value of Magma at such year based upon a multiple of projected after-tax cash
flows. After-tax cash flows were calculated as projected earnings adjusted for
all non-cash items, less capital expenditures and principal payments on debt
obligations. Gleacher applied several discount rates (ranging from 10% to 15%)
and an after-tax cash flow multiple of 14x to Magma's after-tax cash flows.
The discount rates and after-tax cash flow multiple used by Gleacher in its
analysis were based upon discussions with the management of CECI and Gleacher's
judgments as to the manner in which companies in the Comparable Group are
valued. The "Comparable Group" included CECI, The AES Corporation, Destec
Energy, Inc. and Sithe Energies, Inc. Using this valuation method, the implied
value of the common stock of Magma ranged between approximately $30 per share
and over $50 per share, respectively.
Trading Valuation. Gleacher reviewed and compared certain actual and
estimated financial and operating results and stock market performance of Magma
and the Comparable Group. Applying trading multiples of the Comparable Group
to Magma's financial performance, and adding an assumed control premium of 25%
- - 50% to Magma's trading value, the implied value of the Common Stock of Magma
was estimated to be in excess of $40 per Share.
Pro Forma Analyses. Gleacher analyzed the pro forma impact of the
Merger on earnings per share of CECI Common Stock for periods following
consummation of the Merger, and compared such amounts to projected earnings per
share on a stand-alone basis for CECI based on CECI's base operating plan.
Assuming that CECI achieves a modest level of synergies in 1995 resulting from
the Merger, and assuming that the All Cash Component Amount was exercised by
CECI, such analyses estimated that the Merger would be accretive to earnings
per share for the CECI Common Stock by 1.0% in 1995, 10.6% in 1996 and 22.6% in
1997.
Stock Trading Analysis. Gleacher reviewed and analyzed the historical
trading prices and volumes for the common stock of Magma during the 30-month
period preceding the Offer.
In arriving at the Gleacher Opinion and in presenting the Gleacher
Report, Gleacher performed a variety of financial analyses, the material
portions of which are summarized above. The summary set forth above does not
purport to be a complete description of the analyses performed by Gleacher. In
addition, Gleacher believes that its analyses must be considered as a whole and
that selecting portions of its analyses and of the factors considered by it,
without considering all such factors and analyses, could create a misleading
view of the process underlying its analyses set forth in the Gleacher Opinion
and the Gleacher Report. The matters considered by Gleacher in arriving at the
Gleacher Opinion that, as of the date of such opinion, the Consideration to be
paid by CECI pursuant to the Offer and the Merger is fair to CECI from a
financial point of view, are based on numerous macroeconomic, operating and
financial assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond CECI's
control. Any estimates incorporated in the analyses performed by Gleacher are
not necessarily indicative of actual past or future results or values, which
may be significantly more or less favorable than such estimates. Estimated
values do not purport to be appraisals and do not necessarily reflect the
prices at which businesses or companies may be acquired in the future, and such
estimates are inherently subject to uncertainty. Arriving at a fairness
opinion is a complex process not necessarily susceptible to partial or summary
description. No public company utilized as a comparison is identical to Magma.
Accordingly, an analysis of publicly traded comparable companies is not
mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
comparable companies and other factors that could affect the public trading
value of the comparable companies or company to which they are being compared.
Gleacher is a recognized investment banking firm routinely engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions and other purposes. The CECI Board selected Gleacher to act as
CECI's exclusive financial advisor based on Gleacher's familiarity with CECI
and Gleacher's substantial experience in mergers and acquisitions and in
securities valuation generally. No limitations were imposed by the CECI Board
<PAGE>
upon Gleacher with respect to the investigations made or procedures followed by
Gleacher in rendering its opinion.
Pursuant to the terms of a letter agreement dated September 18, 1994,
between CECI and Gleacher (the "Gleacher Engagement Letter"), CECI paid
Gleacher a fee of $250,000 and has agreed to pay Gleacher (i) a fee of
$4,000,000 payable upon the completion of the direct or indirect acquisition by
CECI, either alone or in partnership with another entity, by merger,
acquisition of securities, or otherwise, of 50.1% or more of the equity
securities of Magma, which fee shall be offset by the $250,000 previously paid
to Gleacher by CECI and (ii) a fee equal to 0.25% of the principal amount of
debt directly arranged by Gleacher and Lehman Brothers in connection with the
proposed transaction, which is estimated to be $1,250,000, assuming the full
amount of the Merger Facilities is drawn down by CECI.
In addition to any fees payable to Gleacher pursuant to the terms of
the Gleacher Engagement Letter, CECI shall reimburse Gleacher for all
reasonable travel and other reasonable out-of-pocket expenses incurred by
Gleacher thereunder, including all reasonable fees and disbursements of
Gleacher's legal counsel and any other professional advisors.
In connection with the matters described in the Gleacher Engagement
Letter, CECI and Gleacher entered into a separate letter agreement, dated
September 18, 1994, providing for the indemnification, contribution, and
reimbursement of Gleacher and certain other entities and individuals for a
period of six years from the date of termination of Gleacher's engagement
pursuant to the terms of the Gleacher Engagement Letter.
Financing of Merger Consideration
If CECI elects to pay the Merger Consideration with a combination of
cash and Common Stock, CECI estimates that approximately $710,900,000 will be
required to effectuate the Merger, to refinance bank borrowings incurred in
connection with the Offer and to pay related fees and expenses. If CECI elects
to pay the Merger Consideration solely in cash, approximately $957,400,000 will
be required. Approximately one-half of whichever amount is required will be
provided under secured bank credit facilities (the "Merger Facilities") with
Credit Suisse pursuant to which Credit Suisse will provide, on specified terms
and subject to customary conditions, up to $500,000,000 in secured bank
financing. Such funds, together with a capital contribution by CECI from the
Company's general corporate funds and, if CECI elects to pay the Merger
Consideration solely in cash, the net proceeds of a CECI Common Stock public
offering, will be sufficient to pay the Merger Consideration, to refinance bank
borrowings incurred in connection with the Offer and to pay related fees and
expenses.
CECI has received a fully underwritten financing commitment letter from
Credit Suisse (the "Commitment Letter") which states that Credit Suisse will
provide to CE Sub, on specified terms and subject to customary conditions (i) a
facility of up to $250,000,000 to capitalize CE Sub for the purpose of
financing the Offer (the "Tender Facility"), which facility has been [fully
utilized] in connection with consummation of the Offer, and (ii) the Merger
Facilities for, among other things, refinancing the Tender Facility and
effectuating the Merger.
On January 10, 1995, in connection with the purchase of Shares pursuant
to the Offer, CECI borrowed $[250] million under the Tender Facility on a
limited-recourse basis (recourse as to interest only and certain fees) and
loaned the proceeds of such borrowing to CE Sub in exchange for a secured term
note of CE Sub (the "CE Sub Note"). The economic terms of CE Sub Note mirror
those of the Tender Facility.
The Tender Facility is a 12-month term loan extendible for up to three
years by the mutual consent of CECI and Credit Suisse. Borrowings under the
Tender Facility are secured by an assignment and pledge of CE Sub Note, which
in turn is secured by an assignment and pledge of the 12,400,000 Shares
purchased by CE Sub pursuant to the Offer and an additional 200,000 Shares
contributed by CECI to the capital of CE Sub. Interest on borrowings under the
Tender Facility is payable at spreads of 2.50% above LIBOR (adjusted for
reserves) or 1.25% above Base Rate.
The Tender Facility contains affirmative and negative covenants
customary for similar credit facilities. Such covenants include: a negative
pledge of all stock and unencumbered assets of CE Sub and its subsidiaries; a
limitation on guaranties by CECI and CE Sub; a limitation on mergers and sales
of assets by CECI and its subsidiaries; a limitation on investments in other
persons by CECI and its subsidiaries; a prohibition on dividends and other
payments by CECI and its subsidiaries to CECI unless the proceeds are used to
pay down the Tender Facility in amounts to be agreed upon; a prohibition on the
sale of ownership interests in CE Sub and its subsidiaries; a prohibition on
the incurrence of additional debt by CE Sub and its subsidiaries; a requirement
that CECI deliver each month a certificate as to the absence of material
adverse changes in (i) CECI and its subsidiaries, taken as a whole, and (ii) CE
Sub and its subsidiaries, taken as a whole, which in either case could
reasonably be expected to materially affect the ability of CECI to service the
Tender Facility or the ability of the lenders to realize on the collateral for
the Tender Facility; and a restriction on a change in the nature of the
business of CECI and its subsidiaries, except as contemplated by the Merger
Agreement.
The Tender Facility also contains financial covenants and customary
events of default, including events of default based on: a permanent injunction
prohibiting the Merger; breaches of covenants; cross defaults with respect to
debt of CECI, Magma and their subsidiaries; bankruptcy and similar events; the
failure to pay one or more final judgments aggregating more than a specified
threshold; the failure to make a payment with respect to the Tender Facility
<PAGE>
when due; and the failure of the pledge agreement with respect to the Shares
and CE Sub Note to be in full force and effect.
The Merger Facilities will be comprised of (i) a six year term loan
("Term Loan A") in a principal amount of up to the difference between $500
million and the principal amount of Term Loan B (as defined below), expected to
be amortized in semi-annual payments, and (ii) an eight year term loan ("Term
Loan B") in a principal amount expected to be not less than $150 million,
expected to be amortized in semi-annual payments in the seventh and eighth
years of such Term Loan. Loans under the Merger Facilities will be made to
CECI on a non-recourse basis, and CECI will lend the proceeds of such loans to
Magma in exchange for secured term note of Magma (the "Magma Notes"). The
loans under the Merger Facilities are to be amortized from internally generated
funds of Magma and will be secured by an assignment and pledge by CECI of the
Magma Notes and 100% of the capital stock of Magma. The Magma Note will be
secured by a collateral assignment of certain unencumbered assets of Magma.
Interest on loans borrowed under the Merger Facilities will be payable
at spreads of 2.50% above LIBOR (adjusted for reserves) or 1.50% above Credit
Suisse's Base Rate for Term Loan A, and 3.00% above LIBOR (adjusted for
reserves) or 2.00% above Credit Suisse's Base Rate for Term Loan B. CECI may
elect to have the loans bear interest based on either LIBOR or Credit Suisse's
Base Rate.
The Merger Facilities will contain affirmative and negative covenants
customary for similar credit facilities. Such covenants will include: a
negative pledge of all stock and unencumbered assets of Magma and its
subsidiaries; a limitation on guaranties by Magma and its subsidiaries; a
limitation on mergers and sales of assets by Magma and its subsidiaries; a
limitation on investments in other persons by Magma and its subsidiaries; a
prohibition on dividends and other payments by Magma and its subsidiaries to
CECI unless the proceeds are used to pay down the Merger Facilities in amounts
to be agreed upon; a limitation on the sale of ownership interests in Magma and
its subsidiaries; a prohibition on the incurrence of additional debt by Magma
and its subsidiaries; a requirement that CECI deliver each fiscal quarter a
certificate as to the absence of material adverse changes in CECI or Magma
which could reasonably be expected to materially affect the ability of CECI to
service the Merger Facilities or the ability of the lenders to realize on the
collateral for the Merger Facilities; and a restriction on a change in the
nature of the business of Magma and its subsidiaries.
The Merger Facilities will also contain financial covenants and
customary events of default, including events of default based on: breaches of
covenants; cross defaults with respect to debt of CECI, Magma and their
subsidiaries; bankruptcy and similar events; the failure to pay one or more
final judgments aggregating more than a specified threshold to be agreed upon;
the failure to make a payment with respect to the Merger Facilities when due;
and the failure of the pledge agreement with respect to the capital stock of
Magma and the Magma Notes to be in full force and effect.
Credit Suisse's commitment to provide the Merger Facilities is subject
to certain customary conditions, including without limitation (a) a capital
investment in CE Sub in an amount and form satisfactory to Credit Suisse and
(b) the absence of certain material adverse changes.
CECI has agreed to pay certain fees to Credit Suisse with respect to
the Merger Facilities and Tender Facilities which, in the aggregate, are not
material to the transactions described herein.
Certain Effects of the Merger: Operations After the Merger
As a result of the Merger there will be no public market for the
Shares. Upon consummation of the Merger, the Shares will cease to be quoted on
the NNM, the registration of the Shares under the Exchange Act will be
terminated and will no longer constitute "margin securities" under the rules of
the Board of Governors of the Federal Reserve System.
Following completion of the Merger, CECI will own the entire equity
interest in Magma and will thereby have a 100% interest in Magma's net assets
and earnings. If CECI elects to pay the Merger Consideration with a
combination of cash and CECI Common Stock, upon completion of the Merger, the
existing stockholders of Magma will receive CECI Common Stock representing
approximately 32.2% of the CECI Common Stock then outstanding and will share to
such extent in CECI's earnings and assets with the existing stockholders of
CECI.
Except for the Merger and except as otherwise described in this
Information Statement, CECI has no present plans or proposals which relate to
or would result in (i) an extraordinary corporate transaction, such as a
merger, reorganization or liquidation involving Magma or any of its
subsidiaries, (ii) a sale or transfer of a material amount of assets of Magma
or any of its subsidiaries, (iii) any material change in the present dividend
rate or policy or indebtedness or capitalization of Magma or (iv) any other
material change in Magma's corporate structure or business. See "--Financing
of Merger Consideration."
Federal Income Tax Consequences
The following summary is a general discussion of the material federal
income tax consequences to stockholders of Magma of the Merger. The discussion
is based upon the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury regulations thereunder, administrative procedures, rulings
and decisions in effect on the date hereof, all of which are subject to change
(possibly with retroactive effect) by legislation, administrative action or
judicial decision. No ruling has or will be requested from the Internal Revenue
Service (the "Service") regarding the anticipated tax consequences described
<PAGE>
herein. The discussion set forth below does not discuss all aspects of federal
income taxation that may be relevant to a particular stockholder in light of
his personal investment circumstances or to certain types of stockholders
subject to special treatment under the federal income tax laws (for example,
tax-exempt organizations, foreign corporations and individuals who have
received Shares as compensation or who are not citizens or residents of the
United States) and does not discuss any aspect of state, local or foreign
taxation. The discussion is limited to those stockholders who hold the Shares
as capital assets (generally, property held for investment) within the meaning
of Section 1221 of the Code. Stockholders should consult their individual tax
advisors concerning the specific tax consequences of the Merger, including the
application and effect of state, local, foreign and other tax laws.
Tax Effects of the Merger. Each outstanding Share (other than Shares
held by CECI, CE Sub or any other direct or indirect subsidiary of CECI and
Shares held in the treasury of Magma) will be converted in the Merger into the
right to receive, at CECI's election (which election shall be made no later
than five business days prior to the Magma Special Meeting), either (i) all
cash such that the blended consideration paid by CECI in the Offer and the
Merger would be $38.75 per Share or (ii) a combination of cash and CECI Common
Stock such that the consideration paid by CECI in the Offer and the Merger
would consist, on a blended basis, of $28.50 per Share in cash and $10.50 per
Share in market value of CECI Common Stock, based on the Average Closing Price
and subject to the Collar Provision. The Merger will be a taxable transaction
for federal income tax purposes. A stockholder exchanging Shares for cash and
CECI Common Stock pursuant to the Merger will recognize gain or loss in the
Merger equal to the difference between (i) the sum of the cash and the fair
market value of the CECI Common Stock received (if any) in the Merger and (ii)
the holder's adjusted tax basis for the Shares exchanged pursuant to the
Merger. Gain or loss will be calculated separately for each block of Shares
exchanged. A holder's tax basis in the CECI Common Stock received (if any)
pursuant to the Merger will equal the fair market value of such CECI Common
Stock as of the Effective Time, and the holder's holding period for such CECI
Common Stock will commence as of the Effective Time. For tax purposes, the fair
market value of the CECI Common Stock will be determined as of the Effective
Time and, whether or not the Collar Provision is applicable, may differ from
the Average Closing Price used for purposes of determining the number of Shares
to be issued in the Merger.
Gain or loss recognized by an exchanging stockholder in the Merger will
be capital gain or loss if the Shares at the Effective Time are held as capital
assets. Such capital gain or loss will be classified as a long-term capital
gain or loss to the extent that the exchanged Shares have a holding period of
more than one year at the Effective Time. Long-term capital gains recognized
by an exchanging individual stockholder will be subject to tax at a maximum
marginal federal rate of 28%. Short-term capital gains or non-capital gains
recognized by an exchanging individual stockholder will be subject to tax at a
maximum marginal federal rate of 39.6%. Net gains recognized by an exchanging
corporate stockholder will be subject to tax at a maximum marginal federal rate
of 35%.
Backup Withholding. To prevent "backup withholding" of federal income
tax on payments of cash to a stockholder of Magma who exchanges Shares for cash
in the Merger, a stockholder of Magma must, unless an exception applies under
the applicable law and regulations, provide the payor of such cash with such
stockholder's correct taxpayer identification number ("TIN") on a Substitute
Form W-9 and certify under penalties of perjury that such number is correct and
that such stockholder is not subject to backup withholding. A Substitute Form
W-9 is included in the Letter of Transmittal. If the correct TIN and
certifications are not provided, a $50 penalty may be imposed on a stockholder
of Magma by the Service, and cash received by such stockholder in exchange for
Shares in the Merger may be subject to backup withholding at the rate of 31%.
Amounts paid as backup withholding do not constitute an additional tax and
would be allowable as a credit against the stockholder's federal income tax
liability.
The discussion above is included for general information only. It does
not address the state, local or foreign tax aspects of the Merger. In
addition, it does not discuss the federal income tax considerations that may be
relevant to certain persons, including holders of options, and may not apply to
certain holders subject to special tax rules. The discussion is based upon
current law. Legislative, judicial or administrative changes may be
forthcoming that could affect this discussion. EACH STOCKHOLDER SHOULD CONSULT
HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER TO HIM OR HER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE,
LOCAL AND FOREIGN TAX LAWS.
Federal Securities Law Consequences
All CECI Common Stock issued in connection with the Merger will be
freely transferable, except that any CECI Common Stock received by persons who
are deemed to be "affiliates" (as such term is defined under the Securities
Act) of Magma prior to the Merger may be sold by them only in transactions
permitted by the resale provisions of Rule 145 promulgated under the Securities
Act (or Rule 144 if such persons are or become affiliates of CECI) or as
otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of Magma or CECI generally include individuals or entities that
control, are controlled by, or are under common control with, such party and
may include certain officers and directors of such party as well as principal
stockholders of such party.
Accounting Treatment
The Merger will be accounted for under the purchase method of
accounting.
<PAGE>
Stock Exchange Listing
It is a condition to the Merger that the shares of CECI Common Stock to
be issued pursuant to the Merger be authorized for listing on the NYSE, subject
to official notice of issuance.
Dissenters' Rights
Stockholders of CECI are not entitled to appraisal rights under Section
262 of the Delaware General Corporation Law (the "DGCL") in connection with the
Merger.
Holders of Shares do not have the right to dissent from the Merger,
pursuant to Section 78.482 of the Nevada General Corporation Law ("NGCL"),
which provides that holders of securities of Nevada corporations have no right
of dissent with respect to a plan of merger or exchange in favor of holders of
shares of any class or series which was, at the record date fixed to determine
the holders entitled to vote on the merger or plan of exchange, listed on a
national securities exchange or held by at least 2,000 stockholders of record,
unless the articles of incorporation of the corporation provide otherwise or
if, in the merger, the holders will receive consideration other than cash,
shares of the surviving corporation or shares of another corporation which are
listed on a national securities exchange. Since the Shares are listed on the
NNM, and holders thereof will receive in the Merger cash and/or shares of CECI
Common Stock, which are listed on the NYSE, the holders of Shares will not be
entitled to any dissenters' rights.
Expenses of the Transaction
It is estimated that when the Merger is consummated expenses incurred
in connection with the Offer and the Merger will be approximately as follows
(in thousands):
Financial advisory fees and expenses $-----
Commission filing fees -----
Legal fees and expenses -----
Accounting fees -----
Printing costs -----
Proxy solicitation, distribution and Paying Agent fees -----
Blue Sky fees -----
Miscellaneous -----
Total -----
All costs and expenses incurred in connection with the Merger Agreement
and the transactions contemplated thereby will be paid by the party incurring
such expenses, except that expenses incurred in connection with printing,
filing and mailing this Information Statement and all Commission and other
regulatory filing fees in connection therewith will be shared equally by CECI
and Magma.
THE MERGER AGREEMENT
General
The following description of the Merger Agreement does not purport to
be complete, omits provisions that have been rendered inapplicable as a result
of the consummation of the Offer and is qualified in its entirety by reference
to the Merger Agreement, a copy of which is attached hereto as Annex A and
incorporated herein by reference. Stockholders of Magma are urged to read the
Merger Agreement in its entirety.
The Merger
General. The purpose of the Merger is to acquire all Shares not
beneficially owned by CECI following consummation of the Offer. Pursuant to
the Merger Agreement, CECI, CE Sub and Magma have agreed to effectuate the
Merger in accordance with the provisions of the Merger Agreement as promptly as
practicable following consummation of the Offer. Following is a description of
the material terms of the Merger Agreement. The Merger Agreement provides that
as promptly as practicable after the satisfaction or waiver of the conditions
described below (the "Effective Time"), CE Sub will be merged with and into
Magma, with Magma continuing as the surviving corporation following the Merger
(the "Surviving Corporation"). As a result of the Merger, Magma will become a
wholly owned subsidiary of CECI. In addition, the directors of CE Sub
immediately prior to the Effective Time will become the initial directors of
the Surviving Corporation, and the officers of Magma immediately before the
Effective Time will become the initial officers of the Surviving Corporation,
in each case until their successors are duly elected or appointed and
qualified.
Effective Time
Following the adoption of the Merger Agreement and subject to
satisfaction or waiver of certain terms and conditions contained in the Merger
Agreement, the Merger will become effective on such date as the Merger
Agreement and the officers' certificates of each of Magma, CECI and CE Sub, are
duly filed with the Secretary of State of Nevada and the Secretary of State of
Delaware. The filing of the Merger Agreement and the officers' certificates
shall be made as promptly as practicable after all conditions contemplated by
the Merger Agreement have been satisfied or waived.
Terms of the Merger
<PAGE>
The Merger Consideration. In the Merger, each outstanding Share (other
than Shares held by CECI, CE Sub or any other direct or indirect subsidiary of
CECI and Shares held in the treasury of Magma) will be converted into the right
to receive, at CECI's election (which election shall be made no later than five
business days prior to the Magma Special Meeting), either (i) the All Cash
Component Amount, net in cash, without interest thereon or (ii) both (A) the
Mixed Cash Component Amount, net in cash, without interest thereon, and (B) the
number of fully paid and nonassessable shares of CECI Common Stock equal to the
quotient of (I) $39 less (II) the Mixed Cash Component Amount divided by the
Average Closing Price (the All Cash Component Amount or (ii)(A) and (ii)(B),
collectively, as applicable, being the "Merger Consideration").
The foregoing formula for determining the consideration to be paid in
the Merger was established so that (i) if CECI elects to pay the Merger
Consideration with a combination of cash and CECI Common Stock, the
consideration paid by CECI in the Offer and the Merger will consist, on a
blended basis, of $28.50 per Share in cash and $10.50 per Share in market value
of CECI Common Stock, based on the Average Closing Price and subject to the
Collar Provision, and (ii) if CECI elects to pay only cash consideration in the
Merger, the blended consideration paid by CECI in the Offer and the Merger
would be $38.75 per Share. The consideration to be paid in the Offer,
including the terms of the Collar Provision, was negotiated on an arms' length
basis between CECI and Magma. The purpose of the Collar Provision is to limit
the number of shares of CECI Common Stock required to be issued in the Merger
if the Average Closing Price is less than $14.27 and to establish a minimum
number of shares of CECI Common Stock required to be issued in the Merger if
the Average Closing Price exceeds $18.73.
Stock Options. Each option outstanding immediately prior to the
Effective Time under the Magma Stock Option Plans (as defined in the Merger
Agreement), whether or not then exercisable, shall be cancelled by Magma and,
in exchange therefor, each holder of any such option shall be entitled to
receive from Magma at the Effective Time, or as soon as practicable thereafter,
an amount in cash equal to the product of (x) the number of Shares previously
subject to such option and (y) the excess, if any, of $39.00 (if CECI elects to
pay the Merger Consideration with a combination of cash and CECI Common Stock)
or $38.75 (if CECI elects to pay the Merger Consideration solely in cash) over
the exercise price per Share previously applicable to such option. Each
unvested share of deferred stock outstanding immediately prior to the Effective
Time (each, a "Deferred Share") shall be cancelled by Magma and each holder of
a cancelled Deferred Share shall be entitled to receive at the Effective Time
or as soon as practicable thereafter from Magma an amount in cash equal to
$39.00 (if CECI elects to pay the Merger Consideration with a combination of
cash and CECI Common Stock) or $38.75 (if CECI elects to pay the Merger
Consideration solely in cash).
Board Representation. Pursuant to the Merger Agreement, on January 10,
1995, CECI obtained majority representation on the Magma Board of Directors
(the "Magma Board"). The Magma Board currently consists of six designees of
CECI (the "Acquisition Designees") and two individuals who were directors of
Magma at the time the Merger Agreement was executed. Prior to the Effective
Time, any amendment of the Merger Agreement or Articles of Incorporation or By-
laws, any extension by Magma of the time for the performance of any of the
obligations or other acts of CECI or CE Sub, or waiver of any of Magma's rights
under the Merger Agreement, and any other consent or action of the Magma Board
under the Merger Agreement will require the concurrence of a majority (which
shall be at least two) of the directors of Magma then in office who are not
designees of CECI or CE Sub ("Disinterested Directors").
CECI has agreed to use its best efforts to nominate and cause up to two
nominees of Magma to be elected or appointed as members of the CECI Board.
Acquisition Designees
CE Sub has selected the following Acquisition Designees:
David L. Sokol, 38, has served as President and Chief Executive Officer
of CECI since April 19, 1993, as Chairman of the Board of Directors since May
5, 1994 and has been a director of California Energy since March 1991. He has
served as Chairman of the Board of Directors, President and Chief Executive
Officer of CE Sub since its organization. Formerly, Mr. Sokol was Chairman,
President, and Chief Executive Officer of CECI from February 1991 until January
1992. Mr. Sokol has served as Chairman, President and Chief Executive Officer
of CE Sub since its formation on September 22, 1994. Mr. Sokol was the
President and Chief Operating Officer of, and a director of, JWP, Inc., from
January 27, 1992 to October 1, 1992. From November 1990 until February 1991,
Mr. Sokol was the President and Chief Executive Officer of Kiewit Energy
Company. From 1983 to November 1990, Mr. Sokol was the President and Chief
Executive Officer of Ogden Projects, Inc.
Edgar D. Aronson, 59, has been a director of CECI since April 1983.
Mr. Aronson founded EDACO Inc., a private venture capital company, in 1981, and
has been President of EDACO since that time. Prior to that, Mr. Aronson was
Chairman, Dillon, Read International from 1979 to 1981 and a General Partner in
charge of the International Department at Salomon Brothers Inc from 1973 to
1979.
Richard K. Davidson, 52, was appointed a director of CECI in March
1993. Mr. Davidson has been Chairman and Chief Executive Officer of Union
Pacific Railroad since 1991. From 1989 to 1991 he was Executive Vice President
- - Operations of Union Pacific Railroad, and from 1986 to 1989 he was Vice
President - Operations of Union Pacific Railroad. Mr. Davidson is also a
director of FirsTier Financial, Inc., Chicago & Northwestern Holdings
Corporation and Missouri Pacific Railroad Company.
Ben Holt, 80, has been a director of CECI since September 1993. Mr.
<PAGE>
Holt is the founder, and was Chairman and Chief Executive Officer, of The Ben
Holt Co., an engineering firm located in Pasadena, California, which California
Energy acquired in September 1993. Mr. Holt retired as Chairman and CEO of The
Ben Holt Co. in December 1993 and is currently a consultant to California
Energy. Mr. Holt is a beneficial owner of 3,763 Shares, representing less than
1% of the outstanding Shares.
Richard R. Jaros, 42, has been director of CECI since March 1991. Mr.
Jaros served as Chairman of the Board from April 19, 1993 to May 5, 1994 and
served as President and Chief Operating Officer of CECI from January 8, 1992 to
April 19, 1993. From 1990 until January 8, 1992, Mr. Jaros served as a Vice
President of PKS and is currently an Executive Vice President and a director of
PKS. Mr. Jaros serves as a director of MFS Communications Company, Inc. and C-
TEC Corporation, both of which are publicly traded companies in which PKS holds
a majority ownership interest. From 1986 to 1990, Mr. Jaros served as a Vice
President for Mergers and Acquisitions for Kiewit Holdings, a subsidiary of
PKS.
Walter Scott, Jr., 62, has been a director of CECI since June 1991.
Mr. Scott was the Chairman and Chief Executive Officer of CECI from January 8,
1992 until April 19, 1993. Mr. Scott is Chairman and President of PKS, a
position he has held since 1979. Mr. Scott is a director of Berkshire
Hathaway, Inc., Burlington Resources, Inc., ConAgra, Inc., FirsTier Financial,
Inc., and Valmont Industries, Inc. Mr. Scott also serves as a director of MFS
Communications Company, Inc. and C-TEC Corporation, both publicly traded
companies in which PKS holds a majority ownership interest.
Surrender and Payment
The Merger Agreement provides that before the Effective Time, Magma
will appoint a bank or trust company to act as the exchange agent for the
holders of Shares (the "Exchange Agent") to receive the funds and/or securities
necessary to make the payments of the Merger Consideration. Each holder of a
certificate representing any Shares canceled upon the Merger may thereafter
surrender such certificate to the Exchange Agent to effect the surrender of
such certificate on such holder's behalf for a period ending one year after the
Effective Time. Promptly after the Effective Time, CECI shall cause the
distribution to holders of record of Shares as of the Effective Time of
appropriate materials to facilitate such surrender, including a letter of
transmittal.
STOCKHOLDERS OF MAGMA SHOULD NOT SEND CERTIFICATES
REPRESENTING THEIR SHARES TO MAGMA OR TO THE EXCHANGE
AGENT PRIOR TO RECEIPT OF THE LETTER OF TRANSMITTAL
If payment of the Merger Consideration in respect of canceled Shares is
to be made to a person other than the person in whose name a surrendered
certificate or instrument is registered, it shall be a condition to such
payment that the certificate or instrument so surrendered shall be properly
endorsed or shall be otherwise in proper form for transfer and that the person
requesting such payment shall have paid any transfer and other taxes required
by reason of such payment in a name other than that of the registered holder of
the certificate or instrument surrendered or shall have established to the
satisfaction of the Surviving Corporation that such tax either has been paid or
is not payable.
At the close of business on the day of the Effective Time, the stock
transfer books of Magma shall be closed and there shall not be any further
registration or transfer of Shares thereafter on the records of Magma. If,
after the Effective Time, certificates for Shares are presented to the
Surviving Corporation, they shall be canceled and exchanged (without interest)
for the Merger Consideration.
Fractional Shares
If CECI elects to pay the Merger Consideration with a combination of
cash and CECI Common Stock, fractional shares of CECI Common Stock shall not be
issued in connection with the Merger. In lieu of any such fractional share,
each holder of Shares who would otherwise have been entitled to a fraction of a
share of CECI Common Stock upon surrender of certificates for exchange shall be
paid cash (without interest) in an amount equal to such holder's proportionate
interest in the net proceeds from the sale or sales in the open market of the
aggregate fractional CECI Common Stock issued pursuant to the Merger Agreement.
As soon as practicable following the Effective Time, the Exchange Agent shall
determine the excess of (i) the number of full shares of CECI Common Stock
delivered to the Exchange Agent by CECI over (ii) the aggregate number of full
shares of CECI Common Stock to be distributed to holders of Shares ("Excess
Shares"), and the Exchange Agent, as agent for the former holders of Shares,
shall sell the Excess Shares at the prevailing prices on the NYSE. The sale of
the Excess Shares by the Exchange Agent shall be executed on NYSE in round lots
to the extent practicable. The Exchange Agent shall deduct from the proceeds
of the sale of the Excess Shares all commissions, transfer taxes and other
reasonable out-of-pocket transaction costs, including the expenses and
compensation of the Exchange Agent incurred in connection with such sale of
Excess Shares.
Conditions to Consummation of the Merger
Consummation of the Merger remains subject to certain conditions,
including (i) approval and adoption of the Merger and the Merger Agreement by
the requisite vote of Magma's stockholders, (ii) approval of the issuance of
CECI Common Stock in order to effectuate the Merger by the requisite vote of
CECI's stockholders, (iii) the CECI Common Stock issuable to Magma's
stockholders in the Merger having been authorized for listing on the NYSE upon
official notice of issuance, (iv) the registration statement to be filed with
the Commission by CECI on Form S-4 under the Securities Act for the purpose of
<PAGE>
registering the shares of CECI Common Stock to be issued in the Merger shall
have become effective in accordance with the provisions of the Securities Act
and no stop order suspending such effectiveness shall have been issued by the
Commission and remain in effect, and (v) that there shall not be in effect (a)
any judgment, decree or order issued by any Federal, state or local court of
competent jurisdiction, or (b) any statute, rule or regulation enacted or
promulgated by any Federal, state, local or legislative, administrative or
regulatory body of competent jurisdiction, that in either of cases (a) or (b)
prohibits the consummation of the Merger or makes such consummation illegal.
Representations and Warranties
The Merger Agreement contains customary representations and warranties
of the parties thereto, including representations by each of Magma and CECI as
to the absence of certain changes or events concerning its business, compliance
with law, approval of the Offer and the Merger by Magma for purposes of certain
Nevada antitakeover statutes, energy regulatory status, environment, employee
benefit plans, insurance, taxes, related party transactions, the status of
development and construction projects and the status of operating projects.
Conduct of Business by Magma and CECI Pending the Merger
Magma has agreed that, prior to the Effective Time, unless CECI shall
otherwise consent in writing and except as is otherwise permitted by the Merger
Agreement, the businesses of Magma and its subsidiaries shall be conducted only
in, and Magma and its subsidiaries shall not take any action except in, the
ordinary course of business and in a manner consistent with past practice; and
Magma will use its best efforts to preserve substantially intact its business
organization, to keep available the services of its present officers, employees
and consultants and to preserve its present relationships with customers,
suppliers and other persons with which it or any of its subsidiaries has
significant business relations. Except as contemplated by the Merger Agreement,
Magma has agreed that neither it nor any of its subsidiaries will, prior to the
Effective Time, directly or indirectly, do any of the following without the
prior written consent of CECI: (a) (i) issue, sell, pledge, dispose of,
encumber, authorize, or propose the issuance, sale, pledge, disposition,
encumbrance or authorization of any Shares or shares of its subsidiaries'
capital stock of any class, or any options, warrants, convertible securities or
other rights of any kind to acquire any shares of its or its subsidiaries'
capital stock, or any other ownership interest (except with respect to Shares
previously reserved for issuance as disclosed in Section 4.03 of the Merger
Agreement); (ii) amend or propose to amend its articles of incorporation or
bylaws or equivalent organizational documents; (iii) split, combine or
reclassify any of its outstanding common stock, or declare, set aside or pay
any dividend or distribution payable in cash, stock, property or otherwise with
respect to the common stock; (iv) redeem, purchase or otherwise acquire or
offer to redeem, purchase or otherwise acquire any shares of its capital stock,
except in the performance of its obligations under existing employee plans; or
(v) authorize or propose or enter into any contract, agreement, commitment or
arrangement with respect to any of the matters set forth in this section (a);
(b) (i) acquire (by merger, consolidation, or acquisition of stock, partnership
interests or assets) any corporation, partnership or other business
organization or division thereof or any other interests in operating
properties; (ii) except in the ordinary course of business and in a manner
consistent with past practices, sell, pledge, lease, transfer, dispose of, or
encumber or authorize or propose the sale, pledge, lease, transfer, disposition
or encumbrance of any of its or its subsidiaries' assets (including intangible
assets); (iii) create, incur, assume or guarantee any indebtedness or other
similar obligation, or enter into any contract or agreement, except in the
ordinary course of business and consistent with past practice; (iv) enter into
any new line of business or make any bid or enter into any commitment in
respect of any new or proposed projects; (v) prepay or refinance any part of
the principal or interest of any existing indebtedness before the due date
thereof; (vi) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations
of any other person or entity, except for endorsements in the ordinary course
of business in connection with the deposit of items for collection; (vii) make
any loans, advances or capital contributions to or investments in any person or
entity; (viii) waive, release, grant or transfer any rights of value or modify
or change in any material respect any existing license, material lease or
commitment; (ix) make or commit to or guarantee any single capital expenditure
or obligation which is not consistent with past practice and currently
budgeted; or (x) enter into or amend any contract, agreement, commitment or
arrangement with respect to any of the matters set forth in this section (b);
(c) take any action other than in the ordinary course of business and in a
manner consistent with past practice (none of which actions shall be
unreasonable or unusual) with respect to the grant of any severance or
termination pay (otherwise than pursuant to policies of Magma or any of its
subsidiaries in effect on November 30, 1994) or with respect to any increase of
benefits payable under its severance or termination pay policies in effect on
November 30, 1994; (d) make any payments (except in the ordinary course of
business and in amounts and in a manner consistent with past practice) under
any of its employee plans to any of its or its subsidiaries' employees,
independent contractors or consultants, enter into any new employee plan, any
new employment or consulting agreement, grant or establish any new awards under
such plan or agreement, or adopt or otherwise amend any of the foregoing; (e)
take any action except in the ordinary course of business and in a manner
consistent with past practice (none of which actions shall be unreasonable or
unusual) with respect to accounting policies or procedures (including without
limitation its procedures with respect to the payment of accounts payable); (f)
before the purchase of Shares pursuant to the Offer and other than pursuant to
the Merger Agreement, take any action to cause the shares of its common stock
to cease to be listed on the NNM; (g) cause or permit any of their current
insurance (or reinsurance) policies to be cancelled or terminated or any of the
coverage thereunder to lapse, unless forthwith upon notice of such termination,
cancellation or lapse, Magma or such subsidiary used its best efforts to obtain
<PAGE>
commercially reasonable replacement policies from the same or comparable
insurers providing coverage which is the same as or comparable to that provided
under the cancelled, terminated or lapsed policies; (h) enter into any
agreement or transaction with any affiliate of Magma upon terms and conditions
less favorable to Magma or such affiliate than could be obtained on an arm's
length basis, except for agreements or transactions in the ordinary course of
business and consistent with past practice; (i) settle any material pending
litigation; or (j) enter into any oral or written agreement, contract,
commitment, arrangement or understanding with respect to any of the foregoing.
Notwithstanding the foregoing: (i) Magma may close the financing of its
Malitbog project without the prior consent of CECI provided that CECI has been
given the opportunity to review the relevant financing documents and Magma has
given CECI at least two days prior notice of the anticipated closing date; (ii)
Magma may make and commit to ordinary course budgeted operational capital and
other expenditures relating to projects in operation or construction without
the consent of CECI; (iii) Magma may make planned capital and operational
expenditures with respect to its Malitbog project, without the consent of CECI;
(iv) Magma will not make any capital or other expenditures in excess of
$500,000 in the aggregate with respect to its Nevada Power Pumped Storage
contract, its Alto Peak contract and any other contract related to a
development project without prior consultation with CECI and CECI's consent;
(v) Magma may honor all existing contractual obligations relating to projects
in operation or construction without the consent of CECI; and (vi) Magma will
not incur any additional indebtedness (secured or unsecured) or make new
project or capital commitments in excess of $1,000,000 without prior
consultation with CECI and CECI's consent.
CECI has agreed that, prior to the Effective Time, unless Magma shall
otherwise consent in writing, and except as is otherwise permitted by the
Merger Agreement, neither CECI nor any of the CE Subsidiaries shall, directly
or indirectly, do any of the following: (a) (i) issue or sell, or propose the
issuance or sale of, any shares of its or its subsidiaries' capital stock of
any class, or any options, warrants, convertible securities or other rights of
any kind to acquire any shares of its or its subsidiaries' capital stock, or
any other ownership interest (except with respect to CECI Common Stock
previously reserved for issuance as disclosed in Section 3.03 of the Merger
Agreement) if (A) the proceeds of any such issuance or sale ("Proceeds") exceed
$50,000,000 and (B) such proceeds are not applied, if necessary, so as to allow
CECI to exercise its option to pay cash in the Merger such that the blended
average per Share consideration paid in the Offer and the Merger equals $38.75;
(ii) split, combine or reclassify any of its outstanding common stock, or
declare, set aside or pay any dividend or distribution payable in cash, stock,
property or otherwise with respect to the common stock; (iii) redeem, purchase
or otherwise acquire or offer to redeem, purchase or otherwise acquire any
shares of its capital stock, except in the performance of its obligations under
existing employee plans or pursuant to a repurchase program under Rule 10b-18
promulgated under the Exchange Act; or (iv) authorize or propose or enter into
any contract, agreement, commitment or arrangement with respect to any of the
matters set forth in this section (a); (b) in the case of CECI, merge or
consolidate with or into another person or engage in a recapitalization or
other similar extraordinary business transaction; (c) make any material change
in accounting policies, other than as required by generally accepted accounting
principles; or (d) enter into any oral or written agreement, contract,
commitment, arrangement or understanding with respect to any of the foregoing.
Indemnification
If any action, suit, proceeding or investigation relating hereto or to
the transactions contemplated by the Merger Agreement is commenced, whether
before or after the Effective Time, the parties hereto agree to cooperate and
use their best efforts to defend against and respond thereto. Magma shall, to
the fullest extent permitted under applicable law and regardless of whether the
Merger becomes effective, indemnify and hold harmless, and after the Effective
Time, the Surviving Corporation and CECI shall, to the fullest extent permitted
under applicable law, indemnify and hold harmless, each director, officer,
employee, fiduciary and agent of Magma or any subsidiary and their respective
subsidiaries and controlled affiliates, including, without limitation, officers
and directors serving as such on the date hereof (collectively, the
"Indemnified Parties"), from and against any costs or expenses (including
attorneys' fees), judgments, fines, losses, claims, damages, liabilities and
amounts paid in settlement in connection with any claim, action, suit,
proceeding or investigation arising out of or pertaining to any of the
transactions contemplated by the Merger Agreement, including without
limitation, liabilities arising under the Securities Act or the Exchange Act in
connection with the Merger. CECI shall cause the Surviving Corporation to
continue in effect the indemnification provisions currently provided (or
provisions that are no less favorable to the Indemnified Parties than those
currently provided) by the Articles of Incorporation, Bylaws or any written
indemnification agreement of Magma for a period of not less than six years
following the Effective Time.
CECI shall cause to be maintained in effect for not less than three
years after the Effective Time the current policies of directors' and officers'
liability insurance maintained by Magma and its subsidiaries with respect to
matters occurring prior to the Effective Time; provided, however, CECI may
substitute therefor its current policies or other policies of at least the same
coverage containing terms and conditions which are no less advantageous to the
Indemnified Parties; provided, however, that in no event shall CECI be required
to expend more than an amount equal to 125% of current annual premiums paid by
Magma for such insurance.
If CECI, the Surviving Corporation or any of either of their successors
or assigns (i) consolidates with or merges into any other person and shall not
be the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
<PAGE>
to any person, then and in each such case, proper provision shall be made so
that the successors and assigns of CECI or Surviving Corporation assume the
indemnification obligations.
Termination; Fees and Expenses
Termination. The Merger Agreement provides that it may be terminated
before the Effective Time in the following circumstances: (a) by mutual consent
of the CECI Board and the Magma Board; or (b) by Magma or CECI if the Effective
Time shall not have occurred on or prior to September 30, 1995; or (c) by
either CECI or Magma if a court of competent jurisdiction or governmental,
regulatory or administrative agency or commission shall have issued an order,
decree or ruling or taken any other action (which order, decree or ruling the
parties hereto shall use their best efforts to lift), in each case permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated
by the Merger Agreement and such order, decree, ruling or other action shall
have become final and nonappealable; or (d) by CECI if (i) the Magma Board
withdraws, modifies or changes its recommendation of the Merger Agreement or
any of the transactions contemplated thereby or shall have resolved to do any
of the foregoing or (ii) the Magma Board recommends to the holders of Shares
any proposal with respect to a merger, consolidation, share exchange or similar
transaction involving Magma or any of its subsidiaries, other than the
transactions contemplated by the Merger Agreement; or (e) by CECI if, without
Magma's consent, any person has acquired beneficial ownership or the right to
acquire beneficial ownership of or any "group" (as defined under Section 13(d)
of the Exchange Act and the rules and regulations promulgated thereunder) has
been formed which beneficially owns, or has the right to acquire beneficial
ownership of, more than 10% of the Shares; or (f) by Magma or CECI if (i) a
corporation, partnership, person or other entity or group shall have made a
bona fide offer that the Magma Board determines in its good faith judgment and
in the exercise of its fiduciary duties, after consultation with and based upon
the advice of its financial and legal advisors, is more favorable to Magma's
stockholders than the Offer and the Merger or any person (including, without
limitation, Magma or any affiliate thereof), other than CECI or any affiliate
of CECI, shall have become the beneficial owner of more than 50% of the then
outstanding Shares; or (g) by either CECI or Magma if the other party shall
have breached the Merger Agreement in any material respect and such breach
continues for a period of ten days after the receipt of notice of the breach
from the nonbreaching party.
Termination Fee for CECI. The Merger Agreement provides that if it is
terminated pursuant to clauses (d) or (f) or terminated by CECI pursuant to
clause (g) of the preceding paragraph, Magma will be required to pay CECI a
termination fee of $8,000,000 plus CECI's actual documented out-of-pocket
expenses incurred since September 13, 1994 in connection with the Merger
Agreement and the transactions contemplated thereby, including, without
limitation, legal and professional fees and expenses.
Amendment
The Merger Agreement provides that it may be amended by the parties
thereto at any time before the Effective Time by an instrument in writing
signed by the parties. However, after approval of the Merger by Magma's
stockholders, no amendment may be made which would materially adversely affect
the interests of such stockholders or reduce the amount or change the type of
consideration into which each Share will be converted upon consummation of the
Merger. Following the election or appointment of the Acquisition Designees and
prior to the Effective Time, any amendment of the Merger Agreement or Articles
of Incorporation or Bylaws, any termination of the Merger Agreement by Magma,
any extension by Magma of the time for the performance of any of the
obligations or other acts of CECI or CE Sub, or waiver of any of Magma's rights
under the Merger Agreement, and any other consent or action of Magma's Board
under the Merger Agreement will require the concurrence of a majority (which
shall be at least two) of the Disinterested Directors.
MARKET PRICES OF AND DIVIDENDS ON
CAPITAL STOCK OF CECI
AND RELATED STOCKHOLDER MATTERS
CECI Common Stock is listed on the NYSE under the symbol "CE." CECI
Common Stock is also listed on the PSE and the LSE. The following table sets
forth the quarterly high and low last reported sales price per share of CECI
Common Stock, as reported on the NYSE Composite Tape, based on published
financial sources, for the fiscal quarters indicated.
High Low
Fiscal Year Ended December 31, 1993:
First Quarter $21.50 $16.50
Second Quarter 20.13 17.25
Third Quarter 18.38 16.00
Fourth Quarter 20.13 18.13
Fiscal Year Ended December 31, 1994:
First Quarter $19.25 $17.13
Second Quarter 18.13 16.00
Third Quarter 17.75 16.00
Fourth Quarter 17.13 15.25
Fiscal Year Ending December 31, 1995:
First Quarter (through January 5) $16.25 $15.38
On September 19, 1994, the day of CECI's issuance of its press release
announcing the transmission of a letter to Magma containing a proposal to
acquire Magma in a transaction in which stockholders would receive cash and
shares of CECI Common Stock having a combined cash and market value of $35 per
<PAGE>
share, the last reported sale price for CECI Common Stock was $16.875. On
December 2, 1994, the last full trading day prior to the announcement that the
Merger Agreement had been executed, the last reported sale price for CECI
Common Stock was $16.50. On January 5, 1995, the last full trading day for
which quotations were available at the time of printing of this Information
Statement, the last reported sale price for CECI Common Stock was $16.13.
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT QUOTATIONS FOR THE CECI COMMON STOCK.
As of March 21, 1994, there were approximately 1,408 holders of record
of CECI Common Stock.
The present policy of CECI is to retain earnings to provide sufficient
funds for the operation and expansion of CECI's business. Accordingly, CECI
has not paid, and does not have any present plan to pay, cash dividends on CECI
Common Stock. In January of 1990 and January of 1991, CECI paid a 4% stock
dividend to the holders of CECI Common Stock. CECI did not pay such a dividend
in 1992, and has no plans to pay any such dividend in the future.
The agreements relating to the Senior Notes issued by CECI prohibit the
payment of dividends unless CECI satisfies various covenants and conditions.
The Certificate of Designation with respect to the Series C Preferred Stock
prohibits cash dividend payments with respect to CECI Common Stock unless all
accumulated dividends on the Series C Preferred Stock have been paid.
CECI's ability to pay dividends is dependent upon receipt of dividends
or other distributions from CECI's subsidiaries and the partnerships and joint
ventures in which CECI has interests. The availability of distributions from
the Coso Project is subject to the satisfaction of various covenants and
conditions contained in the Coso Joint Ventures' refinancing documents and CECI
anticipates that future project level financings will contain certain
conditions and similar restrictions on the distribution of cash flow to CECI.
MARKET PRICES OF AND DIVIDENDS ON
CAPITAL STOCK OF MAGMA
AND RELATED STOCKHOLDER MATTERS
The Shares are quoted on the NNM under the symbol "MGMA." The
following table sets forth the quarterly high and low last reported sales
prices of Shares, as reported by the NNM, based on published financial sources,
for the fiscal quarters indicated.
High Low
Fiscal Year Ended December 31, 1993:
First Quarter $40.00 $30.75
Second Quarter 41.50 30.75
Third Quarter 39.00 29.75
Fourth Quarter 40.50 30.00
Fiscal Year Ended December 31, 1994:
First Quarter $35.25 $30.75
Second Quarter 33.25 28.00
Third Quarter 35.25 26.50
Fourth Quarter 37.50 34.25
Fiscal Year Ending December 31, 1995:
First Quarter (through January 5) $37.88 $37.50
On September 19, 1994, the day of CECI's issuance of its press release
announcing the transmission of a letter to Magma containing a proposal to
acquire Magma in a transaction in which stockholders would receive cash and
shares of CECI Common Stock having a combined cash and market value of $35 per
share, the last reported sale price on the NNM was $27.50. On December 2,
1994, the last full trading day prior to the announcement that the Merger
Agreement had been executed, the last reported sale price for Shares was
$35.50. On January 5, 1995, the last full trading day for which quotations
were available at the time of printing of this Information Statement, the last
reported sale price for Shares was $37.88. STOCKHOLDERS ARE URGED TO OBTAIN
CURRENT QUOTATIONS FOR THE SHARES.
As of October 10, 1994, there were approximately 2,238 holders of
record of Shares.
Magma's policy has been to retain earnings to provide sufficient funds
for the operation and expansion of its business. Accordingly, Magma has not
paid, and has no present plan to pay, dividends on the Shares. In addition,
pursuant to the Merger Agreement, Magma has agreed not to declare or pay, and
has not declared or paid, any dividends, prior to consummation of the Merger.
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
Selected Historical Consolidated Financial and Operating Data of CECI
The following table sets forth selected historical consolidated
financial and operating data, which should be read in conjunction with "CECI'S
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO," "SELECTED HISTORICAL
CONSOLIDATED FINANCIAL AND OPERATING DATA OF CECI" and "CECI MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The
unaudited consolidated financial statements of CECI as of and for the nine
months ended September 30, 1993 and 1994 reflect all adjustments necessary, in
the opinion of management (consisting only of normal recurring adjustments),
for a fair presentation of such financial data. The selected consolidated data
as of and for each of the five years in the period ended December 31, 1993 have
been derived from the audited historical consolidated financial statements of
CECI.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
1989 1990 1991 1992 1993 1993 1994
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales of electricity $43,010 $89,026 $104,155 $115,087 $129,861 $99,398 $115,357
Sales of steam -- -- 2,029 2,255 2,198 1,648 1,851
Interest and other income 5,386 7,787 9,379 10,187 17,194 12,294 21,980
Total revenue 48,396 96,813 115,563 127,529 149,253 113,340 139,188
Plant operations, general and
administrative and royalties 13,615 37,412 41,506 45,183 46,794 34,019 41,321
Income before depreciation,
amortization, interest,
income taxes, extraordinary
item and cumulative effect of
change in accounting
principle (1) 34,781 59,401 74,057 82,346 102,459 79,321 97,867
Depreciation and amortization 6,605 13,372 14,752 16,754 17,812 13,044 15,439
Interest expense, net of
capitalized interest 15,125 30,464 24,439 14,860 23,389 17,171 36,962
Provision for income taxes 2,715 3,522 8,284 11,922 18,184 14,295 14,067
Income before extraordinary
item and cumulative effect of
change in accounting
principle (1) 10,336 12,043 26,582 38,810 43,074 34,811 31,399
Extraordinary
item-refinancing (2) -- -- -- (4,991) -- -- (2,007)
Cumulative effect of change in
accounting principle (3) -- -- -- -- 4,100 4,100 --
Net income (1) . . . . 10,336 12,043 26,582 33,819 47,174 38,911 29,392
Preferred dividends (paid in kind) -- -- -- 4,275 4,630 3,429 3,711
Net income available to common
stockholders $10,336 $12,043 $26,582 $29,544 $42,544 $35,482 $25,681
<PAGE>
(continued)
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
1989 1990 1991 1992 1993 1993 1994
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Income per share before
extraordinary item and
cumulative effect of change
in accounting principle (1)
Assuming no dilution . $0.38 $0.44 $0.75 $0.92 $1.00 $0.81 $0.77
Assuming full dilution (4) 0.38 0.44 0.75 0.92 1.00 0.81 0.76
Extraordinary item per share (2) -- -- -- (0.13) -- -- (0.06)
Cumulative effect of change in
accounting principle per share (3) -- -- -- -- 0.11 0.11 --
Net income per share
Assuming no dilution $0.38 $0.44 $0.75 $0.79 $1.11 $0.92 $0.71
Assuming full dilution (4) $0.38 $0.44 $0.75 $0.79 $1.11 $0.92 $0.70
Weighted average shares
outstanding (5) 27,019 27,254 35,471 37,495 38,485 38,436 36,174
Capital expenditures 124,749 32,514 68,377 32,446 87,191 64,250 78,892
<CAPTION>
December 31, September 30,
1989 1990 1991 1992 1993 1993 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Property-power plant, net $302,514 $321,303 $373,948 $389,646 $458,974 $440,527 $522,268
Total assets 349,282 393,853 517,994 580,550 715,984 710,659 1,087,064
Total debt 260,120 270,738 257,038 299,334 382,610 390,972 775,534
Preferred stock -- 4,705 54,705 54,350 58,800 57,650 62,350
Stockholders' equity 42,163 55,088 143,128 168,764 211,503 206,675 179,660
<FN>
- ---------------
(1) The Navy I Plant commenced operation prior to 1989 and the BLM and Navy II Plants commenced commercial operation in February
1989 and January 1990, respectively. The Desert Peak, Nevada facility and the Roosevelt Hot Springs, Utah steam field were
acquired in March and January 1991, respectively.
(2) The refinancing of CECI's three largest domestic projects located at the Naval Air Weapons Station at China Lake, California
(collectively, the "Coso Project") resulted in an extraordinary item in 1992 in the amount of $5.0 million, after the tax effect of
$1.5 million. The defeasance of the Senior Notes resulted in an extraordinary item in 1994 in the amount of $2.0 million, after
the tax effect of $1.0 million.
(3) On January 1, 1993, CECI adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS
109"), which resulted in a cumulative adjustment to net income of $4.1 million in 1993.
(4) Fully diluted earnings per share reflects the dilutive effect of convertible subordinated debentures as if they were converted
at the beginning of the reporting period.
(5)The number of shares outstanding is calculated by using the treasury stock method.
</TABLE>
Selected Historical Consolidated Financial and Operating Data of Magma
The selected financial data set forth below with respect to Magma's statements
of operations for each of the five years in the period ended December 31, 1993
and the balance sheets of Magma as of December 31, 1989 through 1993 are
derived from the consolidated financial statements of Magma that have been
audited by Coopers & Lybrand, independent certified public accountants. The
selected financial data set forth below with respect to Magma's statements of
operations for the nine-month period ended September 30, 1994 and 1993 and,
with respect to the balance sheet of Magma as of September 30, 1994, have been
derived from the unaudited consolidated financial statements of Magma, which,
in the opinion of Magma's management, reflect all adjustments necessary
(consisting only of normal recurring adjustments) for a fair presentation of
such financial data.
The selected financial data set forth below should be read in conjunction with
"MAGMA'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO," "SELECTED
HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA OF MAGMA" and "MAGMA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
1989 1990 1991 1992 1993 1993 1994
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues $63,103 $ 85,599 $94,891 $108,966 $167,138 $124,781 $146,104
Operating revenues(1) 56,743 76,893 84,135 100,313 162,943 121,146 142,238
Income from operations 26,892 36,694 41,204 49,667 74,913 57,957 67,915
Income before cumulative
effect of accounting change 22,295 30,166 33,941 36,358 52,135 39,469 46,843
Cumulative effect of change
in accounting for income taxes -- -- -- 17,833(2) -- -- --
Net income 22,295 30,166 33,941 54,191 52,135 39,469 46,843
Return on revenues 35.3% 35.2% 35.8% 33.4%(3) 31.2% 31.6% 32.1%
Capital expenditures $43,762 $ 7,054 $15,711 $ 12,043 $ 8,434 $ 5,718 $ 8,854
Return on averagestockholders'
<PAGE>
equity 16.1% 17.6% 16.2% 14.3%(3) 16.4% 13.0% 12.5%
Weighted average shares
outstanding 21,999 22,898 23,611 22,936 24,063 24,037 24,017
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
1989 1990 1991 1992 1993 1993 1994
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
(continued)
Income before cumulative effect
of accounting change per
common share
Assuming no dilution $1.01 $1.32 $1.44 $1.59 $2.17 $1.64 $1.95
Assuming full dilution(4) 0.96 1.32 1.44 1.52 2.17 1.64 1.95
Income per common share
Assuming no dilution 1.01 1.32 1.44 2.36(2) 2.17 1.64 1.95
Assuming full dilution(4) 0.96 1.32 1.44 2.27(2) 2.17 1.64 1.95
<CAPTION>
December 31, September 30,
1989 1990 1991 1992 1993 1994
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Property, plant and
equipment, net $124,062(5) $120,125 $118,541 $113,922 $265,215 $256,561
Exploration and development
costs, net 46,681 44,782 48,644 52,001 107,069 104,271
Total assets 282,624 325,131 353,788 396,650 611,311 630,422
Long-term obligations(6) 98,212 99,297 89,808 87,339 200,509 164,313
Total debt(7) 100,517 102,842 97,541 96,126 226,008 188,969
Stockholders' equity 150,142 192,626 226,872 282,260 351,918 395,286
<FN>
_______________
(1)Excludes interest and other income.
(2)The cumulative effect of Magma's adoption of SFAS 109 increased net income by $17,833, or $.77 per share. See Note 11,
Provision for Income Taxes, accompanying the consolidated financial statements for the year ended December 31, 1992 for Magma
incorporated by reference in its Annual Report on Form 10-K for the year ended December 31, 1993.
(3)Excludes the impact of cumulative effect of change in accounting for income taxes.
(4)Fully diluted earnings per share reflects the dilative effect of stock options and warrants at the end of the reporting period.
(5)Projects in progress reclassified to appropriate asset classification.
(6)Consists of the noncurrent portion of long-term loans payable and other long-term liabilities.
(7)Represents loans payable, including the current portion of long-term loans payable.
</TABLE>
The above information should be read in conjunction with CECI's and Magma's
historical and pro forma combined financial statements and notes thereto
included herein.
<PAGE>
Pro Forma Unaudited Condensed Combined Financial Data
The following Pro Forma Unaudited Condensed Combined Balance Sheet as of
September 30, 1994 and the Pro Forma Unaudited Condensed Combined Statements of
Earnings for the year ended December 31, 1993 and the nine months ended
September 30, 1994 combine the historical consolidated balance sheets of CECI
and Magma as if the acquisition had been effective on September 30, 1994, and
the historical statements of income as if the acquisition had been effective at
the beginning of the period. The acquisition is reflected under the purchase
method of accounting, after giving effect to the pro forma adjustments and
assumptions described in the accompanying notes. Under this method of
accounting, which is in accordance with generally accepted accounting
principles, assets and liabilities of Magma are adjusted to their estimated
fair value, and combined with the recorded values of the assets and liabilities
of CECI. This pro forma combined financial data should be read in conjunction
with the financial data appearing under "SELECTED HISTORICAL CONSOLIDATED
FINANCIAL AND OPERATING DATA OF CECI," "SELECTED HISTORICAL CONSOLIDATED
FINANCIAL DATA OF MAGMA" and the consolidated financial statements, including
the notes thereto, of CECI and Magma, included herein.
CECI has not completed reviewing Magma's records in order to make its
determination of the fair value of Magma's assets and liabilities. The fair
value adjustments reflected in the accompanying pro forma combined financial
data reflect, among other things, estimates of fair value made by CECI based on
market quotations and assumptions it believes to be reasonable.
It should be noted, however, that the actual fair values will be determined
on the basis of the financial condition of Magma at the time the Shares are
purchased.
The pro forma data do not reflect operating efficiencies and cost
reductions which CECI anticipates are achievable. The savings would be largely
attributable to the economies of scale obtained through the combination of
CECI's operations with Magma's operations, and the resulting decrease in
employment and occupancy costs, as well as general overhead expenses.
The pro forma combined financial data are not intended to present the results
that would have actually occurred if the acquisition had been in effect on the
assumed dates and for the assumed periods, and are not necessarily indicative
of the results that may be obtained in the future.
<PAGE>
Pro Forma Unaudited Condensed Combined Balance Sheet
(Merger Consideration Consisting of a Combination of
Cash and CECI Common Stock)
CECI and Magma
As of September 30, 1994
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
CECI Magma Adjustments Combined
<S> <C> <C> <C> <C>
Assets
Cash and short term investments $316,349 $ 5,111 $(210,944)(4C) $110,516
Marketable securities -- 43,609 -- 43,609
Joint venture cash and short
term investments 27,088 25,478 -- 52,566
Restricted cash and short term
investments 127,380 -- -- 127,380
Accounts receivable--trade
and other 33,901 54,204 -- 88,105
Prepaid expenses and other assets -- 10,423 -- 10,423
Due from joint ventures. . . . 1,639 -- -- 1,639
Property and plant, net. . . . 522,268 395,560 340,000(4B) 1,257,828
Equipment, net . . . . . . . . 4,699 -- -- 4,699
Notes receivable--joint venture 12,255 -- -- 12,255
Other investments. . . . . . . 11,517 41,245 -- 52,762
Power purchase contracts . . . -- 21,313 60,000(4B) 81,313
Deferred charges and other assets 29,968 24,480 6,948(4B,4C) 61,396
Goodwill . . . . . . . . . . . -- 8,999 319,143(4B) 328,142
---------- -------- -------- ----------
Total Assets $1,087,064 $630,422 $515,147 $2,232,633
---------- -------- -------- ----------
---------- -------- -------- ----------
<CAPTION>
Liabilities and Stockholders' Equity
Liabilities
<S> <C> <C> <C> <C>
Accounts payable . . . . . . . $ 1,021 $ 7,832 $ -- $ 8,853
Other accrued liabilities. . . 23,357 3,605 -- 26,962
Income taxes payable . . . . . 587 -- -- 587
Construction loans . . . . . . 21,079 -- -- 21,079
Project loans. . . . . . . . . 233,080 188,969 -- 422,049
Senior discount notes. . . . . 421,375 -- -- 421,375
Convertible subordinated debenture 100,000 -- -- 100,000
Deferred income taxes. . . . . 24,774 22,376 158,000(4B) 205,150
Other long term liabilities. . -- 12,354 500,000(4C) 512,354
----------- -------- -------- ----------
Total liabilities. . . . . . 825,273 235,136 658,000 1,718,409
Deferred income. . . . . . . . 19,781 -- -- 19,781
Redeemable preferred stock . . 62,350 -- -- 62,350
Stockholders' Equity
Preferred stock
Common Stock . . . . . . . . . 2,407 2,401 (1,599) (4A) 3,209
Additional paid in capital . . 100,000 142,765 49,350 (4A) 292,115
Unrealized gain from marketable
securities -- (677) 677 (4A) --
Retained earnings. . . . . . . 136,769 250,797 (250,797)(4A) 136,769
Treasury stock . . . . . . . . (59,516) -- 59,516 (4A) --
---------- -------- -------- ----------
Total stockholders' equity. . 179,660 395,286 (142,853) 432,093
---------- -------- -------- ----------
Total liabilities and
stockholders' equity $1,087,064 $630,422 $515,147 $2,232,633
---------- -------- -------- ----------
---------- -------- -------- ----------
</TABLE>
The accompanying notes to the pro forma unaudited condensed combined
financial statements are an integral part of these statements.
Pro Forma Unaudited Condensed Combined Statements of Earnings
(Merger Consideration Consisting of a
Combination of Cash and CECI Common Stock)
CECI and Magma
For the Year Ended December 31, 1993 and the
Nine Months Ended September 30, 1994
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1993 Nine Months Ended September 30, 1994
Pro Forma Pro Pro Forma Pro
Adjustment Forma Adjustment Forma
CECI Magma (4D) Combined CECI Magma (4D) Combined
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<PAGE>
Revenues
Sales of electricity
and steam. $132,059 $137,882 $ -- $269,941 $117,208 $124,086 $ -- $241,294
Royalties -- 19,629 -- 19,629 -- 15,062 -- 15,062
Interest and other
income . . 17,194 4,195 (10,547) 10,842 21,980 3,866 (7,910) 17,936
Management
services . -- 5,432 -- 5,432 -- 3,090 -- 3,090
-------- -------- -------- ------- -------- ------- ------- --------
Total Revenue 149,253 167,138 (10,547) 305,844 139,188 146,104 (7,910) 277,382
Costs and Expenses
Plant operations 25,362 49,493 -- 74,855 23,887 41,208 -- 65,095
General and
administrative 13,158 10,943 -- 24,101 9,536 9,602 -- 19,138
Royalties 8,274 -- -- 8,274 7,898 -- -- 7,898
Depreciation and
amortization 17,812 21,692 18,254 57,758 15,439 17,737 13,690 46,866
Other non-plant
costs. . . -- 471 -- 471 -- 380 -- 380
Interest expense 30,205 9,626 45,000 84,831 44,480 9,262 33,750 87,492
Less interest
capitalized (6,816) -- -- (6,816) (7,518) -- -- (7,518)
-------- -------- -------- ------- -------- ------- ------- --------
Total costs and
expenses . 87,995 92,225 63,254 243,474 93,722 78,189 47,440 219,351
-------- -------- -------- ------- -------- ------- ------- --------
Income before
income taxes 61,258 74,913 (73,801) 62,370 45,466 67,915 (55,350) 58,031
Provision for
income taxes 18,184 22,778 (26,056) 14,906 14,067 21,072 (19,542) 15,597
-------- -------- -------- ------- -------- ------- ------- --------
Income from
continuing operations 43,074 52,135 (47,745) 47,464 31,399 46,843 (35,808) 42,434
Preferred dividends 4,630 -- -- 4,630 3,711 -- -- 3,711
-------- -------- -------- ------- -------- ------- ------- --------
Income available to
common stock-
holders. . $38,444 $52,135 $(47,745) $42,834 $27,688 $46,843 $(35,808) $38,723
-------- -------- -------- ------- -------- ------- ------- --------
-------- -------- -------- ------- -------- ------- ------- --------
Income per
common and common equiva-
lent share
Assuming no dilution $1.00 $2.17 $0.80 $0.77 $1.95 $0.75
-------- -------- ------- -------- ------- --------
-------- -------- ------- -------- ------- --------
Assuming full dilution $1.00 $2.17 $0.79 $0.76 $1.95 $0.73
-------- -------- ------- -------- ------- --------
-------- -------- ------- -------- ------- --------
Weighted average
common shares
outstanding 38,485 24,063 53,784 36,174 24,017 51,473
-------- -------- ------- -------- ------- --------
-------- -------- ------- -------- ------- --------
</TABLE>
The accompanying notes to the pro forma unaudited condensed combined financial
statements are an integral part of these statements.
<PAGE>
<PAGE>
Notes To Pro Forma Unaudited Condensed Combined Financial Data
(Merger Consideration Consisting of a
Combination of Cash and CECI Common Stock)
CECI and Magma
(Tables in thousands)
The Merger will be accounted for as a purchase. The resulting
adjustments are based on the historical consolidated financial statements of
CECI and Magma. The final adjustments will be based on the fair value of CECI
Common Stock and the fair value of the assets and liabilities of Magma at or
near the closing. For purposes of the pro forma combined financial statements,
it is assumed that one hundred percent of the Shares will be acquired and that
the fair value of the CECI Common Stock will be $16.50 (the mid-point of the
"Average Closing Price" range limits stipulated in the Agreement and Plan of
Merger).
The pro forma unaudited condensed combined financial statements are
based on the following assumptions:
1. The Merger occurred as of September 30, 1994 for balance sheet purposes
and at the beginning of the periods presented for statement of earnings
purposes.
2. 23,843,000 Shares outstanding as of September 30, 1994 will be
purchased for $39.00 per Share consisting of a package of, on a blended basis,
approximately $28.50 per share in cash and approximately $10.50 in market value
per share of CECI Common Stock (see "Merger Consideration").
3. The Magma options outstanding will be retired for approximately
$8,500,000 in cash.
4. The pro forma adjustments to reflect the effect of the transaction are
as follows:
A. The adjustments reflect the elimination of Magma's equity
accounts and the issuance of CECI Common Stock.
B. The adjustments which have been made to the net assets of Magma
and CECI to give effect to the Merger follow:
Assumed value of the
Common Stock and cash consideration
plus estimated direct costs to be
incurred in consummating the Merger . . $942,377
Cost of retiring outstanding
Magma options . . . . . . . . . . . . . 8,500
Cost of 200,000 Magma shares presently
owned by CECI . . . . . . . . . . . . . 5,552
Net assets of Magma. . . . . . . . . . . . $395,286
Adjustment to eliminate goodwill
of Magma. . . . . . . . . . . . . . . . (8,999) (386,287)
-------- ---------
Excess of purchase price over carrying
value of net assets acquired. . . . . . 570,142
Allocated to:
Property and plant. . . . . . . . . . . (340,000)
Power purchase contracts. . . . . . . . (60,000)
Deferred income taxes on allocated costs 158,000
Goodwill . . . . . . . . . . . . . . . . . $328,142
C. The additional cash which CECI will be required to pay in order
to effect the Merger has been provided for in the pro forma adjustments as
follows:
Reduce cash on hand . . . . . . . . . . . . $210,944
Increase long-term debt . . . . . . . . . . 500,000
-------
$710,944
=======
Represents:
Payments to Magma common stockholders. . . . $677,444
Payments to Magma stock option holders . . . 8,500
Other direct acquisition costs . . . . . . . 12,500
Finance costs. . . . . . . . . . . . . . . . 12,500
--------------
$710,944
==============
D. The pro forma adjustments to the pro forma combined statements
of earnings include the following:
i. Record amortization of the excess of purchase price
over net assets acquired over a 40-year period, eliminate the amortization of
goodwill from the historical operating results of Magma and provide
depreciation expense on costs allocated to property and plant. CECI's policy
is to provide depreciation and amortization expense beginning upon the
commencement of energy production over the estimated remaining useful life of
plant and equipment or the contract period for costs applicable to power sales
and development contracts. Costs of $150 million have been allocated to power
sales and development contracts and plant for which energy production is not
expected to commence until 1996 or later. Accordingly, revenues, period
operating costs and amortization of future costs to be incurred in the
completion of such facilities together with amortization of this allocation of
acquisition costs are not included in the pro forma combined statements of
<PAGE>
earnings.
ii. Increase interest expense relating to amortization of
deferred financing costs over ten years and cash used to finance the merger,
utilizing an 8.75 percent annual interest rate assumption applied to additional
borrowings and a 5 percent annual interest rate assumption applicable to the
reduction of cash on hand.
iii. Change income tax expense as a result of pro forma
adjustments which affect taxable income.
The pro forma income per common share has been
determined on the basis of weighted average outstanding shares which have been
adjusted to include the number of shares of CECI Common Stock to be exchanged
for the outstanding Shares.
5. The pro forma combined income from continuing operations available to
common shareholders per share for the year ended December 31, 1993, and nine
months ended September 30, 1994, would be $0.82 and $0.78, respectively, based
upon the assumption that (1) 100% of the Shares are acquired by CECI and (2)
the market value of CECI Common Stock issued to the present shareholders of
Magma is $18.73 per share. The pro forma combined book value per share at
September 30, 1994, would be $9.45 under the same assumptions.
6. The pro forma combined income from continuing operations available to
common shareholders per share for the year ended December 31, 1993, and nine
months ended September 30, 1994, would be $0.76 and $0.72, respectively, based
upon the assumption that (1) 100% of the Shares are acquired by CECI and (2)
the market value of CECI Common Stock issued to the present shareholders of
Magma is $14.27 per share. The pro forma combined book value per share at
September 30, 1994, would be $8.66 under the same assumptions.
<PAGE>
Pro Forma Unaudited Condensed Combined Balance Sheet
(Merger Consideration Consisting of All Cash)
CECI and Magma
As of September 30, 1994
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
CECI Magma Adjustments Combined
<S> <C> <C> <C> <C>
Assets
Cash and short term
investments $316,349 $ 5,111 $(190,699)(5C)$130,761
Marketable securities. . . . . -- 43,609 -- 43,609
Joint venture cash and short
term investments 27,088 25,478 -- 52,566
Restricted cash and short term
investments 127,380 -- -- 127,380
Accounts receivable--trade
and other 33,901 54,204 -- 88,105
Prepaid expenses and
other assets -- 10,423 -- 10,423
Due from joint ventures. . . . 1,639 -- -- 1,639
Property and plant, net. . . . 522,268 395,560 340,000(5B) 1,257,828
Equipment, net . . . . . . . . 4,699 -- -- 4,699
Notes receivable-joint venture 12,255 -- -- 12,255
Other investments. . . . . . . 11,517 41,245 -- 52,762
Power purchase contracts . . . -- 21,313 60,000(5B) 81,313
Deferred charges and
other assets 29,968 24,480 6,948(5B,5C) 61,396
Goodwill . . . . . . . . . . . -- 8,999 313,132(5B) 322,131
---------- ---------- ------------ -----------
Total Assets. . . . . . . . . $1,087,064 $630,422 $529,381 $2,246,867
---------- ---------- ------------ -----------
---------- ---------- ------------ -----------
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C> <C> <C>
Liabilities
Accounts payable . . . . . . .$ 1,021 $ 7,832 $ -- $ 8,853
Other accrued liabilities. . . 23,357 3,605 -- 26,962
Income taxes payable . . . . . 587 -- -- 587
Construction loans . . . . . . 21,079 -- -- 21,079
Project loans. . . . . . . . . 233,080 188,969 -- 422,049
Senior discount notes. . . . . 421,375 -- -- 421,375
Convertible subordinated
debenture 100,000 -- -- 100,000
Deferred income taxes. . . . . 24,774 22,376 158,000(5B) 205,150
Other long term liabilities. . -- 12,354 500,000(5C) 512,354
---------- ---------- ------------ -----------
Total liabilities . . . . . . 825,273 235,136 658,000 1,718,409
Deferred income. . . . . . . . 19,781 -- -- 19,781
Redeemable preferred stock . . 62,350 -- -- 62,350
Stockholders' Equity
Preferred stock
Common Stock . . . . . . . . . 2,407 2,401 (1,507)(5A) 3,301
Additional paid in capital . . 100,000 142,765 63,492 (5A) 306,257
Unrealized gain from
marketable securities -- (677) 677 (5A) --
Retained earnings. . . . . . . 136,769 250,797 (250,797)(5A) 136,769
Treasury stock . . . . . . . . (59,516) -- 59,516 (5A) --
---------- ---------- ------------ -----------
Total stockholders' equity. . 179,660 395,286 (128,619) 446,327
---------- ---------- ------------ -----------
Total liabilities and
stockholders' equity $1,087,064 $630,422 $529,381 $2,246,867
---------- ---------- ------------ -----------
---------- ---------- ------------ -----------
</TABLE>
The accompanying notes to the pro forma unaudited condensed combined
financial statements are an integral part of these statements.
<PAGE>
Pro Forma Unaudited Condensed Combined Statements of Earnings
(Merger Consideration Consisting of All Cash)
CECI and Magma
For the Year Ended December 31, 1993 and the
Nine Months Ended September 30, 1994
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1993 Nine Months Ended September 30, 1994
Pro Forma Pro Pro Forma Pro
Adjustment Forma Adjustment Forma
CECI Magma (5D) Combined CECI Magma (5D) Combined
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Sales of electricity
and steam. $132,059 $137,882 $ -- $269,941 $117,208 $124,086 $ -- $241,294
Royalties -- 19,629 -- 19,629 -- 15,062 -- 15,062
Interest and other
income . . 17,194 4,195 (9,535) 11,854 21,980 3,866 (7,151) 18,695
Management
services . -- 5,432 -- 5,432 -- 3,090 -- 3,090
-------- -------- -------- -------- -------- -------- -------- --------
Total Revenue 149,253 167,138 (9,535) 306,856 139,188 146,104 (7,151) 278,141
Costs and Expenses
Plant operations 25,362 49,493 -- 74,855 23,887 41,208 -- 65,095
General and
administrative 13,158 10,943 -- 24,101 9,536 9,602 -- 19,138
Royalties 8,274 -- -- 8,274 7,898 -- -- 7,898
Depreciation and
amortization 17,812 21,692 18,103 57,607 15,439 17,737 13,577 46,753
Other non-plant
costs. . . -- 471 -- 471 -- 380 -- 380
Interest expense 30,205 9,626 45,000 84,831 44,480 9,262 33,750 87,492
Less interest
capitalized (6,816) -- -- (6,816) (7,518) -- -- (7,518)
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and
expenses . 87,995 92,225 63,103 243,323 93,722 78,189 47,327 219,238
-------- -------- -------- -------- -------- -------- -------- --------
Income before
income taxes 61,258 74,913 (72,638) 63,533 45,466 67,915 (54,478) 58,906
Provision for
income taxes 18,184 22,778 (25,656) 15,306 14,067 21,072 (19,242) 15,898
-------- -------- -------- -------- -------- -------- -------- --------
Income from
continuing operations 43,074 52,135 (46,982) 48,227 31 ,399 46,843 (35,236) 43,008
Preferred dividends 4,630 -- -- 4,630 3,711 -- -- 3,711
-------- -------- -------- -------- -------- -------- -------- --------
Income available to
common stock-
holders. . $38,444 $52,135 $(46,982) $43,597 $27,688 $46,843 $(35,236) $39,297
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Income per
common and common equiva-
lent share:
Assuming no dilution $1.00 $2.17 $0.79 $0.77 $1.95 $0.74
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Assuming full dilution $1.00 $2.17 $0.78 $0.76 $1.95 $0.73
Weighted average
common shares
outstanding 38,485 24,063 55,152 36,174 24,017 52,841
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
The accompanying notes to the pro forma unaudited condensed combined financial
statements are an integral part of these statements.
<PAGE>
Notes To Pro Forma Unaudited Condensed Combined Financial Data
(Merger Consideration Consisting of All Cash)
CECI and Magma
(Tables in thousands)
The Merger will be accounted for as a purchase. The resulting
adjustments are based on the historical consolidated financial statements of
CECI and Magma. The final adjustments will be based upon the net proceeds to
CECI from the sale of its Common Stock contemplated by this Information
Statement and the fair market value of the assets of Magma at or near the
Effective Time.
The pro forma unaudited condensed combined financial statements are
based on the following assumptions:
1. The Merger occurred as of September 30, 1994 for balance sheet purposes
and at the beginning of the periods presented for statement of earnings
purposes.
2. 16,666,667 shares of CECI Common Stock will be sold at a price
sufficient to provide net proceeds of $16.00 per share to CECI, all of which
will be used to fund a portion of the cost of the Merger. The CECI treasury
stock will be canceled.
3. 23,843,000 Shares outstanding as of September 30, 1994 will be
purchased for cash in an amount of $483,600,000 as to 12,400,000 Shares and
cash in an amount of $440,266,000 as to 11,443,000 Shares.
4. The Magma options outstanding will be retired for approximately
$8,500,000 in cash.
5. The pro forma adjustments to reflect the effect of the transaction are
as follows:
A. The adjustments reflect the elimination of Magma's equity
accounts, the sale of CECI Common Stock, and the cancellation of CECI treasury
stock.
B. The adjustments which have been made to the net assets of Magma
and CECI to give effect to the Merger follow:
Cash consideration
plus estimated direct costs to be
incurred in consummating the Proposed
Merger. . . . . . . . . . . . . . . . . $936,366
Cost of retiring outstanding
Magma options . . . . . . . . . . . . . 8,500
Cost of 200,000 Magma shares presently
owned by CECI . . . . . . . . . . . . . 5,552
Net assets of Magma. . . . . . . . . . . . $395,286
Adjustment to eliminate goodwill
of Magma. . . . . . . . . . . . . . . . (8,999)(386,287)
------ -------
Excess of purchase price over carrying
value of net assets acquired. . . . . . 564,131
Allocated to:
Property and plant. . . . . . . . . . . (340,000)
Power purchase contracts. . . . . . . . (60,000)
Deferred income taxes on allocated costs 158,000
--------
Goodwill . . . . . . . . . . . . . . . . . $322,131
========
C. The cash which CECI will be required to pay in order to effect
the Merger has been provided for in the pro forma adjustments as follows:
Reduce cash on hand . . . . . . . . . . . . $190,699
Proceeds from sale of CECI Common Stock . . 266,667
Increase long-term debt . . . . . . . . . . 500,000
-------
$957,366
=======
Represents:
Payments to Magma common stockholders. . . . $923,866
Payments to Magma stock option holders . . . 8,500
Other direct acquisition costs . . . . . . . 12,500
Finance costs. . . . . . . . . . . . . . . . 12,500
-------
$957,366
=======
D. The pro forma adjustments to the pro forma combined statements
of earnings include the following:
i. Record amortization of the excess of purchase price
over net assets acquired over a 40-year period, eliminate the amortization of
goodwill from the historical operating results of Magma and provide
depreciation expense on costs allocated to property and plant. CECI's policy
is to provide depreciation and amortization expense beginning upon the
commencement of energy production over the estimated remaining useful life of
plant and equipment or the contract period for costs applicable to power sales
and development contracts. Costs of $150 million have been allocated to power
sales and development contracts and plant for which energy production is not
expected to commence until 1996 or later. Accordingly, revenues, period
operating costs and amortization of future costs to be incurred in the
<PAGE>
completion of such facilities together with amortization of this allocation of
acquisition costs are not included in the pro forma combined statements of
earnings.
ii. Increase interest expense relating to amortization of
deferred financing costs over ten years and cash used to finance the merger,
utilizing an 8.75 percent annual interest rate assumption applied to additional
borrowings and a 5 percent annual interest rate assumption applicable to the
reduction of cash on hand.
iii. Change income tax expense as a result of pro forma
adjustments which affect taxable income.
The pro forma income per common share has been
determined on the basis of weighted average outstanding shares which have been
adjusted to include the number of shares of CECI Common Stock to be sold.
<PAGE>
BUSINESS OF CECI AND MAGMA
AND RELATED INFORMATION
GENERAL
CECI
CECI is primarily engaged in the exploration for, and development and
operation of, environmentally responsible independent power production
facilities worldwide utilizing geothermal resources or other energy sources,
such as hydroelectric, natural gas, oil and coal. CECI was an early
participant in the domestic independent power market, and after giving effect
to the Merger is the largest geothermal power producers in the world (on the
basis of MW of electric generating capacity in operation or under
construction). On a pro forma basis, CECI had revenues of approximately $278.1
million and net income from continuing operations of approximately $43.0
million for the nine months ending September 30, 1994 and total assets of
$2,246.9 million as of September 30, 1994. CECI has a strategic relationship
with PKS, an approximate 43% stockholder of CECI (on a fully diluted basis).
PKS is a large employee-owned construction, mining and telecommunications
company with approximately $2.2 billion in revenues in 1993. PKS is one of the
largest construction companies in North America and has been in the
construction business since 1884. Since the time of the PKS investment in CECI
in 1991, at which time a new management team was installed, CECI's net income
increased four-fold.
Following completion of the Merger, CECI will have an aggregate net
ownership interest of 347 MW of electric generating capacity on a worldwide
basis. These facilities are principally located in Southern California. In
addition, CECI will have an aggregate net ownership interest of 417 MW of
electric generating capacity in three geothermal power projects in the
Philippines with an aggregate net capacity of 516 MW, which are financed and
under construction. CECI is also developing five additional projects with
executed or awarded power sales contracts in the Philippines, Indonesia and the
United States. CECI will have a net ownership interest of 935 MW in these
development projects which represent an aggregate net capacity of 1,589 MW of
additional potential electric generating capacity.
Rationale For the Merger
CECI believes that Magma is an excellent strategic fit and that the
acquisition of Magma will create significant benefits, including:
-- Expansion and Enhancement of Development Efforts
Development of new opportunities, particularly internationally,
is a key component of CECI's strategy. Since 1990, CECI and Magma have each
pursued international development opportunities primarily in Southeast Asia.
By pursuing additional development opportunities rather than competing with
Magma for the same opportunities, CECI expects to expand its development
efforts to cover additional projects and thereby more effectively capitalize on
the numerous opportunities in the growing international independent power
market.
Furthermore, CECI will have available to it technology of both
CECI and Magma. CECI owns production technology compatible with the relatively
low mineral content of its wells at its Coso Projects, and Magma owns
technology compatible with the high levels of mineral precipitates found in the
geothermal resource at the Salton Sea Projects. CECI expects that access to
these technologies will enable it to compete for new power development projects
from geothermal reservoirs encompassing a wide range of geothermal resource
characteristics.
-- Benefits of Increased Size
CECI believes that size is an important factor in determining
the success of an independent power producer. This view is based upon CECI's
belief that potential customers consider both the price of power and the
provider's capacity to fulfil its obligation as primary factors in the
selection of power suppliers. The expanded size and capabilities of the
combined companies is expected to further enhance CECI's reputation and
credibility with sovereign government and state utility customers and therefore
enhance its ability to successfully compete for new projects. CECI will have
over $2 billion of total assets and an aggregate net ownership interest of
1,691 MW in projects in operation, under construction or in development, which
total 2,642 MW. CECI believes that the combination with Magma will create the
opportunity to reduce CECI's average cost per kWh by expanding its asset base,
without materially expanding its cost structure. This will allow it to be more
price competitive with other geothermal power producers and traditional fossil
fuel power plants, which CECI believes will be its primary competition in the
future.
-- Opportunities for Operational and Administrative Cost Savings
Based in part on its experience in restructuring the
operations of CECI since 1991, management of CECI believes that it can achieve
meaningful cost savings upon the combination of Magma and CECI. Through the
implementation of CECI's existing organizational structure, management policies
and cost controls, CECI presently expects that the cost of duplicate functions
will be substantially eliminated and that the productivity of its combined
operating and engineering staff will be significantly increased.
-- Diversification in Sources of Revenue and Operations
The combination of CECI's and Magma's operations will
<PAGE>
increase CECI's sources of revenue and increase the number of operating sites
(including projects under construction) from eight to 16. CECI believes that
the resulting diversification in sources of revenue and operations can be
expected to reduce the risk profile of CECI, thereby enhancing its overall
credit position and improving its access to capital in relation to competitors
with more concentrated sources of revenues and operations.
Geothermal Energy
Geothermal energy is a clean, renewable and generally sustainable
energy source that releases significantly lower levels of emissions than result
from energy generation based on the burning of fossil fuels. Geothermal energy
is derived from the natural heat of the earth when water comes sufficiently
close to hot molten rock to heat the water to temperatures of 400 degrees
Fahrenheit or more. The heated water then ascends naturally toward the
surface of the earth where it can be extracted by drilling geothermal wells.
The energy necessary to operate a geothermal power plant is typically obtained
from several such wells which are drilled using established technology similar
to that employed in the oil and gas industry.
Geothermal production wells are normally located within approximately
one to two miles of the power plant as geothermal fluids cannot be transported
economically over longer distances. From the well heads, the heated fluid
flows through pipelines to a series of separators where it is separated into
water, "brine" and steam. The steam is passed through a turbine which drives a
generator to generate electricity. Once the steam has passed through the
turbine, it is then cooled and condensed back into water which, along with any
brine, is returned to the geothermal reservoir via injection wells. Geothermal
plants in the United States are eligible to be qualifying facilities ("QFs")
under the Public Utility Regulatory Policies Act of 1978 ("PURPA"), which
provides for certain beneficial Federal regulatory treatment. The geothermal
reservoir is a renewable source of energy if natural ground water sources and
re-injection of extracted geothermal fluids are adequate over the long term to
replenish the geothermal reservoir after the withdrawal of geothermal fluids.
The generation of electric power from geothermal resources has certain
advantages when compared to other methods of electric power generation.
Geothermal energy facilities generate significantly less emissions than fossil
fuel power plants. Geothermal energy facilities typically have higher capital
costs but tend to have significantly lower variable costs than fossil fuel
based power plants. The utilization of geothermal power is preferred by
certain governments so as to minimize the import of or maximize the export of
hydrocarbons. Geothermal power facilities also enjoy certain tax benefits in
the United States.
Geothermal Resource - Ring of Fire
Geothermal energy is most prevalent where the different sections or
plates of the Earth's crust meet. Productive geothermal resources are found
throughout the Pacific Rim (the so-called "Ring of Fire"), including the
western United States, Latin America, Hawaii, Indonesia, the Philippines,
Malaysia and New Zealand. These areas are experiencing high rates of
population growth and increased demand for new electric generating capacity.
The Global Power Market
The opportunity for independent power generation has expanded from a
United States market consisting of cogeneration and small power production
projects to a global competitive market for power generation. Many foreign
countries have initiated restructuring policies after the advent of the
independent power market in the United States.
In the United States, the independent power industry expanded rapidly
in the 1980's, facilitated by the enactment of PURPA. PURPA was enacted to
encourage the production of electricity by non-utility companies. According to
the Utility Data Institute, independent power producers were responsible for
about 30,000 MW, or 50%, of the U.S. electric generation capacity which has
come on line since 1988.
As the size of the United States independent power market has
increased, available domestic power capacity and competition in the industry
have also significantly increased. Over the past decade, obtaining a power
sales contract from a U.S utility has generally become increasingly difficult,
expensive and competitive. Many states now require power sales contracts to be
awarded by competitive bidding, which both increases the cost of obtaining such
contracts and decreases the chances of obtaining such contracts as bids
significantly outnumber awards in most competitive solicitations. The federal
Energy Policy Act of 1992 is expected to further increase domestic competition.
As a result of this increased competition, it may be difficult to obtain a
power sales agreement for a proposed project, and the terms and conditions of
any such contract may be less favorable than those in prior agreements.
Large amounts of new electric power are required in developing
countries. The movement toward privatization in some developing countries has
created significant new markets outside the U.S. In 1990, the World Bank
estimated that developing countries will need approximately 380,000 MW of new
power generating capacity through the end of the decade. The need for such
rapid expansion has caused many countries to select private power development
as their only practical alternative and to restructure their legislative and
regulatory systems to facilitate such development. CECI believes that this
significant need for power has created strong local support for private power
projects in many foreign countries and increased the availability of attractive
long-term power contracts. CECI intends to take advantage of opportunities in
these new markets and to develop, construct, and acquire power generation
projects outside the United States.
<PAGE>
Strategy
Domestically, CECI is focusing on market opportunities in which it
believes it has relative competitive advantages due to its geotechnical and
project management and operating expertise. In addition, CECI expects to
continue diversification into other environmentally responsible sources of
energy primarily through selected acquisitions of partially developed or
existing power generating projects and contracts.
CECI presently believes that the international independent power market
holds the majority of new opportunities for financially attractive private
power development in the next several years, in large part because the demand
for new generating capacity is growing more rapidly in emerging nations than in
the United States. In developing its international strategy, CECI pursues
development opportunities in countries which it believes have an acceptable
risk profile and where CECI's geothermal resource development and operating
experience, project development expertise or strategic relationship with PKS or
local partners are expected to provide it with a competitive advantage. CECI
has successfully financed and has under construction three projects
representing 409 MW of net ownership in the Philippines and is currently
pursuing a number of other electric power project opportunities in countries
such as the Philippines and Indonesia. These countries are ideally suited for
CECI to develop, finance and operate power projects successfully because of
their excellent population demographics, extensive geothermal resources and
these countries' commitments to develop private power programs. CECI's
development efforts include both so-called "greenfield" development as well as
the acquisition of or participation in the joint venture development of
projects which are under development or already operating. In greenfield
development, CECI attempts to negotiate power sales contracts for new
generation capacity or engages in competitive bids in response to government
agency or utility requests for proposals for new capacity.
In pursuing its international strategy, CECI intends to own a
significant equity interest in, and to operate, the projects it develops or
acquires. In order to compete more effectively internationally, CECI's
strategy is to attempt to diversify its project portfolio, extend its future
equity funding capacity through joint ventures and utilize fixed-price, turnkey
construction contracts with contractors experienced in the construction of
power plants or other infrastructure facilities. CECI also believes that it is
important in foreign transactions to work with local partners who are
knowledgeable of local culture, political and commercial practices and who
provide a visible local presence and local project representation.
With respect to emerging market projects, CECI's policy is to attempt
to minimize currency risks, including the devaluation of local currencies
versus the U.S. dollar, as well as the risk of availability of hard currency
convertibility. To the extent possible, CECI attempts to secure "political
risk" insurance from the Overseas Private Insurance Company ("OPIC") or similar
multilateral agencies to limit its risk in emerging market countries. In
addition, CECI endeavors to involve the World Bank, export credit agencies or
multilateral funding sources in its international project financings. CECI
believes multilateral lending agencies and foreign source financing and
political risk insurance are available for certain international private power
projects, particularly those utilizing indigenous fuel sources in renewable or
otherwise environmentally responsible generating facilities. CECI believes
that the involvement of these institutions will enhance an international
project's position in emerging market countries.
CECI has an international joint venture agreement with PKS which CECI
believes augments and accelerates CECI's capabilities in foreign power markets.
The joint venture agreement is limited to international activities and provides
that if both CECI and PKS agree to participate in a project, they will share
all development costs equally. Each of CECI and PKS will provide 50% of the
equity required for financing a project developed by the joint venture and CECI
will operate and manage such project. The agreement contemplates a joint
development structure under which, on a project by project basis, CECI will be
the development manager, managing partner and/or project operator, an equal
equity participant with PKS and a preferred participant in the construction
consortium and PKS will be an equal equity participant and the preferred
turnkey construction contractor. The joint venture agreement may be terminated
by either party on 15 days written notice, provided that such termination
cannot affect the pre-existing contractual obligations of either party.
In order to augment its technical capabilities, in 1993 CECI acquired
The Ben Holt Co. ("BHCO"), a California based engineering firm with over 25
years of geothermal experience, specializing in feasibility studies, process
design, detailed engineering, procurement, construction and operation of
geothermal power plants, gathering systems and related facilities.
The Projects
CECI has ownership interests of an aggregate of (i) 347 MW in 13
projects in operation representing an aggregate net capacity of 553 MW of
electric generating capacity, (ii) 409 in three projects under construction
representing an aggregate net capacity of 500 MW of electric generating
capacity and (iii) 935 MW in eight projects in development stages with signed
power sale agreements or under award representing an aggregate net capacity of
1,589 MW of electric generating capacity. The following table sets out CECI's
various projects in operation, under construction and in the latter stages of
development pursuant to signed power sales agreements or awarded mandates.
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL PROJECTS
Projects Under Construction
Facility Net Projected
Net Ownership Commercial
Capacity Interest Operation Contract Contract Power
Project (in MW) (in MW) Location Date Expiration(3) Type Purchaser
<S> <C> <C> <C> <C> <C> <C> <C>
Upper Mahiao(1) 119 119 Leyte, Philippines 1996 CO+10 Build, Own, Transfer PNOC-EDC (GOP)(2)
Mahanagdong(1) 165 74 Leyte, Philippines 1997 CO+10 Build, Own, Transfer PNOC-EDC (GOP)(2)
Malitbog-Phase I 72 72 Leyte, Philippines 1996 CO+10 Build, Own, Transfer PNOC-EDC (GOP)(2)
Malitbog- Phase II 144 144 Leyte, Philippines 1997 CO+10 Build, Own, Transfer PNOC-EDC (GOP)(2)
--- ---
Total Under Construction 500 409
=== ===
<CAPTION>
Projects with Signed Power Sales Contracts/Awarded Development Rights
Facility Net Projected
Net Ownership Commercial
Capacity Interest Operation Contract Contract Power
Project (in MW) (in MW) Location Date Expiration(3) Type Purchaser
<S> <C> <C> <C> <C> <C> <C>
Dieng(1) 400 188West Java, Indonesia 1997-1999 CO+30 Build, Own, Transfer PLN (GOI)
Patuha(1) 400 140Central Java, Indonesia1997-1999 CO+30 Build, Own, Transfer PLN (GOI)
Casecnan(6) 140 98 Luzon, Philippines 1998 CO+20 Build, Own, Transfer NIA(8) (GOP)(2)
Bali(4)(6) 350 210 Bali, Indonesia 1998-1999 CO+30
Alto Peak 70 70 Leyte, Philippines 1997 CO+10 Build, Own, Transfer PNOC-EDC (GOP)
-- --
Total Contracted/Awarded 1,360 706
---- ----
Total International Projects 1,860 1,115
===== =====
<FN>
- ---------------
(1)PKS has elected to exercise its ownership option pursuant to its joint venture agreement with CECI.
(2)Government of the Philippines undertaking guarantees PNOC-EDC and NIA's obligation.
(3) Commercial Operation (CO).
(4)Geothermal resource development rights have been awarded and the power sales contract is subject to negotiation.
(5)Philippine National Irrigation Administration.
(6)PKS has not indicted whether it intends to exercise its ownership option pursuant to its joint venture agreement with CECI.
(7)With respect to the Vulcan, Hoch (Del Ranch), Elmore, Leathers, Salton Sea I, Salton Sea II and Salton Sea III projects, this
represents contract nameplate ratings.
</TABLE>
<PAGE>
DOMESTIC PROJECTS
Projects in Operation
<TABLE>
<CAPTION>
Facility Net
Net Ownership Date of
Capacity Interest Commercial Contract Contract Power
Project (in MW)(7) (in MW) Location Operation Expiration Type Purchaser(8)
<S> <C> <C> <C> <C> <C> <C>
Navy 1 80 37 China Lake, CA 8/1987 8/2011 SO4 SCE
BLM 80 38 China Lake, CA 3/1989 3/2019 SO4 SCE
Navy II 80 40 China Lake, CA 1/1990 1/2010 SO4 SCE
Vulcan 34 17 Imperial Valley, CA 2/1986 2/2016 SO4 SCE
Hoch (Del Ranch) 38 19 Imperial Valley, CA 1/1989 12/2018 SO4 SCE
Elmore 38 19 Imperial Valley, CA 1/1989 12/2018 SO4 SCE
Leathers 38 19 Imperial Valley, CA 1/1990 12/2019 SO4 SCE
Salton Sea I 10 10 Imperial Valley, CA 7/1987 6/2017 Negotiated SCE
Salton Sea II 20 20 Imperial Valley, CA 4/1990 4/2020 SO4 SCE
Salton Sea III 50 50 Imperial Valley, CA 2/1989 2/2019 SO4 SCE
Yuma Cogen 50 50 Yuma, AZ 5/1994 5/2024 Negotiated SDG&E
Roosevelt Hot
Springs 25 18 Milford, UT Gathered Steam UP&L
Desert Peak 10 10 Desert Peak, NV 12/1985 12/1995 NegotiatedSPCC Power
--- ---
Total in Operation 553 341
=== ===
<CAPTION>
Facility Net
Net Ownership Projected
Capacity Interest Commercial Contract Contract Power
Project (in MW)(7) (in MW) Location Operation Expiration Type Purchaser(8)
Date
<S> <C> <C> <C> <C> <C> <C>
BRPU(2) 163 163 Imperial Valley, CA TBD TBD FSO4 SCE(9)
Fish Lake(10) 36 36 Imperial Valley, CA est. 1996 2015 Negotiated SCE
Newberry 30 30 Bend, OR est. 1998 2047 Negotiated BPA/EWEB
-- --
Total Contracted/Awarded 229 229
--- ---
Total Domestic Projects 782 576
--- ---
Total Projects 2,642 1,691
===== =====
<FN>
- ---------------
(8)Southern California Edison Company (SCE); San Diego Gas & Electric Company (SDG&E); Utah Power & Light Company (UP&L); Sierra
Pacific Power Company (SPCC); Bonneville Power Authority (BPA); and Eugene Water and Electric Board (EWEB).
(9)SCE is contesting the BRPU award; accordingly, no power sales contract is currently signed.
(10)Combined Fish Lake and Salton Sea Expansion option.
</TABLE>
<PAGE>
INTERNATIONAL PROJECTS -- DISCUSSION
Projects in Construction
The Philippines. CECI believes that increasing industrialization, a
rising standard of living and an expanding power distribution network has
significantly increased demand for electrical power in the Philippines.
According to the 1993 Power Development Program of the National Power
Corporation of the Philippines ("NAPOCOR"), demand for electricity exceeds
supply. NAPOCOR has also reported that its ability to sustain desired levels
of electric production from existing facilities has been limited due to
frequent breakdowns in many of its older electric generating plants. As a
result, the Philippines has experienced severe power outages, with Manila
suffering significant daily brownouts during much of 1993 and periodic
brownouts during 1994. Although the occurrence of brownouts has been recently
reduced, NAPOCOR has said that it still anticipates significant energy
shortages in the future.
In 1993, the Philippine Congress, pursuant to Republic Act 7648,
granted President Ramos emergency powers to remedy the Philippines' energy
crisis, including authority to (i) exempt power projects from public bidding
requirements, (ii) increase power rates and (iii) reorganize NAPOCOR. Until
1987, NAPOCOR had a monopoly on power generation and transmission in the
Philippines. In 1987, then President Aquino issued Executive Order No. 215,
which granted private companies the right to develop certain power generation
projects, such as those using indigenous energy sources on a "build-operate-
transfer" or "build-transfer" basis. In 1990, the Philippine Congress enacted
Republic Act No. 6957, which authorized private development of priority infra-
structure projects on a "build-operate-transfer" and a "build-transfer" basis.
In addition, under that Act, such power projects were made eligible for certain
tax benefits, including exemption from Philippine national income taxes for at
least six years and exemption from, or reimbursement for, customs duties and
value added taxes on capital equipment to be incorporated into such projects.
In an effort to remedy the shortfall of electricity, the Philippines,
NAPOCOR and the Philippine National Oil Company-Energy Development Company
("PNOC-EDC") continue to jointly solicit bids for private power projects.
Among private power projects selected through this solicitation process were
the Upper Mahiao (the "Upper Mahiao Project"), Mahanagdong (the "Mahanagdong
Project"), Malitbog (the "Malitbog Project") and Alto Peak (the "Alto Peak
Project") geothermal power projects, as described below. Geothermal power has
been identified as a preferred alternative by the Philippine Government due to
the domestic availability and the minimal environmental effects of geothermal
power in comparison to other forms of power production. PNOC-EDC, which is
responsible for developing the Philippines' domestic energy sources, has been
successful in the exploration and development of geothermal resources.
CECI and Magma have financed and commenced construction of the Upper
Mahiao, Mahanagdong and Malitbog Projects, which have an aggregate net capacity
of 500 MW, of which CECI's aggregate net ownership interest is 409 MW. The
following is a summary description of certain information concerning these and
other projects.
Upper Mahiao. CECI has closed the financing and commenced construction
of the Upper Mahiao Project, a 119 gross MW geothermal project to be located in
the Greater Tongonan area of the island of Leyte in the Philippines. The Upper
Mahiao Project will be built, owned and operated by CE Cebu Geothermal Power
Company, Inc. ("CE Cebu"), a Philippine corporation that is approximately 100%
indirectly owned by CECI. It will sell 100% of its capacity on a "take-or-pay"
basis (described below) to PNOC-EDC, which will in turn sell the power to
NAPOCOR for distribution to the island of Cebu, located about 40 miles west of
Leyte.
The Upper Mahiao Project will have a total project cost of
approximately $218 million, including interest during construction, project
contingency costs and a debt service reserve fund. A consortium of
international banks has committed to provide approximately $162 million in a
project-financed construction loan, supported by political risk insurance from
the Export-Import Bank of the United States ("ExIm Bank"). The largest portion
of the term loan for the project will also be provided by the ExIm Bank.
CECI's equity contribution to the Upper Mahiao Project is $56 million. CECI
has arranged for political risk insurance of its equity investment through
OPIC. The financing is collateralized by all the assets of the project.
The Upper Mahiao Project is being constructed by Ormat, Inc. ("Ormat")
and its affiliates pursuant to supply and construction contracts (collectively,
the "Mahiao EPC Contract"), which, taken together, provide for the construction
of the plant on a fixed-price, date-certain, turnkey basis. Ormat is an
international manufacturer and construction contractor that builds binary
geothermal turbines; it has provided its equipment to several geothermal power
projects throughout the United States, the Philippines and internationally.
The Mahiao EPC Contract provides liquidated damage protection of up to 30% of
the Mahiao EPC Contract price. Ormat's performance under the Mahiao EPC
Contract is substantially backed by a completion guaranty of Ormat, by letters
of credit, and by a guaranty of Ormat Industries, Ltd., an Israeli corporation
and the parent of Ormat, in each case for the benefit of the project lenders.
Under the terms of an energy conversion agreement, executed on
September 6, 1993 (the "Upper Mahiao ECA"), CE Cebu will build, own and operate
the Upper Mahiao Project during the approximately two-year construction period
and the ten-year cooperation period, after which ownership will be transferred
to PNOC-EDC at no cost.
The Upper Mahiao Project will be located on land provided by PNOC-EDC
<PAGE>
at no cost; it will take geothermal steam and fluid, also provided by PNOC-EDC
at no cost, and convert its thermal energy into electrical energy to be sold to
PNOC-EDC on a "take-or-pay" basis. Specifically, PNOC-EDC will be obligated to
pay for the electric capacity that is nominated each year by CE Cebu,
irrespective of whether PNOC-EDC is willing or able to accept delivery of such
capacity. PNOC-EDC will pay to CE Cebu a fee (the "Capacity Fee") based on the
plant capacity nominated to PNOC-EDC in any year (which, at the plant's design
capacity, is approximately 95% of total contract revenues) and a fee (the
"Energy Fee") based on the electricity actually delivered to PNOC-EDC
(approximately 5% of total contract revenues). The Capacity Fee serves to
recover the capital costs of the project, to recover fixed operating costs and
to cover return on investment. The Energy Fee is designed to cover all
variable operating and maintenance costs of the power plant. Payments under
the Upper Mahiao ECA will be denominated in U.S. dollars, or computed in
dollars and paid in Philippine pesos at the then-current exchange rate, except
for the Energy Fee, which will be used to pay peso-denominated expenses. The
convertibility of peso receipts into U.S. dollars is insured by OPIC.
Significant portions of the Capacity Fee and Energy Fee will be indexed to U.S.
and Philippine inflation rates, respectively. PNOC-EDC's payment requirements,
and its other obligations under the Upper Mahiao ECA, are guaranteed by the
Philippines through a performance undertaking.
The payment of Capacity Fees is not excused if PNOC-EDC fails to
deliver or remove the steam or fluids or fails to provide the transmission
facilities, even if its failure was caused by a force majeure event. In
addition, PNOC-EDC must continue to make Capacity Fee payments if there is a
force majeure event (e.g., war, nationalization, etc.) that affects the
operation of the Upper Mahiao Project and that is within the reasonable control
of PNOC-EDC or the government of the Philippines or any agency or authority
thereof. If CE Cebu fails to meet certain construction milestones or the power
plant fails to achieve 70% of its design capacity by the date that is 120 days
after the scheduled completion date (as that date may be extended for force
majeure and other reasons under the Upper Mahiao ECA), the Upper Mahiao Project
may, under certain circumstances, be deemed "abandoned," in which case the
Upper Mahiao Project must be transferred to PNOC-EDC at no cost, subject to any
liens existing thereon.
PNOC-EDC is obligated to purchase CE Cebu's interest in the facility
under certain circumstances, including (i) extended outages resulting from the
failure of PNOC-EDC to provide the required geothermal fluid, (ii) certain
material changes in policies or laws which adversely affect CE Cebu's interest
in the project, (iii) transmission failure, (iv) failure of PNOC-EDC to make
timely payments of amounts due under the Upper Mahiao ECA, (v) privatization of
PNOC-EDC or NAPOCOR, and (vi) certain other events. Prior to completion of the
Upper Mahiao Project, the buy-out price will be equal to all costs incurred
through the date of the buy-out, including all Upper Mahiao Project debt, plus
an additional rate of return on equity of ten percent per annum. In a post-
completion buy-out, the price will be the net present value at a discount rate
(based on the Last Published Commercial Interest Reference Rate of the
Organization for Economic Cooperation and Development) of the total remaining
amount of Capacity Fees over the remaining term of the Upper Mahiao ECA.
Mahanagdong. CECI has also closed the financing and commenced
construction of the Mahanagdong Project, a 180 gross MW geothermal project,
which will also be located on the island of Leyte. The Mahanagdong Project
will be built, owned and operated by CE Luzon Geothermal Power Company, Inc.
("CE Luzon"), a Philippine corporation that during construction is indirectly
owned 50% by CECI and 50% by PKS. Up to a 10% financial interest in CE Luzon
may be sold at completion to another industrial company. The Mahanagdong
Project will sell 100% of its capacity on a similar basis as described above
for the Upper Mahiao Project to PNOC-EDC, which will in turn sell the power to
NAPOCOR for distribution to the island of Luzon.
Mahanagdong has a total project cost of approximately $320 million,
including interest during construction, project contingency costs and a debt
service reserve fund. The proposed capital structure consists of a project
financing construction and term loan of approximately $240 million provided by
OPIC, ExIm Bank and a consortium of international banks, and approximately $80
million in equity contributions. Political risk insurance from ExIm Bank has
been obtained for the commercial lenders. CECI's equity investment for the
Mahanagdong Project will be approximately $40 million. Subject to the pledge
of the project company's stock to the lenders, CECI has arranged for political
risk insurance on its equity investment through OPIC. The financing is
collateralized by all the assets of the project.
The Mahanagdong Project is being constructed by a consortium (the "EPC
Consortium") of Kiewit Construction Group, Inc. ("KCG") and BHCO pursuant to
fixed-price, date-certain, turnkey supply and construction contracts
(collectively the "Mahanagdong EPC Contract"). The obligations of the EPC
Consortium under the Mahanagdong EPC Contract are supported by a guaranty of
KCG at an aggregate amount equal to approximately 50% of the Mahanagdong EPC
Contract's price. KCG, a wholly owned subsidiary of PKS, is the lead member of
the EPC Consortium, with an 80% interest. KCG performs construction services
for a wide range of public and private customers in the U.S. and
internationally. The Mahanagdong EPC Contract provides for maximum liability
for liquidated damages of up to $100.5 million and total liability of up to
$201 million. Construction projects undertaken by KCG during 1993 included
transportation projects, including highways, bridges, airports and railroads,
power facilities, buildings and sewer and waste disposal systems; and water
supply systems, utility facilities, dams and reservoirs. KCG accounts for 80%
of PKS's revenues, contributing $1.7 billion in revenues in 1993. KCG has an
extensive background in power plant construction.
BHCO will provide design and engineering services for the EPC
Consortium, holding a 20% interest. CECI has provided a guaranty of BHCO's
obligations under the Mahanagdong EPC Contract.
<PAGE>
The terms of an energy conversion agreement (the "Mahanagdong ECA"),
executed on September 18, 1993, are substantially similar to those of the Upper
Mahiao ECA. The Mahanagdong ECA provides for an approximately three-year
construction period and a ten-year cooperation period. All of PNOC-EDC's
obligations under the Mahanagdong ECA are guaranteed by the Philippines through
a performance undertaking. The Capacity Fees are expected to be approximately
97% of total revenues at the design capacity levels and the Energy Fees are
expected to be approximately 3% of such total revenues.
Malitbog. In December 1994 Magma closed the financing and commenced
construction of the Malitbog Project, a 231 gross MW geothermal project, which
will also be located on the island of Leyte. The Malitbog Project will be
built, owned and operated by Visayas Geothermal Power Company ("VGPC"), a
Philippine general partnership that is wholly owned, indirectly, by Magma.
VGPC will sell 100% of its capacity on substantially the same basis as
described above for the Upper Mahiao Project to PNOC-EDC, which will in turn
sell the power to NAPOCOR.
The Malitbog Project has a total project cost of $280 million,
including interest during construction and project contingency costs. A
consortium of international banks and OPIC have provided a total of $210
million of construction and term loan facilities, the $135 million
international bank portion of which is supported by political risk insurance
from OPIC. Magma's equity contribution to VGPC is approximately $70 million.
Magma's equity participation is covered by political risk insurance from OPIC
which is assigned to the benefit of the lenders.
The Malitbog Project will be constructed by Sumitomo Corporation
pursuant to a fixed-price, date-certain, turnkey supply and construction
contract (the "Malitbog EPC Contract"). The EPC Contract provides that certain
liquidated damages will be paid by Sumitomo for failure to meet the schedule,
including the payment of any liquidated damages or penalties required to be
paid by the Partnership to PNOC-EDC under the Energy Conversion Agreement
(subject to limitations on the total amount of liquidated damages payable by
Sumitomo). The EPC Contract also provides for the payment of certain
liquidated damages on a per unit basis if upon completion of the facility tests
do not demonstrate its ability to operate at a net generating capacity of at
least 222.3 MW. The liquidated damages are capped at 13 1/3% of the total EPC
contract price for each generating unit. Pursuant to a reimbursement
undertaking, Magma has agreed to reimburse Sumitomo for draws, if any, by PNOC-
EDC on the construction bond provided by Sumitomo on behalf of Magma in excess
of the liquidated damage amounts provided in the EPC Contract.
Sumitomo is one of the principal trading and investment companies in
Japan, and has built power plants around the world, often on a turnkey basis.
As of October 20, 1994, Sumitomo had a credit rating of Aa3 from Moody's. The
Malitbog EPC Contract requires Sumitomo to provide engineering, procurement,
construction, start-up and testing services with respect to the facility.
Construction of the facility has begun, with commercial operation of
unit 1 scheduled to commence on or about June 1, 1996, and commercial operation
of unit 2 and unit 3 scheduled to commence on or about June 1, 1997.
The terms of an energy conversion agreement ("Malitbog ECA"), executed
on September 10, 1993, are substantially similar to those of the Upper Mahiao
ECA. The Malitbog ECA provides for a two-phase construction period, of three
identical 77 gross MW units with the first phase (unit 1) scheduled to start up
by July 1996 and the second phase (units 2 and 3) scheduled to start up by July
1997. The cooperation period is ten years from the completion of unit 3. All
of PNOC-EDC's obligations under the Malitbog ECA are guaranteed by the
Philippines through a performance undertaking. The Capacity Fees are 100% of
total revenues and there is no Energy Fee.
Projects in Development
Casecnan. In November 1994, CECI signed a "Project Agreement" with the
Philippine National Irrigation Administration ("NIA") to develop an estimated
$320 million combined irrigation and hydroelectric power generation project
(the "Casecnan Multipurpose Project"). Such Project will deliver excess water
from the Casecnan and Denip (Cagoyan) watershed in Northern Luzon to the
Pampanga watershed and the Pantabangan Reservoir for irrigation use in the
Central Luzon Valley. The Casecnan Multipurpose Project will also provide 140
MW of net electric generation capacity to the Luzon grid.
The Project Agreement is structured as a build, operate and transfer
agreement under which NIA will supply the water for the Casecnan Multipurpose
Project. The Project Agreement provides for a 20-year cooperation period with
significant "take-or-pay" obligations for water and electricity. At the end of
the 20-year cooperation period, the Project will be transferred to NIA at no
cost. CECI anticipates commencing construction in 1995.
Completion of such Project remains subject to a number of significant
uncertainties, including arranging financing and obtaining certain required
permits and licenses, none of which can be assured.
Alto Peak. Alto Peak is a smaller geothermal project in the same
general area of Leyte as Upper Mahiao, Mahanagdong and Malitbog. Magma and
PNOC-EDC have executed a 70 MW net Energy Conversion Agreement, dated May 7,
1994. The general terms and conditions are similar to the Malitbog ECA.
However, the plant design has not been initiated as PNOC-EDC has not finalized
the steam conditions (pressure, composition and ph), as PNOC-EDC is still
drilling and testing the geothermal wells that will supply steam to the
project. Consequently, Magma has not commenced financing arrangements for the
project.
<PAGE>
Indonesia. Indonesia, which has the world's fourth largest population,
has experienced rapid growth in electricity demand. CECI believes that load
growth averaged in excess of 13% from 1980 through 1990, and has exceeded 17%
over the past two years. Furthermore, CECI believes that rapid expansion in
industrial growth has created a backlog of unconnected industrial users in
excess of 4,000 MW. In its sixth five-year plan, the Indonesian government has
called for the addition of 12,000 MW of additional generating capacity by 1999.
The long range plan calls for an additional 15,000 MW to be added by the year
2004. The plans call for approximately 75% of this capacity to be added by
independent power producers. Although Indonesia is a member of OPEC and is
also the world's largest exporter of LNG, the government has announced that it
wishes to maintain sufficient amounts of oil for export, which will require a
shift to coal fired generation and the use of other energy sources, such as
geothermal.
It is estimated that Indonesia has sufficient geothermal steam
potential to generate 16,000 MW, centered in the Java and Sumatra areas (the
two most populous of the 13,000 islands in Indonesia). To date, less than 150
MW of geothermal facilities have been commissioned, as the Government of
Indonesia was not encouraging the development of geothermal energy, but these
measures have been repealed.
The Indonesian state-owned utility has recently been converted to a
limited liability company, P.T. PLN (Persero) ("PLN"), as a first step towards
the privatization of its two largest generating subsidiaries. The main
objective of Indonesia's electric energy policy has been to secure a continuity
of supply at reasonable rates for households (40% of which have no power) and
to minimize the utilization of hydrocarbons. Rural electrification will remain
an important component of the energy policy as PLN is targeting the addition of
2 million customers a year.
Indonesia is rated Baa3/BBB- by Moody's Investors Service, Inc. and
Standard & Poor's Corporation.
CECI believes that Indonesia represents an attractive development
opportunity as it combines growing power needs with ample geothermal resources
and creditworthy contract parties.
The following is a summary description of certain information
concerning CECI's projects in Indonesia. Since these projects are still in
development, however, there can be no assurance that this information will not
change materially over time. In addition, there can be no assurance that
development efforts on any particular project, or CECI's efforts generally,
will be successful.
Dieng. On December 2, 1994, a subsidiary of CECI executed a joint
operation contract (the "Dieng JOC") for the development of the geothermal
steam field and geothermal power facilities at the Dieng geothermal field,
located in Central Java (the "Dieng Project") with Perusahaan Pertambangan
Minyak Dan Gas Bumi Negara ("Pertamina"), the Indonesian national oil company,
and executed a "take-or-pay" energy sales contract (the "Dieng ESC") with both
Pertamina and PLN, the Indonesian national electric utility.
A subsidiary of CECI has entered into a joint development agreement
with P.T. Himpurna Enersindo Abadi ("P.T. HEA"), its Indonesian partner, which
is a subsidiary of Himpurna, an association of Indonesian military veterans,
whereby CECI and P.T. HEA have agreed to work together on an exclusive basis to
develop the Dieng Project (the "Dieng Joint Venture"). The Dieng Joint Venture
is structured with subsidiaries of CECI having a minimum 47% interest,
subsidiaries of PKS having the option to take a 47% interest and P.T. HEA
having a 6% interest in the Dieng Project.
Pursuant to the Dieng JOC and ESC, Pertamina will grant to the Dieng
Joint Venture the geothermal field and the wells and other facilities presently
located thereon and the Dieng Joint Venture will build, own and operate power
production units with an aggregate capacity of up to 400 MW. The Dieng Joint
Venture will accept the field operation responsibility for developing and
supplying the geothermal steam and fluids required to operate the plants. The
Dieng JOC is structured as a build own transfer agreement and will expire
(subject to extension by mutual agreement) on the date which is the later of
(i) 42 years following completion of well testing and (ii) 30 years following
the date of commencement of commercial generation of the final unit completed.
Upon the expiration of the proposed Dieng JOC, all facilities will be
transferred to Pertamina at no cost. The Dieng Joint Venture is required to
pay Pertamina a production allowance equal to three percent of the Dieng Joint
Venture's net operating income from the Dieng Project, plus a further amount
based upon the negotiated value of existing Pertamina geothermal production
facilities that CECI expects will be made available by Pertamina.
Pursuant to the Dieng ESC, PLN agreed to purchase and pay for all of
the Project's capacity and energy output on a "take or pay" basis regardless of
PLN's ability to accept such energy made available from the Dieng Project for a
term equal to that of the Dieng JOC. The price paid for electricity includes a
base energy price per kWh multiplied by the number of kWhs the plants deliver
or are "capable of delivering," whichever is greater. Energy price payments
are also subject to adjustment for inflation. PLN will also pay a capacity
payment based on plant capacity. All such payments are payable in U.S.
dollars.
CECI presently intends to begin well testing by the second quarter of
1995 and to commence construction of an initial 55 MW unit in the 4th quarter
of 1995, and then to proceed on a modular basis with construction of three
additional units to follow shortly thereafter, resulting in an aggregate first
phase net capacity at this site of 220 MW. CECI estimates that the total
project cost of these units will be approximately $450 million. The next phase
is expected to expand the total capacity to 400 MW. The cost of the full Dieng
<PAGE>
Project is estimated to approximate $1 billion. CECI anticipates a consortium
consisting of KCG and BHCO will submit a proposal for the design and
construction of the Dieng Project, and that CECI, through a subsidiary, will be
responsible for operating and managing the Dieng Project.
The Dieng field has been explored domestically for over 20 years and
BHCO has been active in the area for more than five years. Pertamina has
drilled a total of 27 wells to date. CECI has a significant amount of data,
which it believes to be reliable as to the production capacity of the field.
However, a number of significant steps, both financial and operational, must be
completed before the Dieng Project can proceed further. These steps, none of
which can be assured, include obtaining required regulatory permits and
approvals, completing the well testing, entering into a construction agreement
and other project contracts, and arranging financing.
Patuha. CECI is also developing a geothermal power plant with respect
to the Patuha geothermal field in Java, Indonesia (the "Patuha Project"). CECI
has entered into a joint venture (the "Joint Venture Project") for Patuha with
P.T. Enerindo Supra Abadi ("P.T. ESA"), an Indonesian company. P.T. ESA is an
affiliate of the Bukaka Group, which has extensive experience in general
construction, fabrication and electrical transmission construction in
Indonesia. In exchange for project development services, P.T. ESA will
receive a 10% equity interest in the Patuha Project with an option to acquire
an additional 20% interest for cash upon the satisfaction of certain
conditions. Subject to the exercise of that option, subsidiaries of CECI will
have a 45% interest and subsidiaries of PKS will have the option to take a 45%
interest in the Patuha Project.
On December 2, 1994, the Patuha Joint Venture executed both a joint
operation contract (the "Patuha JOC") and an energy sales contract (the "Patuha
ESC"), each of which currently contains terms substantially similar to those
described above for the Dieng Project. The Patuha Joint Venture intends to
proceed on a modular basis similar to the Dieng Project, with an aggregate
capacity of up to 400 MW. CECI estimates that the total cost will be
approximately $1 billion. CECI presently intends to begin well testing and
further exploration in the fourth quarter of 1995 with construction of the
first unit expected to begin by 1996.
The Patuha Project remains subject to a number of significant
uncertainties, as described above in connection with the Dieng Project, and
there can be no assurance that the Patuha Project will proceed or reach
commercial operation.
Bali. CECI and PT Panutau Group, an Indonesian consortium of energy,
oil, gas and mining companies, have formed a joint venture to pursue the
development of geothermal resources in Bali and to obtain a power sales
contract from PLN.
CECI presently intends to develop the Bali Project and other possible
projects in Indonesia using a structure similar to that contemplated for the
Dieng Project.
The Bali Project remains subject to a number of significant
uncertainties, as described above for the Dieng Project, and there can be no
assurance that CECI will pursue the Bali Project or that it will proceed or
reach commercial operation.
DOMESTIC PROJECTS -- DISCUSSION
Projects in Operation
The Coso Projects. In 1979, CECI entered into a 30-year contract (the
"Navy Contract") with the United States Department of the Navy (the "Navy") to
develop geothermal power facilities located on approximately 5,000 acres of the
Naval Air Weapons Station at China Lake, California (150 miles northeast of Los
Angeles). In 1985, CECI entered into a 30-year lease (the "BLM Lease") with
the United States Bureau of Land Management ("BLM") for approximately 19,000
acres of land adjacent to the land covered by the Navy Contract. The Navy
Contract and the BLM Lease provide for certain royalty payments as a percentage
of gross revenue and certain other formulas. CECI formed three joint ventures
(the "Coso Joint Ventures") with one primary joint venture partner, Caithness
Corporation ("Caithness"), to develop and construct the three facilities which
comprise the Navy I project (the "Navy I Project"), the BLM project (the "BLM
Project") and the Navy II project (the "Navy II Project") (collectively the
"Coso Projects").
The Coso Joint Ventures are as follows: (i) Coso Finance Partners,
which owns the Navy I Project (the "Navy I Partnership"), (ii) Coso Energy
Developers, which owns the BLM Project (the "BLM Partnership"), and (iii) Coso
Power Developers, which owns the Navy II Project (the "Navy II Partnership"
and, together with the Navy I Partnership and the BLM Partnership, the "Coso
Partnerships"). CECI holds ownership interests of approximately 46% in the
Navy I Partnership; approximately 48% in the BLM Partnership, after payout to
CECI and Caithness; and 50% in the Navy II Partnership. CECI consolidates its
respective share of the operating results of the Coso Partnerships into its
financial statements. In addition, CECI indirectly holds rights to certain
cash flows from its partners in the BLM Project, and, to a lesser extent, the
Navy I Project and Navy II Project. Each of the Coso Joint Ventures is managed
by a management committee which consists of two representatives from CECI and
two representatives from CECI's partners. CECI operates the Coso Projects, for
which it receives fees from the Coso Partnerships.
The Coso Projects sell all electricity generated by the respective
plants pursuant to three long-term SO4 Agreements between the Navy I
Partnership, the BLM Partnership, and the Navy II Partnership, respectively,
and SCE. These SO4 Agreements provide for capacity payments, capacity bonus
<PAGE>
payments and energy payments. SCE makes fixed annual capacity payments to the
Coso Partnerships, and to the extent that capacity factors exceed certain
benchmarks is required to make capacity bonus payments. The price for capacity
and capacity bonus payments is fixed for the life of the SO4 Agreements.
Energy is sold at increasing fixed rates for the first ten years of each
contract and thereafter at SCE's Avoided Cost of Energy. The fixed price
periods of the SO4 Agreements extend until August 1997, March 1999 and January
2000 for each of the Navy I, BLM and Navy II Partnerships, respectively, at
rates ranging from 11.0 cents per kWh in 1994 to 14.6 cents per kWh in
2000. CECI's
share of the revenues received by the Coso Partnerships for 1993 and the first
nine months of 1994 was $92.9 million and $78.9 million, respectively.
The physical facilities used for geothermal energy production are
substantially the same at the Coso Projects.
The Navy I Project. The geothermal resource for the Navy I Project
currently is produced from approximately 32 wells. The Navy I Project consists
of three turbine generators, each with approximately 32 MW of electrical
generating capacity. The Navy I Project has an aggregate gross electrical
generating capacity of approximately 96 MW, and operated at an average
operating capacity factor of 99.8% in 1992, 111.2% in 1993 and 114.6% in the
first nine months of 1994, based on a net capacity of 80 MW.
The BLM Project. The BLM Project's geothermal resource currently is
produced from approximately 20 wells. The BLM Project consists of three
turbine generators. Two of these turbine generators are located at the BLM
East site in a dual flash system, each with a nameplate capacity of 29 MW; and
one is located at the BLM West site in a single flash system, with a nameplate
capacity of 29 MW. The BLM Project has an aggregate gross electrical
generating capacity of approximately 96 MW, and operated at an average
operating capacity factor of 87.2% in 1992, 98.1% in 1993, and 98.5% in the
first nine months of 1994, based on a net capacity of 80 MW.
The Navy II Project. The geothermal resource for the Navy II Project
currently is produced from approximately 25 wells. The Navy II Project
consists of three individual turbine generators, each with approximately 32 MW
of electrical generating capacity. The Navy II Project has an aggregate gross
electrical capacity of approximately 96 MW, and operated at an average
operating capacity factor of 98.1% in 1992, 102.6% in 1993, and 103.5% in the
first nine months of 1994, based on a net capacity of 80 MW.
In December 1992, the Coso Joint Ventures refinanced the existing bank
debt on the Coso Projects with the proceeds of the sale of approximately $560
million in non-recourse senior secured notes (the "Notes") in a private
placement pursuant to Rule 144A under the Securities Act. The Notes were
issued by Coso Funding Corp. ("Coso Funding"), a corporation owned by the Coso
Joint Ventures and formed exclusively for the purpose of issuing the Notes.
Coso Funding lent the Coso Joint Ventures substantially all of the net proceeds
of the sale of the Notes. At the time of their issuance, the Notes were rated
"BBB-" by Standard & Poor's Corporation, "Baa3" by Moody's Investors Service,
Inc., and "BBB" by Duff & Phelps Credit Rating Co., all investment grade
ratings. The outstanding balance of the Notes on September 30, 1994 was $483.5
million with a remaining average life of 3.5 years, and the average interest
rate on the Notes for the nine months ending on the same date was 8.07%. The
obligations of each Coso Partnership under the loans from Coso Funding are non-
recourse to CECI. Coso Funding may look solely to each Coso Partnership's
pledged assets for satisfaction of such Coso Partnership's loan. In addition,
the Project Loans are cross-collateralized by certain support loans only to the
extent of the other Coso Joint Ventures' available cash flow and, under certain
circumstances, the debt service reserve funds, and not as to other assets.
Salton Sea Known Geothermal Resource Area Projects. Magma acquired
three geothermal power plants which comprise the Salton Sea I project (the
"Salton Sea I Project"), the Salton Sea II project (the "Salton Sea II
Project") and the Salton Sea III project (the "Salton Sea III Project")
(collectively, the "Salton Sea Projects") and all related wellfield, land and
other related assets in March 1993 from Union Oil Company of California. Each
of Vulcan, Hoch (Del Ranch), Elmore and Leathers projects (the "Vulcan
Project," the "Hoch (Del Ranch) Project," the "Elmore Project" and the
"Leathers Project," respectively, and collectively, the "Partnership Projects")
is owned by an equal partnership (the "Vulcan Partnership," the "Del Ranch
Partnership," the "Elmore Partnership" and the "Leathers Partnership,"
respectively, and collectively, the "Partnerships") between Magma and a
subsidiary of Mission Energy, a wholly owned subsidiary of SCE. In the case of
the Vulcan Project, the Vulcan Partnership owns certain geothermal resources
supplying the Vulcan Plant. In the case of the other three Partnership Plants,
Magma owns the geothermal resources and receives royalty payments from the
Hoch, Elmore and Leathers Partnerships. In the first nine months of 1994, such
royalties totaled $15.96 million. Magma's share of the aggregate revenues
received by the Salton Sea Projects and the Partnerships for the first nine
months of 1994 was $124.1 million. In each case, a subsidiary of Magma is the
managing general partner, and Magma consolidates one-half of the operating
results of each Partnership Plant into its financial statements. A subsidiary
of Magma operates each of the Salton Sea Plants and the Partnership Plants.
The Salton Sea Projects operated at a combined nameplate capacity
factor (excluding scheduled maintenance hours) of 94.1% in the nine months
ended December 31, 1993 and 90.8% in the first nine months of 1994. The
Partnership Projects operated at a combined nameplate capacity factor of 100.7%
in 1993 and 105.0% in the first nine months in 1994.
Vulcan. The Vulcan Project sells electricity to SCE under a 30-year
SO4 Agreement that commenced on February 10, 1986. The Vulcan Project has a
contract capacity and contract nameplate of 29.5 MW and 34 MW of electric
generating capacity, respectively. Under the contract, SCE is obligated to pay
the Vulcan Project a capacity payment, a capacity bonus payment, and an energy
<PAGE>
payment.
The price for contract capacity payments is fixed for the life of such
SO4 Agreement. The as-available capacity price is based on a payment schedule
as approved by the CPUC from time to time. The contract energy payment
increases each year for the first ten years, which period expires on February
9, 1996. Thereafter, the energy payments will be based on SCE's published
Avoided Cost of Energy. The energy payment per kWh is 10.9 cents
for 1994, 11.8 cents
for 1995 and 12.6 cents for 1996. The Vulcan Project is unleveraged.
Hoch (Del Ranch). The Hoch (Del Ranch) Project sells electricity to
SCE under a 30-year SO4 Agreement that commenced on January 1, 1989. The Hoch
(Del Ranch) Project has a contract nameplate of 38 MW of electric generating
capacity. The contract capacity and contract nameplate are 34 MW and 38 MW,
respectively. The provisions of such SO4 Agreement are substantially the same
as for the SO4 Agreement with respect to the Vulcan Project.
The price for contract capacity payment is fixed for the life of the
SO4 Agreement. The energy payment per kWh for the first ten-year period, which
expires on December 31, 1998, is fixed at rates ranging from 10.9 cents
for 1994 to
14.6cents for 1998. Thereafter, the energy payments will be based on SCE's
published Avoided Cost of Energy.
The Del Ranch Partnership entered into a $66 million secured credit
facility with commercial banks in March 1988. The final maturity date of the
term loans is September 15, 2001. The secured credit agreement was amended to
allow for the issuance of commercial paper and medium-term notes supported by a
letter of credit as an alternative to borrowing directly from the banks.
Elmore. The Elmore Project sells electricity to SCE under a 30-year
SO4 Agreement that commenced on January 1, 1989. The Elmore Project sells
electricity to SCE under a 30-year SO4 Agreement that commenced on January 1,
1989. The contract capacity and contract nameplate are 34 MW and 38 MW,
respectively. The provisions of such SO4 Agreement are substantially the same
as for the SO4 Agreement with respect to the Vulcan Project.
The price for contract capacity payments is fixed for the life of the
SO4 Agreement. The fixed energy payments for the first ten-year period, which
expires on December 31, 1998, are fixed at rates ranging from 10.9cents in
1994 to
14.6cents in 1998. Thereafter, the energy payments will be based on SCE's
published Avoided Cost of Energy.
The Elmore Partnership entered into a $66 million secured credit
facility with commercial banks in March 1988. The final maturity date of the
term loans is September 15, 2001. The secured credit agreement was amended and
restated on April 18, 1990 (the "Credit Agreement") to allow for the issuance
of commercial paper and medium-term notes supported by a letter of credit as an
alternative to borrowing directly from the banks.
Leathers. The Leathers Project sells electricity to SCE pursuant to a
30-year SO4 Agreement that commenced on January 1, 1990. The contract capacity
and contract nameplate are 34 MW and 38 MW, respectively. The provisions of
such SO4 Agreement are substantially the same as for the SO4 Agreement with
respect to the Vulcan Project.
The price for contract capacity payments is fixed for the life of the
SO4 Agreement. The monthly energy payments per kWh for the first ten-year
period, which expires on December 31, 1999, are fixed at rates ranging from
10.9cents in 1994 to 15.6cents in 1999. Thereafter, the monthly energy
payments are
based on SCE's published Avoided Cost.
The Leathers Partnership entered into an $82 million secured credit
facility with commercial banks in March 1988. The final maturity date of the
term loans is September 15, 2002. The secured credit agreement was amended to
allow for the issuance of commercial paper and medium-term notes supported by a
letter of credit as an alternative to borrowing directly from the banks.
Salton Sea I Project. The Salton Sea I Project sells electricity to
SCE pursuant to a 30-year negotiated power purchase agreement, as amended (the
"Salton Sea I PPA"), which provides for capacity and energy payments.
The initial (Phase I) contract capacity and nameplate is 10 MW. The
Project may add subsequent increments of contract capacity (subject to
notification requirements) the sum of which may not exceed 20 MW (the "Project
Expansion"). See "-Projects in Development - Fish Lake/Salton Sea I
Expansion."
The capacity payment is based on the firm capacity price which is
currently $123.61/kW-year. The contract capacity payment adjusts quarterly
based on a basket of energy indices for the term of the power purchase
agreement. The energy payment is calculated using a Base Price (defined as the
initial value of the energy payment (4.701cents per kWh for the second quarter
of
1992)), which is subject to quarterly adjustments based on a basket of indices.
The time period weighted average energy payment for Unit 1 was 4.8cents per kWh
during 1993. As the Salton Sea I Contract is not an SO4 Agreement, the energy
payments do not revert to SCE's Avoided Cost of Energy.
Salton Sea II Project. The Salton Sea II Project sells electricity to
SCE pursuant to a 30-year modified SO4 Agreement that commenced on April 15,
1990. The contract capacity is 15 MW and the nameplate capacity is 20 MW. The
contract requires SCE to make capacity payments, capacity bonus payments and
energy payments. The price for contract capacity and contract capacity bonus
payments is fixed for the life of the modified SO4 Agreement. The energy
payments for the first ten-year period, which period expires on April 4, 2000,
are levelized at a time period weighted average of 10.6cents per kWh. For the
period April 1, 1994 through March 31, 2004, SCE is entitled to receive, at no <PAGE>
cost, 5% of all energy delivered in excess of 80% of contract capacity.
Thereafter, the monthly energy payment will be SCE's Avoided Cost of Energy.
Salton Sea III Project. The Salton Sea III Project sells electricity
to SCE pursuant to a 30-year modified SO4 Agreement. The contract capacity is
47.5 MW and the nameplate capacity is 50 MW. The SO4 Agreement requires SCE to
make capacity payments, capacity bonus payments and energy payments for the
life of the Agreement. The price for contract capacity payments is fixed. The
energy payments for the first ten-year period, which period expires on February
13, 1999, are levelized at a time period weighted average of 9.8cents per kWh.
Thereafter, the monthly energy payment will be SCE's Avoided Cost of Energy.
The partnerships that own the Salton Sea Projects (the "Salton Sea
Partnerships") are parties to a secured credit facility with commercial banks.
The agreement provides for a $130 million term loan broken into two tranches,
(i) tranche A (covers Units 1 and 2) in the original principal amount of $37
million with a final maturity date of March 15, 2000 and (ii) tranche B (covers
Unit 3) in the original principal amount of $93 million with a final maturity
date of January 31, 1999. In addition, the agreement provides for a renewable
working capital loan in the aggregate principal amount of $5,000,000 with an
initial maturity date of February 27, 1995.
Desert Peak. CECI is the owner and operator of a 10 MW geothermal
plant at Desert Peak, Nevada that is currently selling electricity to Sierra
Pacific Power Company under a power sales contract that expires December 31,
1995 and that may be extended on a year-to-year basis as agreed by the parties.
The price for electricity under this contract is 6.3cents per kWh, comprising an
energy payment of 1.8cents per kWh (which is adjustable pursuant to an
inflation-
based index) and a capacity payment of 4.5 per kWh. CECI is currently
negotiating the terms of an extension to this contract.
Yuma. During 1992, CECI acquired a development stage 50 MW natural
gas-fired cogeneration project in Yuma, Arizona (the "Yuma Project"). The Yuma
Project is designed to be a QF under PURPA and to provide 50 MW of electricity
to San Diego Gas & Electric Company ("SDG&E") under an existing 30-year power
purchase contract. The electricity is sold at SDG&E's avoided cost. The power
is wheeled to SDG&E over transmission lines constructed and owned by Arizona
Public Service Company ("APS"). An agreement for interconnection and a firm
transmission service agreement have been executed between APS and the Yuma
Project entity and have been accepted for filing by the Federal Energy
Regulatory Commission ("FERC").
The Yuma Project commenced commercial operation in May 1994. The
project entity has executed steam sales contracts with an adjacent industrial
entity to act as its thermal host in order to maintain its status as a QF,
which is a requirement of its SDG&E contract. Since the industrial entity has
the right under its contract to terminate the agreement upon one year's notice
if a change in its technology eliminates its need for steam, and in any case to
terminate the agreement at any time upon three years notice, there can be no
assurance that the Yuma Project will maintain its status as a QF. However, if
the industrial entity terminates the agreement, CECI anticipates that it will
be able to locate an alternative thermal host in order to maintain its status
as a QF or build a greenhouse at the site for which CECI believes it would
obtain QF status. A natural gas supply and transportation agreement has been
executed with Southwest Gas Corporation. The Yuma Project is unleveraged other
than intercompany debt.
Mammoth Plants. Magma receives royalty revenues from a 10 MW and a 12
MW nameplate capacity geothermal power plant (the "First Mammoth Plant" and the
"Second Mammoth Plant", respectively, and referred to herein, collectively, as
the "Mammoth Plants") at Mammoth Lakes, California. Electricity from the
Mammoth Plants is sold to SCE under two long-term power purchase agreements.
The First Mammoth Plant and the Second Mammoth Plant began commercial operation
in 1985 and 1991, respectively. Magma leases both property and geothermal
resources to support the Mammoth Plants in return for certain base royalty and
bonus royalty payments. For the First Mammoth Plant and the Second Mammoth
Plant, the base royalty is 12.5% and 12%, respectively, of gross electricity
sales revenues. The bonus royalty (if any) for each Mammoth Plant is 50% of
the excess of annual gross electricity sales revenues over an annual revenue
standard based on the plants operating at 85% of contract capacity.
The East Mesa Plant. Magma also receives royalty revenues from a 37 MW
nameplate capacity geothermal power plant (with two units) at East Mesa in
Imperial Valley, California. Electricity from the plant is sold to SCE
pursuant to two SO4 Agreements formerly held by Magma, and Magma is entitled to
receive a senior payment of 4% of gross electricity sales revenues and a junior
payment of 10% of gross electricity sales revenues. To date, such junior
payment has not been received. Since 1992, Magma recognized the accrued junior
SO4 payments as royalty income.
Roosevelt Hot Springs. CECI operates and owns an approximately 70%
interest in a 25MW geothermal steam field which supplies geothermal steam to a
power plant owned by Utah Power & Light Company ("UP&L") located on the
Roosevelt Hot Springs property under a 30-year steam sales contract. CECI
obtained approximately $20.3 million of cash under a pre-sale agreement with
UP&L whereby UP&L paid in advance for the steam produced by the steam field.
CECI must make certain penalty payments to UP&L if the steam produced does not
meet certain quantity and quality requirements.
Projects in Development
The BRPU Process. Magma is seeking new long-term Final Standard Offer
No. 4 power purchase agreements ("FSO4s") in southern California through the
bidding process adopted by the CPUC under its 1992 Biennial Resource Plan
Update ("BRPU"). In its 1992 BRPU, the CPUC cited the need for an additional
9,600 MW of power production through 1999 among California's three investor-
<PAGE>
owned utilities, SCE, SDG&E and Pacific Gas and Electric Company (collectively,
the "IOUs"). Of this amount, 275 MW was set aside for bidding by independent
power producers (such as Magma) utilizing renewable resources. Pursuant to an
order of the CPUC dated June 22, 1994 (confirmed on December 21, 1994), Magma
was awarded 163 MW for sale to SCE and SDG&E, with in-service dates in 1997 and
1998. However, the IOUs may continue to challenge the order and there can be
no assurance that power sales contracts will be executed or that any such
projects will be completed.
Fish Lake/Salton Sea I Expansion. The Salton Sea I Project has an
option to supply an additional 20 MW of power to SCE under the Salton Sea I
PPA. Magma, through its wholly-owned subsidiary, Fish Lake Power Company
("FLPC"), acquired in 1992 a modified ISO4 power purchase agreement (the "Fish
Lake ISO4") to supply electric power to SCE from a 16 MW geothermal power plant
proposed to be built at Fish Lake in Esmeralda County, Nevada (the "Fish Lake
Project").
The Fish Lake ISO4 was a 30-year contract providing for a contract
capacity of 14 MW and a nameplate rating of 16 MW. The contract capacity
payment under the Fish Lake ISO4 is levelized in the contract for the full 30-
year term of the contract at $180 per kilowatt year. The capacity portion
(plus bonus capacity) of such revenues is levelized at approximately 2.5 per
kWh for 30 years (assuming a 90% nameplate capacity factor). The energy
payment thereunder is fixed for the first ten years starting at 10.2cents per
kWh
in 1996 and escalates at an average annual rate of 3.9%. For years 11 through
15, such energy payment is set at SCE's Avoided Cost of Energy, plus an
additional specified amount which decreases each year. For the last 15 years
of the Fish Lake ISO4, the energy payment is at SCE's Avoided Cost of Energy.
On November 29, 1994, SCE filed an application with the CPUC seeking
approval for the proposed restructuring of (i) the Salton Sea I PPA and (ii)
the Fish Lake, whereby the Fish Lake Project would not be developed at its
present site in Nevada's Fish Lake Valley and instead would be developed under
an amended and restated power purchase agreement (the "Amended PPA") in
conjunction with the current power purchase agreement for unit 1.
If approved, the Amended PPA will consolidate the Project Expansion
with the Fish Lake Project. The Amended PPA also would reduce the price for
contract capacity payments to $158/kW-year and would alter the energy payment
schedule to commence in 1996 at 8.8cents per kWh.
Newberry. Under a Bonneville Power Administration ("BPA") geothermal
pilot program, CECI is developing a 30 MW net geothermal project at Newberry,
Oregon (the "Newberry Project"). Pursuant to two power sales contracts
executed in September, 1994, after the final environmental impact statement for
the Newberry Project was issued, CECI has agreed to sell 20 MW net to BPA and
10 MW net to Eugene Water and Electric Board ("EWEB") from the Newberry
Project. In addition, BPA and EWEB together have an option to purchase up to
an additional 100 MW of production from the Project under certain
circumstances. In a public-private development effort, CECI is responsible for
development, permitting, financing, construction and operation of the project
(which will be 100% owned by CECI), while EWEB will cooperate in the
development efforts by providing assistance with government and community
affairs and sharing in the development costs (up to 30%). The Newberry Project
is currently expected to commence commercial operation in 1997. The power
sales contracts provide that under certain circumstances the contracts may be
utilized at an alternative location. Completion of the Newberry Project is
subject to a number of significant uncertainties and cannot be assured.
Regulatory and Environmental Matters
Environmental Regulation. The projects of CECI and Magma are subject
to environmental laws and regulations at the federal, state and local levels in
connection with the development, ownership and operation of the projects.
These environmental laws and regulations generally require that a wide variety
of permits and other approvals be obtained for the construction and operation
of an energy-producing facility and that the facility then operate in
compliance with such permits and approvals. Failure to operate the facility in
compliance with applicable laws, permits and approvals can result in the levy
of fines or curtailment of operations by regulatory agencies.
Management of the Coso Joint Ventures believes that the Coso Joint
Ventures are in compliance in all material respects with all applicable
environmental regulatory requirements and that maintaining compliance with
current governmental requirements will not require a material increase in
capital expenditures or materially affect its financial condition or results of
operations. Likewise, management of each of CECI and Magma believes that the
other projects of CECI and Magma are in compliance with all applicable
environmental regulatory requirements. It is possible, however, that future
developments, such as more stringent requirements of environmental laws and
enforcement policies thereunder, could affect the costs of and the manner in
which the Coso Joint Ventures or the other projects of CECI and Magma conduct
their businesses.
Federal Energy Regulations. The principal federal regulatory
legislation relating to CECI's geothermal energy activities is PURPA. PURPA
and associated state legislation have conferred certain benefits on the
independent power production industry. In particular, PURPA exempts certain
electricity producers ("Qualifying Facilities") from federal and state
regulation as a public utility. PURPA also requires utilities, such as SCE, to
purchase electricity from qualifying facilities at the particular utility's
avoided cost.
Each of CECI's domestic projects meets the requirements promulgated
under PURPA to be Qualifying Facilities. Qualifying Facility status under
PURPA provides two primary benefits. First, regulations under PURPA exempt
<PAGE>
qualifying facilities from the Public Utility Holding Company Act of 1935
("PUHCA"), most provisions of the Federal Power Act (the "FPA") and state laws
concerning rates of electric utilities, and financial and organizational
regulations of electric utilities. Second, FERC's regulations promulgated
under PURPA require that (1) electric utilities purchase electricity generated
by Qualifying Facilities, the construction of which commenced on or after
November 9, 1978, at a price based on the purchasing utility's full avoided
cost; (2) the electric utility sell back-up, interruptable, maintenance and
supplemental power to the Qualifying Facility on a non-discriminatory basis;
and (3) the electric utility interconnect with the Qualifying Facility in its
service territory.
CECI's projects remain subject, among other things, to FERC approvals
and permits for power development, and to federal, state and local laws and
regulations regarding environmental compliance, leasing, siting, licensing,
construction, and operational and other matters relating to the exploration,
development and operation of its geothermal properties.
In 1992, Congress enacted comprehensive new energy policy legislation
in its passage of the Energy Policy Act. This new law is designed to, among
other things, foster competition in energy production and provide independent
power producers with competitive access to the transmission grid. To achieve
these goals, the Energy Policy Act amended PUHCA to create a new class of
generating facility called Exempt Wholesale Generators ("EWGs"). EWGs are
generally exempt from public utility regulation under PUHCA. The Energy Policy
Act also provides new authority to FERC to mandate that owners of transmission
lines provide wheeling access at just and reasonable rates. Previously
limited, wheeling rights enhance the ability of independent power producers to
negotiate transmission access and encourages development of facilities whose
most feasible siting lies outside the purchasing utility's service area or
which, like many geothermal sites, are remotely located.
Permits and Approvals. CECI has obtained certain permits, approvals
and certificates necessary for the current exploration, development and
operation of its projects. Similar permits, approvals and certificates will be
required for any future expansion of the Coso Project and for any development
of CECI's other geothermal properties or for other power project development by
CECI. Such compliance is costly and time consuming, and may in certain
instances be dependent upon factors beyond CECI's control.
CECI believes that its operating power facilities are currently in
material compliance with all applicable federal, state and local laws and
regulations. No assurance can be given, however, that in the future all
necessary permits, approvals, variances and certificates will be obtained and
all applicable statutes and regulations will be complied with, nor can
assurance be given that additional and more stringent laws, taxes or
regulations will not be established in the future which may restrict CECI's
current operations or delay the development of new geothermal properties, or
which may otherwise have an adverse impact on CECI.
Employees
As of December 31, 1993, CECI employed approximately 249 people, of
which approximately 160 people were employed at the Navy I, Navy II and BLM
Projects, collectively. The Coso Joint Ventures do not hire or retain any
employees. All employees necessary to the operation of the Coso Project are
provided by CECI under certain plant and field operations and maintenance
agreements.
As of February 28, 1994, Magma employed 340 persons on a regular, full-
time basis, 31 at Magma's headquarters in San Diego, California, and 309 at MOC
in California's Imperial Valley.
Properties
CECI's most significant physical properties are its four operating
power facilities and its related real property interests. CECI also maintains
an inventory of more than 400,000 acres of geothermal property leases and owns
a 70% interest in a geothermal steam field. An affiliate of CECI owns the
approximately 42 acre site in Yuma, Arizona where the 50 MW gas fired
cogeneration facility is being constructed.
CECI owns a one-story office building in Omaha, Nebraska, which houses
it principal executive offices. CECI also leases office space in Ridgecrest,
California, which houses the operating offices for the Coso Project and in
Singapore and Manila, which house offices for CECI's international activities
in the region.
Magma holds geothermal leasehold and fee interests covering
approximately 198,208 acres on a gross acreage basis, after giving effect to
the 1993 Unocal Acquisition and the 1993 Freeport McMoRan Acquisition. See
"Business of Magma." Such amount includes approximately 21,034 acres of
developed (i.e., actively utilized in the production of geothermal energy)
leasehold and fee interests, and approximately 178,174 acres of undeveloped
(i.e., non-producing) geothermal leasehold and fee interests. Certain of the
producing acreage is owned by Magma and is leased to Mammoth-Pacific as owner
and operator of the Mammoth Plants, and Magma, as lessor, receives royalties
from the revenues earned by such power plants. See "Business of Magma--Royalty
Plants". The remainder of Magma's producing geothermal acreage is located in
the SSKGRA and is utilized in the production of geothermal power at the SSKGRA
Plants. Magma, as lessee, pays certain royalties and other fees to the
property owners from the revenue generated by the SSKGRA Plants.
Terms of Geothermal Leases. Lessors are generally paid a monthly or
annual rental payment during the term of the lease unless and until the acreage
goes into production, in which case the rental typically stops and the
<PAGE>
(generally higher) royalty payments begin. Leases of federal property, such as
those at Fish Lake, Nevada are transacted with the Department of Interior,
Bureau of Land Management, pursuant to the Geothermal Steam Act and the
regulations promulgated thereunder (the "Regulations"), and are for a primary
term of 10 years, extendible for an additional five years if drilling is
commenced within the primary term and is diligently pursued for two successive
five-year periods upon certain conditions set forth in the Regulations. A
secondary term of up to 40 years is available so long as geothermal resources
from the property are being produced or used in commercial quantities. Leases
of federal lands provide for a modest yearly rental based on the acreage
covered by the lease, a requirement of diligent exploration, a royalty of not
less than 10% nor more than 15% of the value of geothermal resources sold or
utilized and a royalty of up to 5% of the value of byproducts derived from the
production of geothermal resources, and certain other obligations of the lessee
as provided in the Regulations. Leases of state lands may vary in form.
California, lease provisions and royalty amounts are determined from time to
time by the State Lands Commission. Leases of private lands vary considerably,
since their terms and provisions are the product of negotiations with the
landowners. Generally, the private leases held by Magma provide for a primary
term of five to 10 years, which is extendible for an additional period of time
if certain conditions (such as the drilling of a well) have been satisfied.
Development Royalties and Payments. In connection with the development
of any new geothermal power plants at the SSKGRA, Magma is obligated to pay
royalties and/or one-time lump-sum payments to certain third parties.
Headquarters. Magma's executive and administrative offices are
currently located in San Diego, California. A total of approximately 19,000
square feet are leased in a modern office building. Magma also has a right of
first negotiation on an additional 19,000 square feet in the same building.
The lease expires in 2002.
Legal Proceedings
Neither CECI nor Magma is a party to any material legal proceedings.
<PAGE>
CECI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
For purposes of consistency in financial presentation, dollars and
shares are stated in thousands except per share data and the Plants comprising
the Coso Project (including the Navy I, Navy II and BLM Plants) capacity
factors are based upon a capacity amount of 88 gross MW ("GMW"), 80 net MW
("NMW") for each plant. The Navy I and Navy II Plants each consist of a set of
three turbines located at a plant site. The BLM Plant consists of two turbines
at one site ("BLM East") and one turbine at another site ("BLM West"). In
April 1990, CECI completed a retrofit of the two turbines at BLM East and in
July 1990 completed associated retrofitting of the cooling towers to increase
the aggregate installed capacity of the BLM Plant to 88 GMW/80 NMW, effective
July 2, 1990. Each plant possesses an operating margin which periodically
allows for production in excess of the amount listed above. However, through
1990, the Navy I, Navy II and BLM Plant capacity amounts were restricted by the
then existing PURPA 80 NMW cap. With the lifting of the PURPA 80 NMW cap in
1991, utilization of this operating margin can, at times, produce plant
capacity factors in excess of 100%. Utilization of this operating margin is
based upon a variety of factors and can be expected to vary throughout the year
under normal operating conditions.
Results of Operations Through September 30, 1994
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.
The following operating data represent the aggregate installed capacity
and electricity production of the Coso Project:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
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
</TABLE>
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 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
Three Months Ended Energy and Bonus Total
<PAGE>
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.
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. CECI 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.
CECI'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 CECI's
operator fees) 17.5% 11.5% 17.3% 15.4%
General and admini-
stration 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 capita-
lized) 31.4% 15.7% 31.5% 17.0%
73.9% 50.7% 76.8% 60.3%
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, 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.
<PAGE>
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.
CECI's effective tax rate continues to be less than the expected
statutory tax 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.
Results of Operations for Three Years Ended December 31, 1993, 1992, and 1991
Sales of electricity and steam increased to $132,059 in the year ended
December 31, 1993 from $117,342 in the year ended December 31, 1992, a 12.5%
increase. This improvement was primarily due to a 9.1% increase in the Coso
Project's electric kWh sales to 2,186.7 million kWh from 2,004.0 million kWh,
and an increased price per kWh in accordance with the SO4 Agreements. The
increase in Coso Project kWh sales was primarily due to the completion of new
production wells. The increase in sales of electricity and steam in 1992 to
$117,342 from $106,184 in 1991 was primarily due to increasing kWh sales by
6.0% to 2,004.0 million kWh from 1,890.4 million kWh, largely as a result of
the drilling of additional production wells, and the aforementioned increase in
price per kWh pursuant to the SO4 Agreements.
The following operating data includes the full capacity and electricity
production of the Coso Project only:
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Overall capacity factor 104.0% 95.1% 89.9%
kWh produced 2,186,700,000 2,004,000,000 1,890,402,000
Installed capacity NMW
(average) 240 240 240
</TABLE>
The overall Coso plant capacity factor was 108.8% in the fourth quarter
of 1993 compared to 109.1%, 100.9% and 97.1% for the third, second and first
quarters of 1993, respectively. The Navy I Plant capacity factor was 111.2% in
1993, compared to 99.8% and 98.5% in 1992 and 1991, respectively. The Navy II
Plant capacity factor was 102.6% in 1993, compared to 98.1% and 99.9% in 1992
and 1991, respectively. The BLM Plant capacity factor was 98.1% in 1993,
compared to 87.2% and 71.4% in 1992 and 1991, respectively. The BLM Plant,
Navy I Plant and the Navy II Plant were overhauled in conjunction with
scheduled warranty inspections in 1993, 1992 and 1991 respectively, resulting
in a temporary reduction of the plant capacity factor of 3% in the specified
year.
Electric sale price per kWh for the Coso Project varies seasonally in
accordance with the rate schedule included in the SO4 Agreements. The price
consists of an energy payment based on the annualized contracted rate of 10.11
cents per kWh in 1993, 9.23 cents per kWh in 1992, and 8.58 cents per kWh in
1991, and constant annual capacity payments, of which CECI's share was $5,400
to $5,800 per annum for each of the three power plants. Capacity payments are
significantly higher in the months of June through September. Bonus payments
are received monthly, of which CECI's share was approximately $1,000 per annum
for each of the three power plants.
The Coso Project's average electricity prices per kWh in 1993, 1992 and
1991 were comprised of (in cents):
Energy Capacity & Bonus Total
Average fiscal 1993 10.11 1.93 12.04
Average fiscal 1992 9.23 2.10 11.33
Average fiscal 1991 8.58 2.24 10.82
The Desert Peak and Roosevelt Hot Springs facilities ran at or near
capacity levels for each of the past three years.
Steam sales from the Roosevelt Hot Springs field, which was acquired in
<PAGE>
January 1991, remained relatively unchanged at $2,198, $2,255, and $2,077 in
1993, 1992, and 1991, respectively. Electricity sales from Desert Peak were
$5,177, $5,347 and $3,976 for the years 1993, 1992, and 1991, respectively.
Desert Peak was acquired in March 1991 and, accordingly, reflects only nine
months sales in 1991.
Interest and other income increased in 1993 to $17,194 from $10,187 in
1992 and from $9,379 in 1991. The increase reflects higher average cash
balances, interest income on notes receivable from the Coso Joint Ventures and
interest income on CECI's share of the cash reserves established in the
refinancing of the Coso Project debt in December 1992.
CECI's cost per kWh* was as follows (in cents):
1993 1992 1991
Plant operations (net of
CECI's operator fees) 1.64 1.65 1.77
General and administration 1.03 1.04 1.11
Royalties .65 .61 .49
Depreciation and
amortization 1.39 1.33 1.31
Interest, less amounts
capitalized 1.82 1.17 2.16
Total 6.53 5.80 6.84
_______________
*Cost per kWh includes electrical production from the Desert Peak facility and
the electrical production equivalent of CECI's share of geothermal steam
produced at the Roosevelt Hot Springs field, acquired in March and January
1991, respectively.
CECI's expenses* as a percentage of sales of electricity and steam were as
follows:
1993 1992 1991
Plant operations (net of
CECI's operator fees) 15.8% 17.7% 18.8%
General and administration 10.0 11.1 11.7
Royalties 6.3 6.6 5.2
Depreciation and
amortization 13.5 14.3 13.9
Interest, less amounts
capitalized 17.7 12.7 23.0
Total 63.3% 62.4% 72.6%
_______________
* Expenses as a percentage of electricity sales and steam sales include
electricity sales from the Desert Peak facility and steam sales from the
Roosevelt Hot Springs field, acquired in March and January 1991, respectively.
CECI's expenses, excluding interest, increased as a general result of
the greater electricity production of the Coso Project. However, in 1993,
plant operations and general and administration costs per kWh decreased from
1992. In 1992, CECI's total expenses, excluding interest, were proportionally
less than the increase in electricity production of the Coso Project.
The cost of plant operations increased to $25,362 in 1993 from $24,440
in 1992, an increase of 3.8%. The cost of plant operations increased to
$24,440 in 1992 from $23,525 in 1991, an increase of 3.9%. General and
administration costs remained relatively unchanged at $13,158 in 1993 compared
to $13,033 in 1992. General and administration costs increased to $13,033 in
1992 from $12,476 in 1991, a 4.5% increase. However, for 1993 and 1992 both
plant operations and general and administration costs per kWh continued to
decrease due to a proportionally greater increase in electrical production than
plant operations and general administration costs. Plant cost per kWh
decreased to 1.64 cents in 1993 from 1.65 cents in 1992 and 1.77 cents in 1991.
General and administration cost per kWh decreased to 1.03 cents in 1993 from
1.04 cents in 1992 and 1.11 cents in 1991.
Royalty costs increased to $8,274 in 1993 from $7,710 in 1992, an
increase of 7.3%. Royalty costs increased to $7,710 in 1992 from $5,505 in
1991, an increase of 40.1%, due to higher electrical sales and a contractually
scheduled increase in the 1992 royalty rate for the second and third turbines
of the Navy I Plant. Overall, the royalty cost per kWh increased to 0.65 cents
in 1993 from 0.61 cents in 1992 and 0.49 cents in 1991.
Depreciation and amortization expense increased to $17,812 in 1993 from
$16,754 and $14,752 in 1992 and 1991, respectively, a 6.3% increase from 1992
to 1993, and a 13.6% increase from 1991 to 1992. Depreciation and amortization
expense for 1993 was 1.39 cents per kWh compared to 1.33 cents in 1992 and 1.31
cents per kWh in 1991. The increase in 1993 was due to additional capitalized
costs associated with the settlement of litigation involving Mission Power
Engineering Company ("MPE") and the Mission Power Group, as well as additional
<PAGE>
wells and gathering systems. The increase in per kWh cost in 1992 was due
largely to the costs of an increased number of production and injection wells.
Interest expense, less amounts capitalized, increased to $23,389 in
1993 from $14,860 in 1992, an increase of 57.4%, or 1.82 cents per kWh in 1993,
compared to 1.17 cents in 1992. Net interest expense decreased to $14,860 in
1992 from $24,439, or 2.16 cents per kWh in 1991. Net interest expense in 1993
increased due primarily to CECI's higher weighted average interest rate, higher
levels of indebtedness associated with the Coso Project and the issuance of
convertible subordinated debentures in June 1993. The short-term variable rate
debt on the Coso Project was refinanced in 1992 with longer-term fixed rate
debt. The weighted average interest rate on the Coso Project debt was 7.9%,
5.4% and 8.5% in 1993, 1992, and 1991, respectively. Net interest expense
decreased in 1992 from 1991 as a result of low interest rates associated with
the Coso Project's then variable rate debt.
The provision for income taxes increased to $18,184 in 1993 from
$11,922 and $8,284 in 1992 and 1991, respectively. The effective tax rate was
29.7%, 23.5% and 23.8% in 1993, 1992, and 1991. The increase in the 1993
effective tax rate was a result of adopting Financial Accounting Standard No.
109 ("FAS 109").
Income before the provision for income taxes increased 21% to $61,258
in 1993 from $50,732 in 1992. Net income after a cumulative effect of a change
in accounting principle was $47,174 and net income available to common
shareholders was $42,544 or $1.11 per common share for the year ended December
31, 1993. This compares to net income of $33,819 after an extraordinary item
and net income available to common shareholders of $29,544 or $.79 per common
share for the year ended December 31, 1992. Net income before cumulative
effect of a change in accounting principle for the year ended December 31, 1993
was $43,074 or $1.00 per common share versus net income before an extraordinary
item of $38,810 or $.92 per common share in 1992. In 1991, income before the
provision for income taxes was $34,866 and net income available to common
shareholders was $26,582, or $.75 per share.
Earnings per share were favorably impacted in 1992 by CECI's repurchase
of CECI Common Stock during 1992 at an average price of approximately $12.00
per share. CECI purchased CECI Common Stock to be held as treasury stock,
which was reissued upon the exercise of options and warrants.
Liquidity and Capital Resources Through September 30, 1994
CECI's cash and investments were $316,349 at September 30, 1994 as
compared to $127,756 at December 31, 1993. In addition, CECI'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 CECI 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 agreements by the partners. In addition, CECI 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 CECI
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, CECI 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 CECI.
CECI'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 CECI'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, CECI issued $100,000 principal amount of 5%
Convertible Subordinated Debentures ("Debentures") due July 31, 2000. The
Debentures are convertible into shares of CECI 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
semiannually 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 CECI. 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 CECI
and subordinated to all senior indebtedness of CECI.
In December 1992, CECI 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 CECI's Coso Project
<PAGE>
Joint Venture Partner an option to purchase the CEA interest for a price which
provided CECI with a 17% per annum return for the period CECI owned the CEA
interest. In April 1994, the Coso Project Joint Venture Partner purchased the
CEA interest from CECI for the defined price.
In May 1994, pursuant to a special antidilution provision of the 1991
Stock Purchase Agreement between CECI and Kiewit Energy Company, CECI 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 CECI has repurchased 3,514 shares of CECI
Common Stock at a cost of $61,259. This repurchase provides shares for
issuance under CECI'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.
CECI 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 CECI to expend significant sums for preliminary
engineering, field development, permitting, legal and other expenses in
preparation for competitive bids which CECI 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 CECI, and receipt of required
governmental permits and consents. Further, there can be no assurance that
CECI will obtain access to the substantial debt and equity capital required to
develop and construct electric power projects or to refinance projects for
which CECI has provided initial construction financing. CECI's future growth
is dependent, in large part, upon the demand for significant amounts of
additional electrical generating capacity and CECI's ability to obtain
contracts to supply portions of this capacity. There can be no assurance that
development efforts on any particular project, or CECI's efforts generally,
will be successful.
CECI 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 CECI may not be fully capable of insuring against. The
uncertainty of the legal environment in certain foreign countries in which CECI
may develop or acquire projects could make it more difficult for CECI to
enforce its rights under agreements relating to such projects. In addition,
the laws and regulations of certain countries may limit the ability of CECI to
hold a majority interest in some of the projects that it may develop or
acquire. CECI's international projects may, in certain cases, be terminated by
a government.
In April 1994, CECI 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. CECI 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 o 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 CECI totalled $12,712, and CECI has
invested $1,236. The Overseas Private Investment Corporation ("OPIC") is
providing political risk insurance on the equity investment by CECI 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 CECI'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 CECI 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 CECI 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 CECI 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 CECI of its
capital investment plus incremental return, the plant will be transferred to
PNOC-EDC at no cost.
<PAGE>
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 CECI, 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 CECI (with a 20% interest).
In August 1994, CECI 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, CECI's proportionate share of draws on the construction loan totalled
$443, equity investments made by a subsidiary of CECI totalled $3,899, and CECI
has invested $6,711.
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 CECI without payment by either party. YCA, a wholly owned subsidiary
of CECI, received all outstanding amounts due from SDG&E.
Liquidity and Capital Resources Through December 31, 1993
CECI's cash and investments were $127,756 at December 31, 1993, as
compared to $54,671 at December 31, 1992. In addition, the Coso Project
retained cash and investments on project control accounts, of which CECI's
share was $14,943 and $8,848 at December 31, 1993 and 1992, respectively.
Distributions out of the project control accounts are made monthly to CECI 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 to these liquid instruments,
CECI recorded separately restricted cash of $48,105 and $62,514 at December 31,
1993 and 1992, respectively. The restricted cash balance in 1993 was comprised
primarily of CECI's proportionate share of Coso Project cash reserves for debt
reserve funds and in 1992 included a contingency reserve fund, both of which
were established in conjunction with the Coso Project's refinancing of its
previous bank debt.
Accounts receivable normally represents two months of revenues, and
fluctuates with both production and price per kWh.
The balance due from/to the Coso Joint Ventures relates to operations,
maintenance, and management fees for managing the Coso Project. This amount
fluctuates based on the timing of billings and incurrence of costs.
In December 1992, CECI refinanced the existing bank debt of the Coso
Project (see Note 5 of the Notes to the Consolidated Financial Statements).
Coso Funding Corp. ("Funding Corp."), a single-purpose corporation, was formed
to issue $560,245 of notes for its own account and as an agent acting on behalf
of Navy I, BLM and Navy II Plants. The proceeds were used in part to replace
the outstanding Coso Project bank indebtedness and to provide funding within
the Coso Project for certain reserves. As of December 31, 1993 and 1992 CECI's
proportionate share of the Coso Project loan was $246,880 and $263,604,
respectively.
The Funding Corp. notes have remaining terms of up to eight years and
different fixed interest rates for each tranche. The underlying project loans
have identical terms as the Coso Project loans and are also non-recourse to
CECI.
In connection with the Coso Project refinancing, CECI purchased
Community Energy Alternatives Incorporated's ("CEA") interest in the Coso
Project at the close of the Coso Project refinancing (see Note 5 to the Notes
to the Consolidated Financial Statements).
On June 9, 1993, MPE and the Mission Power Group, subsidiaries of SCE
Corp., and the Coso Joint Ventures reached a final settlement of all of their
outstanding disputes and claims relating to the construction of the Coso
Project. As a result of the various payments and releases involved in such
settlement, the Coso Joint Ventures agreed to make a net payment of $20,000 to
MPE from the cash reserves of the Coso Project contingency fund and MPE agreed
to release its mechanics' liens on the Coso Projects. After making the $20,000
payment, the remaining balance of the Coso Project contingency fund
(approximately $49,300) was used to increase the Coso Project debt reserve fund
from approximately $43,000 to its maximum fully-funded requirement of $67,900.
The remaining $24,400 balance of the contingency fund was retained within the
Coso Project for future capital expenditures and for Coso Project debt service
payments. Since the Coso Project debt service reserve is fully funded in
advance, Coso Project cash flows otherwise intended to fund the Coso Project
debt service reserve funds, subject to satisfaction of certain covenants and
conditions contained in the Coso Joint Ventures' refinancing documents, are
available for distribution to CECI in its proportionate share.
On May 3, 1993, the transmission line dispute was settled and the
transmission line deposit of approximately $7,700 was released to CECI.
In June of 1993, CECI issued $100,000 principal amount of 5%
<PAGE>
convertible subordinated debentures (the "Convertible Subordinated
Debentures"), due July 31, 2000. The Convertible Subordinated Debentures are
convertible into shares of CECI 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 Convertible Subordinated Debentures is
payable semiannually in arrears on July 31 and January 31 each year, commencing
on July 31, 1993. The Convertible Subordinated Debentures are redeemable for
cash at any time on or after July 31, 1996 at a redemption price of (expressed
in percentages of the principal amount) 102%, 101%, 100% and 100% in 1996,
1997, 1998 and 1999, respectively. The Convertible Subordinated Debentures are
unsecured general obligations of CECI and subordinated to all existing and
future senior indebtedness of CECI.
The Senior Notes, of which $35,730 aggregate principal amount are
currently outstanding, mature in March 1995 and bear interest at the rate of
12% per annum, plus contingent interest calculated by reference to CECI's share
of the cash flow from the Coso Project through December 31, 1994. Simultaneous
with the closing of a proposed offering of Senior Discount Notes (see Note 16
of Notes to the Consolidated Financial Statements), CECI intends to use
approximately $39,000 to defease and provide for the repayment of the entire
aggregate principal amount of Senior Notes outstanding. The Senior Notes
prohibit the payment of cash dividends unless CECI has a net worth of at least
$50,000 after payment of such dividends, and dividends do not exceed 50% of
accumulated net income subsequent to December 31, 1987. The Senior Notes also
place restrictions on capital expenditures not related to the Coso Project.
Proceeds and benefits from warrants and options for shares of CECI
Common Stock exercised in 1993 and 1992 aggregated approximately $1,400 and
$8,065, respectively. In addition, in September 1993, CECI acquired the Ben
Holt Co. ("BHC"), a thirty person engineering firm, for a combination of cash
and Company stock. In connection with this transaction, 87 common shares were
issued having an aggregate market value of $1,557.
CECI repurchased 157 shares of CECI Common Stock during 1993 for the
aggregate amount of $2,897. CECI purchased common stock to be held as treasury
stock in anticipation of their reissue upon the exercise of options. CECI
repurchased 565 shares of CECI Common Stock during 1992 at an aggregate amount
of $4,887. The shares were reissued during 1992 upon the exercise of stock
options.
On October 13, 1992, CECI repurchased, and cancelled, certain warrants
exercisable for 1,025 shares of unregistered common stock at $2.04 per share,
for a purchase price of $9.16 per share, or approximately $9,389 in the
aggregate. Kiewit Energy Company ("Kiewit Energy") simultaneously purchased
and exercised other warrants to purchase 600 shares of unregistered common
stock at $2.04 per share, providing CECI with proceeds of $1,200. On October
27, 1992, CECI repurchased and cancelled warrants exercisable for 250 shares of
unregistered common stock at 2.04 per share, for a purchase price of $9.316 per
share, or $2,329 in the aggregate.
On November 15, 1992, CECI called CECI's Series B convertible preferred
stock, no par value (the "Series B preferred stock"), for conversion into
common stock. Each share of Series B preferred stock was converted into two
shares of CECI Common Stock and, accordingly, CECI issued 954.9 shares of
common stock.
In 1991, CECI and Kiewit Energy signed a stock purchase agreement and
related agreements (see Note 12 to the consolidated financial statement). In
addition, in 1991 CECI issued 1,000 shares of its Series C redeemable preferred
stock to Kiewit Energy for $50,000 per share.
On March 31, 1993, CECI acquired leases from Unocal on 26,000 acres of
geothermal properties at the Glass Mountain site in Northern California which
includes three successful production wells.
CECI is actively engaged in the acquisition of, and is seeking to
develop, construct, own and operate power projects utilizing geothermal and
other technologies, both domestically and internationally, the completion of
any of which is subject to substantial risk. CECI is currently pursuing a
number of international power project opportunities in countries where private
power generation programs have been initiated, including the Philippines and
Indonesia. Development can require CECI to expend significant sums for
preliminary engineering, permitting, legal and other expenses in preparation
for competitive bids which CECI may not win or before it can be determined
whether a project is feasible, economically attractive or financeable.
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 CECI, and receipt of required
governmental permits and consents. Further, there can be no assurance that
CECI will obtain access to the substantial debt and equity capital required for
the acquisition or development and construction of electric power projects. To
the extent CECI engages in international development efforts, the financing and
development of projects entails 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 that CECI may not be fully capable of insuring
against. There can be no assurance that development efforts on any particular
project, or CECI's acquisition or development efforts generally, will be
successful.
In particular, CECI is developing a number of international projects,
for which it may have significant capital requirements. In 1994, CECI intends
to incur capital expenditures in excess of $40,000 for international project
development. In addition to its international projects, CECI plans to incur
<PAGE>
domestic geothermal capital expenditures in the approximate aggregate amount of
$30,000 in 1994. CECI's planned capital spending includes, among other things,
its share of recurring Coso Project capital expenditures, as well as
development of the Newberry Project in the Pacific Northwest.
CECI is constructing the Yuma Project, a 50 MW natural gas fired
cogeneration project in Yuma, Arizona. Engineering and equipment procurement
commenced in 1993. Capital expenditures of $10,000 are anticipated through the
completion of the Yuma Project by midyear 1994. The capital expenditures will
be funded from existing cash balances and CECI's operating cash flows.
Inflation has not had a substantial impact on CECI's operating revenues
and costs. The Coso Project's energy payments for electricity will continue to
be based upon scheduled rate increases through the initial ten-year period of
each SO4 Agreement. Prior to the Coso Project refinancing, the project loans
relating to the Coso Project were generally for periods up to twelve months at
LIBOR plus a specified margin. Accordingly, the interest rates on the loans
varied and over the operating period resulted in fluctuating interest payments.
The refinanced Coso Project debt has fixed interest rates.
Adoption of Financial Accounting Standard No. 109
On January 1, 1993, CECI adopted FAS 109. The adoption of FAS 109
changes CECI'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 is reflected in 1993 income
as the cumulative effect of a change in accounting principle. It primarily
represents the recognition of CECI's tax credit carryforwards as a deferred tax
asset. There was no cash impact to CECI upon the required adoption of FAS 109.
Under FAS 109, the effective tax rate utilized increased at the time of
adoption as a result of the tax credit carryforwards being recognized as an
asset and unavailable to reduce the current period's effective tax rate for
computing CECI's provision for income taxes. The effective tax rate continues
to be less than the statutory rate primarily due to the depletion deduction and
the generation of energy credits in 1993. The significant components of the
deferred tax liability are the temporary differences between the financial
reporting bases and income tax bases 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 credit
and alternative minimum tax carryforwards.
<PAGE>
MAGMA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations: Third Quarter 1994 Compared to Third Quarter 1993
Revenues. Total revenues for the third quarter of 1994 were up
$1,568,000 or 3% to $58,883,000 as compared to $57,315,000 for the same period
last year. This increase was made up primarily of increases in the sales of
electricity, interest income and other income.
Sales of Electricity. Revenues from the sale of electricity increased
$918,000 in the third quarter of 1994 to $50,592,000. The revenue gain was due
to a 7.9% increase in the payments for "energy" under the ISO4 contracts of the
four Magma Partnership Plants. The "energy" payments under the ISO4 contracts
of two of the three Salton Sea Plants are "levelized" during their Initial
Terms. The third Salton Sea Plant does not have an ISO4 contract. Under its
"negotiated contract," the energy and capacity payments adjust quarterly
pursuant to a basket of price indices. The "capacity" payments received by all
plants were essentially unchanged during the period.
During the third quarter of 1994 and 1993, the combined "contract" and
"nameplate" capacity factors of the Magma Partnership Plants are shown in the
table below:
Third Quarter
1994 1993
Total Kilowatt Hours produced
(kWh amounts in 000s) 352,564 349,201
Contract Capacity Factor(l) 121.4% 120.3%
Nameplate Capacity Factor(l) 107.9% 106.9%
During the third quarter of 1994, the "contract" and "nameplate" capacity
factors of the three Salton Sea Plants combined are as shown in the table
below:
Third Quarter
1994 1993
Total Kilowatt Hours produced
(kWh amounts in 000s) 162,059 167,603
Contract Capacity Factor(1) 101.2% 104.7%
Nameplate Capacity Factor(1) 92.2% 95.1%
_______________________
(1)Does not exclude scheduled maintenance hours. Calculation is based on a 92-
day (2,208 hours) third quarter.
Interest and Other Income. Interest and other income increased
$494,000, a 55% increase compared to interest and other income for the same
period of the prior year, reflecting the higher cash balances available for
investment and the higher short-term interest rate environment. Cash available
for investment during the same period of the prior year was lower due to the
use of cash in connection with the acquisition of the Salton Sea Plants from
Unocal.
Costs and Expenses. In the third quarter of 1994, total costs and
expenses were $25,744,000 compared to costs and expenses for the same period in
1993 of $26,532,000. This 3% decrease in total costs and expenses was composed
primarily of decreases in plant operating costs and depreciation of $1,681,000
and $499,000, respectively, and increases of $818,000 in general and
administrative expense and $577,000 in interest expense.
The decrease in plant operating costs reflects the realization of
certain efficiencies by integrating the operations of the Magma Partnership and
Salton Sea Plants and the favorable results of Magma's ongoing efforts to
reduce operating costs.
The $818,000 increase in general and administrative costs reflects
Magma's continued devotion of more of its resources towards expansion of
business development activities by increasing staff and support services to
facilitate the planned growth of Magma.
The $577,000 increase in interest expense reflects the effect of higher
borrowing costs due to higher market interest rates. Currently, approximately
84% of Magma's consolidated debt is floating rate debt.
Net Income. Net income was 12% higher at $22,849,000 in the third
quarter of 1994 as compared to $20,453,000 in the corresponding period of the
prior year. The increase in net income reflects the increase in electricity
revenues and interest income and the decrease in total costs and expenses.
Nine Months Ended September 30, 1994 Compared to Nine Months Ended September
30, 1993
Revenues. Total revenues for the first nine months of 1994 were up
$21,323,000 or 17% to $146,104,000 as compared to $124,781,000 for the same
period of the prior year. This increase was made up primarily of an increase
<PAGE>
in the sales of electricity.
Sales of Electricity. Revenues from the sale of electricity increased
$20,767,000 in the first nine months of 1994 to $124,086,000 primarily due to
the inclusion of the revenues of the Salton Sea Plants for the full nine months
of 1994. The Salton Sea Plants contributed $15,311,000 of this revenue gain.
The balance of the revenue gain of $5,456,000 was produced by the four Magma
Partnership Plants by way of a 1% increase in the megawatt hours delivered and
an increase in the price paid for "energy" under their ISO4s with SEC. The
annual time period weighted average price of "energy" under the Magma
Partnership Plants ISO4s increased 7.9% in 1994 to 10.9 cents per kWh. The
energy payments under the ISO4 contracts of two of the Salton Sea Plants are
"levelized" during their Initial Terms. The third Salton Sea Plant does not
have an ISO4 contract. Under its "negotiated" contract, both the energy and
capacity payments adjust quarterly based on a basket of price indices. The
"capacity" payments received by all plants were essentially unchanged during
the first nine months of 1994 compared to 1993.
The combined "contract" and "nameplate" capacity factors of the Magma
Partnership Plants are shown in the table below:
First Nine Months Fiscal Year
1994 1993 1993
Total Kilowatt Hours produced
(kWh amounts in 000s) 1,017,707 968,941 1,305,700
Contract Capacity Factor(1) 118.1% 112.5% 113.3%
Nameplate Capacity Factor(1) 105.0% 99.9% 100.7%
________________________________________
(1)Does not exclude scheduled maintenance hours. Calculation is based on a 273
day (6,552 hour) nine month period in 1994 and 1993.
The combined "contract" and "nameplate" capacity factors of the three Salton
Sea Plants during the period are shown in the table below:
Nine Months Nine Months
Ended Ended
December 31 December 31
1994 1993
Total Kilowatt Hours produced
(kWh amounts in 000s) 474,704 495,800
Contract Capacity Factor(1) 99.9% 103.6%
Nameplate Capacity Factor(1) 90.8% 94.1%
________________________________________
(1)Does not exclude scheduled maintenance hours. Calculation is based on a
273-day (6,552 hours) nine month period in 1994 and a nine month period (6,600
hours) ended December 31, 1993.
Interest and Other Income. Interest and other income increased
$231,000, a 6% increase compared to interest income for the same period of the
prior year, primarily due to higher investment earnings, reflecting the higher
cash balances available for investment and the higher short-term interest rate
environment.
Costs and Expenses. In the first nine months of 1994, total costs and
expenses increased $11,365,000, a 17% increase, compared to costs for the same
period in 1993. This increase was composed primarily of a $4,586,000 increase
in plant operating costs, a $2,288,000 increase in depreciation, a $2,131,000
increase in general and administrative expense, and a $2,381,000 increase in
interest expense. The increase in plant operating costs and depreciation
primarily reflects the cost of operating the Salton Sea Plants for nine months
in 1994 compared to six months in 1993.
The $2,131,000 increase in general and administrative costs reflects
Magma's continued devotion of more of its resources towards expansion of
business development activities by increasing staff and support services to
facilitate the planned growth of Magma.
The $2,381,000 increase in interest expense over the corresponding
period of 1994 reflects the increased cost of borrowings to finance the
acquisition of the Salton Sea Plants. Interest expense related to the Magma
Partnership Plants declined as a result of lower partnership weighted-average
borrowings during the first nine months of 1994 as compared to the same period
of the prior year.
Provision for Income Taxes. Magma's effective tax rate in the first
nine months of 1994 was 31 percent which was comparable to the rate in the same
period of the prior year.
Net Income. Net income was 19% higher at $46,843,000 for the first
nine months of 1994 as compared to $39,469,000 in the corresponding period of
the prior year. The increase in net income reflects the addition of the
earnings of the Salton Sea Plants for nine months in 1994 compared to six
months in 1993 as well as the higher ISO4 electricity revenues received by the
Partnership Plants.
Results of Operations: 1993 Compared to 1992
<PAGE>
Revenues. Magma's operating revenues (total revenues excluding
interest and other income) in 1993 increased $62,630,000 to $162,943,000. This
increase was made up of an increase in the sales of electricity, an increase in
royalties received from the Vulcan, Hoch, Elmore and Leathers plants (the
"Partnership Plants") and an increase in management services fees earned for
providing services to the Partnership Plants and a decrease in royalties
received from third-party owned and operated geothermal power plants.
Sales of Electricity. Revenues from the sale of electricity in 1993
increased $65,646,000 to $137,882,000 primarily due to the inclusion of the
revenues of the three power plants (the "Salton Sea Plants") acquired from
Union Oil Company of California ("Unocal"), as of March 31, 1993. The Salton
Sea Plants contributed $60,158,000 of the electricity revenue gain. The
balance of $5,488,000 was produced by the Partnership Plants and was due to
both an increase in the price paid for energy under their Interim Standard
Offer No. 4 ("ISO4") long-term power purchase contracts with Southern
California Edison Company ("SCE") and an increase in the number of megawatt
hours produced. The annual time period weighted average price of energy under
the Partnership
Plants' ISO4s increased 8.6% in 1993 to 10.1cents per kilowatt hour
("kWh"). The number of megawatt hours produced by these plants increased 2.6%
in 1993.
In addition to the energy payments, the Partnership Plants receive the
following separate payments for capacity based on the contract capacities
specified in their respective ISO4s: Vulcan -- $158 per kilowatt year, Hoch --
$198 per kilowatt year, Elmore -- $198 per kilowatt year and Leathers -- $187
per kilowatt year. Unlike the energy payments which escalate each year for the
first ten years pursuant to schedules attached to the ISO4s and then convert to
SCE's then published avoided cost of energy, the capacity payments are fixed
for the full 30-year term of the ISO4s. The contract capacities specified in
the ISO4s for the Vulcan, Hoch, Elmore and Leathers plants are 29,500, 34,000,
34,000 and 34,000 kilowatts, respectively.
The ISO4s for the Vulcan, Hoch, Elmore and Leathers plants also specify
a nameplate rating. The specified nameplate ratings for these plants are
34,000, 38,000, 38,000 and 38,000 kilowatts, respectively.
The Partnership Plants are 50% owned by Magma and the newly acquired
Salton Sea Plants are 100% owned by Magma. Two of the Salton Sea Plants have
an ISO4 with SCE and the third has a non-standard offer long-term power
purchase contract (a "Negotiated Contract") with SCE. Each of the Salton Sea
Plants earns an energy payment. For the 10 MW, Salton Sea Plant I, the energy
payment under its Negotiated Contract averaged 4.8cents per kWh in the nine
months
ended December 31, 1993. This energy payment adjusts quarterly based on a
basket of indices for the 30-year term of its power purchase agreement with
SCE. For the 20 MW, Salton Sea Plant 2, and the 49.8 MW, Salton Sea Plant 3,
the energy payments under their ISO4 contracts are levelized for the first ten
years at a time period weighted average of 10.6cents and 9.8cents per kWh,
respectively. The first ten years expires in 1999 for Salton Sea Plant 3 and
in 2000 for Salton Sea Plant 2.
Each of the Salton Sea Plants also receives the following capacity
payments based on the contract capacity specified in its power purchase
agreements with SCE: Salton Sea Plant 1 -- $123.61 per kilowatt year, Salton
Sea Plant 2 -- $187.00 per kilowatt year and Salton Sea Plant 3 -- $175.00 per
kilowatt year. The contract capacities specified in the power purchase
agreements for the Salton Sea Plants are 10,000, 15,000 and 47,500 kilowatts,
respectively. The capacity payments for Salton Sea Plants 2 and 3 are fixed
for the full 30-year term of their ISO4s, while the capacity payment for Salton
Sea Plant 1 adjusts quarterly based on a basket of indices for the full 30-year
term of its Negotiated Contract.
The power purchase agreements for the Salton Sea Plants also specify a
nameplate rating. The specified nameplate ratings of these plants are 10,000,
20,000 and 49,800 kilowatts, respectively.
Royalties. Magma's royalty revenues from the Partnership Plants
increased in 1993, while royalties received from third-party plants decreased.
The decrease in third-party royalties was due to the one-time recognition in
1992 of $7,900,000 of earned but unpaid Jr. SO4 payments from the GEO East Mesa
plant. Since 1989, Magma has received Sr. SO4 payments from the East Mesa
plant on a current basis. However, Jr. SO4 payments have gone unpaid pending
conversion of the plant's construction loan to permanent financing. Due to the
strong operating and financial performance and cash flow of the East Mesa
plant, Magma recognized as royalty income in 1992 the $7,900,000 of Jr. SO4
payments which had accrued since the East Mesa plant's start-up. In 1993 Magma
recognized as royalty income $3,190,000 of accrued Jr. SO4 payments from the
East Mesa plant. Although no Jr. SO4 payments have been received by Magma,
loan conversion is expected during the first half of 1994 at which time
substantially all of the accrued Jr. SO4 payments are expected to be received.
Royalties from the Partnership Plants, the major source of Magma's
royalty income, increased $1,225,000 or 10.5% in 1993 to $12,877,000. The
increase resulted from the increased energy revenues in 1993.
Management Services. Revenues received for management services
increased $284,000 in 1993, due to an increase in the incentive fees received
from the Hoch, Elmore and Leathers plants for operating the facilities above
certain predetermined targets and an increase in the administrative fees
received from the four Partnership Plants, reflecting the higher electricity
revenues received by these plants in 1993.
Interest and Other Income. Interest and other income decreased
$4,458,000, or 52%, in 1993 to $4,195,000 due to lower investment earnings,
reflecting the lower short-term interest rate environment and the reduction in
<PAGE>
Magma's cash and marketable securities due to the purchase, in March of 1993,
of the Unocal geothermal properties and assets.
Costs and Expenses.. Total costs and expenses increased $32,926,000 in
1993, a 56% increase primarily due to the acquisition of the Salton Sea Plants
from Unocal. This increase was composed primarily of a $16,235,000 increase in
plant operating costs, a $9,765,000 increase in depreciation, a $4,460,000
increase in general and administrative expense and a $2,795,000 increase in
interest expense.
Plant Operating Costs and Depreciation. The increase in plant
operating costs and depreciation primarily reflects the additional cost of
operating and maintaining the Salton Sea Plants acquired from Unocal. Of the
$16,235,000 increase in plant operating costs in 1993, $16,191,000 was
attributable to the nine months operation of the newly acquired Salton Sea
Plants. Similarly, of the $9,765,000 increase in depreciation, $8,156,000
related to the Salton Sea Plants.
Controllable operating costs for the Partnership Plants (total costs
less depreciation, interest, management fees and royalties) increased by less
than 1% over the prior year and, on a per kilowatt hour basis, have decreased
in 1993 to 4.3cents
per kWh from 4.4cents per kWh in 1992. Magma has established a
goal of significantly reducing controllable operating costs over the next five
years for its plants at the Salton Sea by applying newly developed material and
process technologies and the further realization of the efficiencies gained
through its acquisition of the Salton Sea Plants from Unocal. The goal is to
reduce these costs to less than 3.0 per kWh over the next five years.
General and Administrative. General and administrative costs increased
from $6,483,000 in 1992 to $10,943,000 in 1993, an increase of $4,460,000.
Magma continued to devote more resources to expansion of business development
activities by increasing staff and related costs, which is directed toward
development of international geothermal power projects, and support services to
facilitate the planned growth of Magma.
Interest Incurred. Interest expense increased by $2,795,000, in 1993
to $9,626,000, reflecting the cost of the $140,000,000 one-year term loan
("Bridge Loan") incurred in the acquisition of the Unocal geothermal assets.
Interest expense related to the Partnership Plants actually declined in 1993 as
a result of a lower level of partnership debt and lower market interest rates.
Excluding the Bridge Loan, Magma's weighted average interest rate of 5.6%
during 1993 compared favorably with the corresponding rate of 6.7% in 1992.
Interest expense in 1994 is expected to be higher than in 1993
reflecting principally the replacing of the Bridge Loan on February 28, 1994
with a non-recourse $130,000,000 six-year term loan. The term loan is a
"project level loan", that is, a loan arranged by Magma's subsidiaries owning
the Salton Sea Plants and secured by their assets with no recourse to Magma.
Magma believes that through non-recourse project level debt, typically more
expensive than corporate level recourse loans, it retains more flexibility in
financing future growth.
Provision for Income Taxes. In 1992 Magma adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 changed the manner in which Magma accounted for the tax
benefit of certain items such as operating loss and tax credit carryforwards.
The cumulative effect of this change increased net income approximately
$17,833,000 or $.77 per share in 1992, and is reported separately in the
consolidated statement of operations. As a result of this change Magma's
effective tax rate increased in 1993, and will increase in future years as
well, over what it would have been but for the change, since the future tax
benefit of operating loss and tax credit carryforwards was recognized in 1992
in the cumulative effect adjustment.
Magma's tax provision in 1993, as a percentage of earnings before tax,
increased to 30.4% from the 1992 rate of 26.8% due to higher operating profits
in 1993 as a result of the earnings contribution of the newly acquired Salton
Sea Plants and recognition of the 1% increase in the Federal statutory
corporate tax rate in the current tax provision and the corresponding
adjustment to recognize the effect of the rate increase on the deferred tax
liability. Magma's 1994 provision for income taxes is expected to be
approximately 32%.
Net Income. Magma's 1992 net income of $54,191,000 included a
positive adjustment of $17,833,000 to reflect the cumulative effect of adopting
SFAS No. 109. Before the cumulative effect of the accounting change, 1992's
net income was $36,358,000. Magma's 1993 net income increased by $15,777,000
or 43% to $52,135,000 from 1992's net income before the cumulative effect of
the accounting change. The 1993 increase in net income reflects the addition
of the earnings of the Salton Sea Plants acquired from Unocal, as well as the
higher ISO4 electricity revenues received by the Partnership Plants.
Results of Operations: 1992 Compared to 1991
Revenues. Magma's operating revenues increased $16,178,000 in 1992 to
$100,313,000 from $84,135,000 in 1991. This increase was made up of an
increase in the sales of electricity, an increase in royalties received from
the Partnership Plants and third-party owned and operated geothermal power
plants and an increase in management services fees earned for providing
services to the Partnership Plants.
Sales of Electricity. Revenues from the sale of electricity increased
$6,221,000 in 1992 to $72,236,000 due primarily to an increase in the price for
energy under the ISO4s and a 4.4% increase in kilowatts delivered to SCE. The
average price for energy under the ISO4s increased 8.1% in 1992 to 9.3 per
kWh. <PAGE>
Royalties. Magma's royalty revenues increased $9,318,000 in 1992 to
$22,929,000, $1,050,000 of the increase resulted from the increased energy
revenues of the Partnership Plants in 1992. The remainder of the increase or
$8,268,000 came as the result of higher royalty income recognized from third-
party owned and operated plants of which $7,900,000 was due to the recognition
of accrued royalties ("Jr. SO4 payments") from the GEO East Mesa geothermal
power plant. Since 1989, Magma has received the senior portion of the
royalties ("Sr. SO4 payments") from the East Mesa plant on a current basis,
however, the Jr. SO4 payments have gone unpaid pending conversion of the
plant's construction loan to permanent financing. Due to the strong
performance and cash flow of the East Mesa plant in 1992 and the expected
conversion of the plant's construction loan, Magma elected to recognize the
accrued Jr. SO4 payments as royalty income.
Management Services. Revenues received for management services
provided to the Partnership Plants increased $639,000 in 1992, due primarily to
a $402,000 increase in the incentive fees received from the Hoch, Elmore and
Leathers plants for operating the facilities above certain predetermined
targets, and a $216,000 increase in the fees received from the Partnership
Plants by Magma's wholly-owned subsidiary, Desert Valley Company, for disposal
of drilling muds and cuttings and silica cake at its monofill, a single purpose
landfill owned and operated by Desert Valley.
Interest and Other Income. Interest and other income decreased
$2,103,000 in 1992 to $8,653,000. In spite of higher cash balances available
for investment, interest and other income decreased compared to the prior year
reflecting the lower short-term interest rate environment.
Costs and Expenses. Total costs and expenses in 1992 increased
$5,612,000, a 10.5% increase, over 1991. This increase was comprised primarily
of a $5,905,000 increase in plant operating costs, including depreciation and
amortization, a $549,000 increase in general and administrative expense, offset
by a $1,696,000 decrease in interest expense.
Plant Operating Costs. The increase in plant operating costs reflected
the increased costs in 1992 of processing geothermal fluids and collecting and
disposing of geothermal solids and maintaining the well field and geothermal
reservoir supporting the Partnership Plants.
General and Administrative. General and administrative costs increased
from $5,934,000 in 1991 to $6,483,000 in 1992, an increase of $549,000. Magma
continues to direct more financial resources to business development and
governmental relations.
Interest Incurred. Interest expense declined as a result of lower
partnership weighted average borrowings during 1992 and the effect of lower
borrowing costs, because of lower market interest rates. Magma's weighted
average interest rate of 6.7% during 1992 compares favorably with the
corresponding rate of 8.0% in the prior year.
Provision for Income Taxes. In 1992 Magma adopted SFAS 109. Prior to
1992, the provision for income taxes was based on income and expenses included
in the accompanying consolidated statement of operations. Under SFAS 109,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and the tax basis of the assets and liabilities
using enacted tax rates in effect for the year in which differences are
expected to reverse. SFAS 109 changed the manner in which Magma accounted for
the tax benefit of certain items such as operating loss and tax credit
carryforwards. Accordingly, the cumulative effect of this change in accounting
for income taxes, adopted as of the beginning of 1992, increased net income
approximately $17,833,000 or $.77 per share, and is reported separately in the
consolidated statement of operations. The financial statements for 1991 have
not been restated to reflect SFAS 109.
Magma's tax provision, as a percentage of earnings before tax, was
higher in 1992 as a result of the adoption of SFAS 109. The effect of applying
SFAS 109 in 1992 was to decrease net income before the cumulative effect of
adopting SFAS 109 by approximately $2,821,000 or $.12 per share. Magma's 1992
effective tax rate was 26.8% following the adoption of SFAS 109 rather than
21.1% under the previous accounting treatment. Magma's effective tax rate will
continue to be significantly higher in the future, since the tax benefit of
operating loss and tax credit carryforwards, which could have been expected to
reduce future tax provisions, has been recognized in 1992 in the cumulative
effect adjustment.
Net Income. Net income increased $20,250,000 in 1992 to $54,191,000.
Of this increase $17,833,000 is attributable to the cumulative effect of
adopting SFAS No. 109. In addition, higher net income reflects higher revenues
from the sale of electricity, Magma's core business, higher royalty income from
third-party owned and operated royalty plants including the recognition of
$7,900,000 in accrued Jr. SO4 payments from the GEO East Mesa geothermal power
plants and lower interest expense incurred on partnership non-recourse debt.
The higher revenues and lower interest expense were offset, in part, by lower
interest and other income, higher plant operating costs and a higher tax
provision than would have been recorded under the previous accounting standard.
The lower interest income and interest expense reflects the generally lower
market rates of interest.
Acquisition and New Project Costs. Magma purchased, on March 31, 1993,
all of Unocal's geothermal interests in the Imperial Valley of California,
including three operating geothermal power plants, 40,600 acres of geothermal
leases and an option to develop and sell an additional 20MWs of geothermal
power to SCE. The total cost of the acquisition was $248,200,000 (subject to
certain post-closing adjustments) which included $6,686,000 for certain current
assets and liabilities assumed by Magma, $3,489,000 of interest incurred on the
<PAGE>
unpaid purchase price from January 1, 1993 through the closing date, advisory
fees and transaction costs of $3,400,000, and a $10,000,000 reserve for future
capital expenditures for certain improvements to the assets. The total
purchase price was paid utilizing both Company cash and the proceeds from a
$140,000,000 Bridge Loan. The acquired assets contributed to Magma's revenues
and earnings as of April 1, 1993.
In addition, in separate transactions, Magma purchased from Unocal for
an additional $1,000,000 interest in approximately 12,000 acres of geothermal
leases in central California near Mammoth, California (the "Long Valley
Leases") and its interest in approximately 58,300 acres of geothermal leases in
Nevada. Simultaneously, Magma sold a two-thirds interest in the Long Valley
Leases to two independent power developers.
On March 11, 1992 Magma acquired a 30-year modified ISO4 Power Purchase
Agreement to sell 14MWs of capacity and 16MWs of energy to SCE using geothermal
resources from leases at Fish Lake, Nevada. Magma is currently engaged in
exploratory and well field development activities, which are preparatory to
constructing a power plant. Three wells have been drilled, which could be used
as production wells for the future plant.
Liquidity and Capital Resources
Operations and development activities have been financed with working
capital, the sale of common stock for cash and services, secured and unsecured,
loans and non-recourse loans from commercial banks.
Magma has geothermal projects in the development stage, both domestic
and international, which it intends to finance with a combination of Magma-
supplied equity and non-recourse project debt. These development stage
projects will require significant equity contributions from Magma during the
next five years. Magma believes that its cash reserves, augmented by cash flow
from its current operations, will be sufficient to fund these equity
contributions.
Magma financed the Unocal acquisition with its own cash and with the
proceeds from the $140,000,000 Bridge Loan. On February 28, 1994 the Bridge
Loan was repaid, utilizing both Magma cash and the proceeds from a non-recourse
project level six-year term loan of $130,000,000 collateralized by
substantially all of the assets and power purchase contracts of the three
Salton Sea Plants acquired from Unocal (the "$130,000,000 Term Loan"). In
addition, a $5,000,000 working capital line of credit has been provided to the
subsidiaries owning the plants by two of the banks participating in the
$130,000,000 Term Loan. No loans against the working capital line of credit
have been made.
Magma's cash and marketable securities at December 31, 1993 totalled
$73,022,000 of which $50,103,000 was available for general corporate uses. The
remainder of $22,919,000 is Magma's share of cash and marketable securities of
the four partnerships which own the four Partnership Plans operated by Magma.
These funds are earmarked for the working capital needs of each of the
partnerships. Restrictions in the secured credit agreements for the Hoch,
Elmore and Leathers plants and the $130,000,000 Term Loan for the Salton Sea
Plants place limits on distributions of cash by the partnerships to Magma.
In addition, at December 31, 1993, Magma had non-current investments
totalling $47,642,000 consisting of $32,302,000 in securities with maturities
greater than one year, which are liquid, and $15,340,000 of other investments,
which are not liquid.
At December 31, 1993, long-term obligations were $189,209,000, a
$103,375,000 increase over year-end 1992. The increase reflects the
replacement on February 28, 1994 of the $140,000,000 one-year Bridge Loan, with
the six-year $130,000,000 Term Loan. The increase in long-term obligations was
partially offset by a reduction of $9,028,000 in Magma's pro-rata share of
partnership debt for the Hoch, Elmore and Leathers plants. Partnership debt is
non-recourse to Magma.
Magma has an unused and available line of credit with Morgan Guaranty
Trust Company of New York of $25,000,000.
Cash and marketable securities at September 30, 1994 totaled
$74,198,000 of which $48,720,000 was available for general corporate use. The
remainder of $25,478,000 is Magma's share of the cash and marketable securities
of the "Magma Partnerships," the four separate partnerships which are jointly
owned by Magma and Mission Energy Company and which own the Partnership Plants,
and the cash and marketable securities of the Salton Sea Partnerships, the 100%
owned Magma partnerships which own the three Salton Sea plants acquired from
Unocal (the "Salton Sea Plants"). Certain portions of these funds are
earmarked for the working capital needs of the plants. In addition, the
secured credit agreements for the Hoch, Elmore and Leathers Partnership Plants
and the Term Loan for the Salton Sea Plants place limits on distributions of
cash.
Non-current investments at September 30, 1994, totaled $41,245,000
consisting of $29,676,000 in marketable securities with maturities greater than
one year which are liquid and $11,569,000 of other investments, which are not
liquid.
At September 30, 1994, loans payable (including amounts currently due)
were $188,969,000, a $37,039,000 decrease over year end 1993. The decrease
reflects the $10,000,000 debt reduction that occurred on February 28, 1994 when
the $140,000,000 Bridge Loan was replaced with the $130,000,000 Term Loan and a
$9,992,000 reduction in Magma's pro-rata share of Magma Partnership debt, a
$15,692,000 reduction in Salton Sea Partnership debt, and a $1,355,000
reduction in other debt. The Magma Partnerships debt and the $130,000,000 Term
<PAGE>
Loan are both non-recourse to Magma Power Company and its subsidiaries. The
ratio of debt to debt-plus-equity at September 30, 1994 (inclusive of non-
recourse debt) was 34 percent compared to 40 percent at December 31, 1993.
Magma has an unused and available line of credit with Morgan Guaranty Trust
Company of $25,000,000 at September 30, 1994.
Six of the seven geothermal power plants operated by Magma sell
electricity to SCE under Interim Standard Offer No. 4 "ISO4" long-term power
purchase contracts. Each ISO4 contract provides for both capacity payments and
energy payments. The capacity payments remain constant throughout the life of
each ISO4 contract. During each of the first 10 years of operation (the
"Initial Term"), the energy payments are fixed pursuant to the terms of the
ISO4 contract. Thereafter, the energy payments are SCE's then-current
published avoided cost of energy. In 1994 the time period weighted average
price for energy for the six plants combined is approximately 10.6 cents per
kWh. For September 1994, SCE's avoided cost of energy was 2.2 cents per kWh.
Estimates of SCE's future avoided cost of energy vary substantially, but it is
expected to remain substantially below such contract energy prices. Thus, the
revenues generated by each of Magma's six plants operating under ISO4 contracts
are likely to decline significantly after their respective initial terms
expire. Such decline could have a material adverse effect on Magma's results
of operation. The initial terms expire in 1996 as to 34 megawatts of nameplate
generation, in 1999 for 126 megawatts of nameplate generation and in 2000 for
the remaining 58 megawatts of nameplate generation under ISO4 contracts.
The seventh and smallest plant (approximately 10 megawatts) sells
electricity to SCE under a negotiated power purchase contract (the "Negotiated
Contract"). The energy payment under the Negotiated Contract was 4.8 cents per
kWh in the third quarter of 1994. The capacity payment was approximately 1.7
cents per kWh in the third quarter of 1994. Both the energy and capacity
payments adjust quarterly based on a basket of indices for the 30-year term of
the Negotiated Contract.
Magma's strategy is to mitigate the adverse impact of potentially lower
revenues in the future from its six plants with ISO4 contracts by aggressively
seeking out and developing new power generation projects in both the United
States and abroad, seeking out additional strategic acquisitions, and
continuing to find new ways to significantly reduce plant operating costs for
its existing as well as any new plants. The competition for new power purchase
contracts is intense, however, and any contracts Magma is able to secure in the
future, whether in the United States or abroad, are likely to be on terms and
conditions that are substantially less favorable than those provided in Magma's
current ISO4 contracts.
Other than as described herein and as subject to the ISO4 contract
terms regarding payments for energy after its initial ten-year term (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Future Rates") Magma is not aware of any trends or known demands,
events or uncertainties that would result in or that are reasonably likely to
result in a material change in Magma's liquidity or capital resources, other
than the development activities mentioned above.
Seasonality
The ISO4 contracts held by Magma reflect a seasonal variation in rates
for both energy and capacity. The ISO4 rates are higher in the summer months
(i.e., June through September) to correspond with SCE's peak system load and
are lower in the winter months. Similarly, the rates are higher during peak
hours than they are during the off-peak hours (night time, weekends and
holidays). Consequently, Magma strives to operate its geothermal power plants
at the highest possible output during the peak months and peak hours to take
advantage of the higher rates, and to conduct maintenance during non-peak
months and the off-peak hours (especially during the eight winter off-peak
months). Thus, Magma's monthly revenues from the sale of electricity are
generally higher from June through September of each year.
Inflation
During the period that Magma has been engaged in business, general
inflation has not had a substantial impact on Magma's operating revenues and
costs. However, if Magma were to construct a new geothermal power plant at the
Salton Sea of the same size and using the same technology as its existing
plants, the capital cost of such plant would be significantly higher than that
of any of the existing Salton Sea plants. Also, any general increase in
interest rates will increase the interest expense of the Hoch, Elmore and
Leathers plants and the Salton Sea Plants.
Future Rates
Each of the Partnership Plants sells electricity to SCE under ISO4
contracts. For the first ten years the price paid for energy under these ISO4s
is fixed and escalates at an average rate of 7.5% per year. The price paid for
capacity (including bonus capacity), on the other hand, is fixed for the entire
30-year term of the ISO4s at approximately 2.5cents per kWh (assuming a 90%
nameplate capacity factor). In 1994, the time period weighted average of the
energy payments for each of the Partnership Plants is 10.9cents per kWh, which
along with the fixed capacity payments results in a total time period weighted
average price for electricity of approximately 13.4cents per kWh.
Two of the Salton Sea Plants sell electricity to SCE pursuant to ISO4
contracts under which the capacity payments (including bonus capacity) are
fixed for the full 30-year term of the ISO4s at approximately 2.4cents per kWh
(assuming a 90% nameplate capacity factor). During the first 10 years of these
two ISO4s, the energy payments are fixed (and do not escalate) at a time period
weighted average of 9.8cents per kWh for the 49.8MW Salton Sea Plant 3 and
10.6cents
per kWh for the 20MW Salton Sea Plant 2, which along with their fixed capacity <PAGE>
payments results in a total time period weighted average price of electricity
of approximately 12.2cents and 13cents per kWh, respectively.
Starting in 1996 for the Vulcan plant, 1999 for the Hoch, Elmore and
Salton Sea Plant 3 and 2000 for the Leathers and the Salton Sea Plant 2, the
price for energy under the ISO4 contracts for these plants will automatically
convert to the SCE's then-current published avoided cost of energy. As a
result, the price paid by SCE for a kWh of electricity under these ISO4s will
be composed of the capacity payments per kWh described above and an energy
payment based on SCE's avoided cost of energy. In 1993, SCE's time period
weighted average avoided energy cost was 3.2cents per kWh. Thus, revenues
generated by these plants are likely to decline significantly which may have a
material adverse effect on Magma's results of operations.
The remaining acquired plant (Salton Sea Plant 1) sells electricity to
SCE pursuant to a negotiated contract under which both the capacity and the
energy portions of the revenues adjust quarterly based on a basket of indices.
In 1993, the time period weighted average energy payment was 4.8cents
per kWh,
which along with the capacity payment of approximately 1.7cents per kWh
(assuming a
90% nameplate capacity factor) results in a total payment of
approximately 6.5cents
per kWh.
CECI MANAGEMENT INFORMATION
Certain Biographical Information Regarding Officers and Directors of CECI
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
David L. Sokol 38 President and Chief Executive Officer, Chairman
of the Board of Directors, Director
Thomas R. Mason 50 Senior Vice President, Engineering,
Construction and Operations
Steven A. McArthur 36 Senior Vice President, General Counsel and Secretary
Donald M. O'Shei, Sr. 60 Senior Vice President, Asia Division
John G. Sylvia 35 Senior Vice President, Chief Financial Officer and Treasurer
Gregory E. Abel 32 Vice President, Chief Accounting Officer and Controller
Edward F. Bazemore 57 Vice President, Human Resources
David W. Cox 38 Vice President, Legislative and Regulatory Affairs
Vincent B. Fesmire 53 Vice President, Development and Implementation
David P. Maystrick 43 Vice President, Construction
Dale R. Schuster 42 Vice President, Administration
Edgar D. Aronson 59 Director
Judith E. Ayres 49 Director
James Q. Crowe 44 Director
Richard K. Davidson 52 Director
Ben Holt 80 Director
Richard R. Jaros 42 Director
Everett B. Laybourne 82 Director
Herbert L. Oakes, Jr. 47 Director
Walter Scott, Jr. 62 Director
Barton W. Shackelford 73 Director
David E. Wit 32 Director
</TABLE>
David L. Sokol, 38, Chairman of the Board of Directors, President and
Chief Executive Officer. Mr. Sokol has served as President and Chief Executive
Officer of CECI since April 19, 1993, as Chairman of the Board of Directors
since May 5, 1994 and has been a director of CECI since March 1991. Formerly,
Mr. Sokol was Chairman, President and Chief Executive Officer of CECI from
February 1991 until January 1992. Mr. Sokol has served as Chairman, President
and Chief Executive Officer of the Purchaser since its formation on September
22, 1994. Mr. Sokol was the President and Chief Operating Officer of, and a
director of, JWP, Inc., from January 27, 1992 to October 1, 1992. From November
1990 until February 1991, Mr. Sokol was the President and Chief Executive
Officer of Kiewit Energy Company, the largest stockholder of CECI and a wholly
owned subsidiary of PKS. From 1983 to November 1990, Mr. Sokol was the
President and Chief Executive Officer of Ogden Projects, Inc.
Thomas R. Mason, 50, Senior Vice President, Engineering, Construction
and Operations. Mr. Mason joined CECI in March 1991. From October 1989 to March
1991, Mr. Mason was Vice President and General Manager of Kiewit Energy
Company. Mr. Mason acted as a consultant in the energy field from June 1988 to
October 1989. Prior to that, Mr. Mason was Director of Marketing for Energy
Factors, Inc., a non-utility developer of power facilities.
Steven A. McArthur, 36, Senior Vice President, General Counsel and
Secretary. Mr. McArthur joined CECI in February 1991. Mr. McArthur has served
as a director, Senior Vice President, General Counsel and Secretary of the
Purchaser since its formation on September 22, 1994. From 1988 to 1991 he was
an attorney in the Corporate Finance Group at Shearman & Sterling in San
Francisco. From 1984 to 1988 he was an attorney in the Corporate Finance Group
at Winthrop, Stimson, Putnam & Roberts in New York.
Donald M. O'Shei, Sr., 60, Senior Vice President, Asia Division and
President, CE International, Ltd. General O'Shei was in charge of engineering
and operations for CECI from October 1988 until October 1991. He rejoined CECI
as a Vice President in August 1992. Previously he was President and Chief
Executive Officer of AWD Technologies, Inc., a hazardous waste remediation
firm, and President and General Manager of its predecessor company, Atkinson-
Woodward Clyde. He was a brigadier general in the U.S. Army prior to joining
the Guy F. Atkinson Co. in 1982 as Director of Corporate Planning and
Development.
<PAGE>
John G. Sylvia, 35, Senior Vice President, Chief Financial Officer and
Treasurer. Mr. Sylvia joined CECI in 1988. Mr. Sylvia has served as a director,
Senior Vice President, Chief Financial Officer and Treasurer of the Purchaser
since its formation on September 22, 1994. From 1985 to 1988, Mr. Sylvia was a
Vice President in the San Francisco office of the Royal Bank of Canada, with
responsibility for corporate and capital markets banking. From 1986 to 1990,
Mr. Sylvia served as an Adjunct Professor of Applied Economics at the
University of San Francisco. From 1982 to 1985, Mr. Sylvia was a Vice President
with Bank of America.
Gregory E. Abel, 32, Vice President, Chief Accounting Officer and
Controller. Mr. Abel joined CECI in 1992. Mr. Abel is a Chartered Accountant
and from 1984 to 1992 he was employed by Price Waterhouse. As a Manager in the
San Francisco office of Price Waterhouse, he was responsible for clients in the
energy industry.
Edward F. Bazemore, 57, Vice President, Human Resources. Mr. Bazemore
joined CECI in July 1991. From 1989 to 1991, he was Vice President, Human
Resources, at Ogden Projects, Inc. in New Jersey. Prior to that, Mr. Bazemore
was Director of Human Resources for Ricoh Corporation, also in New Jersey.
Previously, he was Director of Industrial Relations for Scripto, Inc. in
Atlanta, Georgia.
David W. Cox, 38, Vice President, Legislative and Regulatory Affairs.
Mr. Cox joined CECI in 1990. From 1987 to 1990 Mr. Cox was a Vice President
with Bank of America N.T. & S.A. in the Consumer Technology and Finance Group.
From 1984 to 1987, Mr. Cox held a variety of management positions at First
Interstate Bank.
Vincent B. Fesmire, 53, Vice President, Development and Implementation.
Mr. Fesmire joined the Company in October 1993. Prior to joining CECI, Mr.
Fesmire was employed for 19 years with Stone & Webster, an engineering firm,
serving in various management level capacities with an expertise in geothermal
design engineering.
David P. Maystrick, 43, Vice President, Construction. Mr. Maystrick
joined the Company in April 1994. From 1978 to 1994, Mr. Maystrick was employed
as Senior Project Manager with HDR Engineering, Inc. and was responsible for
implementing and monitoring several full service contracts to design, to
construct, and to operate electric and steam generating facilities. From 1974
to 1977, Mr. Maystrick was a design engineer of fossil fuel and nuclear power
plants at Gibbs & Hill, Inc.
Dale R. Schuster, 42, Vice President, Administration. Mr. Schuster
joined CECI in July 1994. From 1991 until joining CECI, he was Senior Vice
President and General Manager of AutoInfo, Inc., a software development and
information systems company, and prior to that, Vice President and General
Manager of ValCom, Inc.
Edgar D. Aronson, 59. Mr. Aronson has been a director of CECI since
April 1983. Mr. Aronson founded EDACO Inc., a private venture capital company,
in 1981, and has been President of EDACO since that time. Prior to that, Mr.
Aronson was Chairman, Dillon, Read International from 1979 to 1981 and a
General Partner in charge of the International Department at Salomon Brothers
Inc from 1973 to 1979.
Judith E. Ayres, 49. Ms. Ayres has been a director of CECI since July
1990. Since 1989 Ms. Ayres has been Principal of The Environmental Group, an
environmental consulting firm in San Francisco, California. From 1988 to 1989,
Ms. Ayres was a Vice President/Principal of William D. Ruckelshaus Associates,
an environmental consulting firm. From 1983 to 1988 Ms. Ayres was the Regional
Administrator of Region 9 (Arizona, California, Hawaii, Nevada and the Western
Pacific Islands) of the United States Environmental Protection Agency.
James Q. Crowe, 44. Mr. Crowe has been a director of CECI since March
1991. Mr. Crowe is Chairman and Chief Executive Officer of MFS Communications
Company, Inc., a publicly traded company in which PKS holds a majority
ownership interest. Prior to assuming his current position in 1991, Mr. Crowe
was President of Kiewit Industrial Company, a [major] subsidiary of PKS. Before
joining Kiewit Industrial Company in 1986, Mr. Crowe was Group Vice President,
Power Group at Morrison-Knudsen Corporation. Mr. Crowe is a director of C-TEC
Corporation, a publicly traded company in which PKS holds a majority ownership
interest.
Richard K. Davidson, 52. Mr. Davidson was appointed a director of CECI
in March 1993. Mr. Davidson has been Chairman and Chief Executive Officer of
Union Pacific Railroad since 1991. From 1989 to 1991 he was Executive Vice
President--Operations of Union Pacific Railroad, and from 1986 to 1989 he was
Vice President--Operations of Union Pacific Railroad. Mr. Davidson is also a
director of FirsTier Financial, Inc., Chicago & Northwestern Holdings
Corporation and Missouri Pacific Railroad Company.
Ben Holt, 80. Mr. Holt has been a director of CECI since September
1993. Mr. Holt is the founder, and was Chairman and Chief Executive Officer, of
The Ben Holt Co., an engineering firm located in Pasadena, California, which
CECI acquired in September 1993. Mr. Holt retired as Chairman and CEO of The
Ben Holt Co. in December 1993 and is currently a consultant to CECI. Mr. Holt
is a beneficial owner of 3,763 Shares, representing less than 1% of the
outstanding Shares.
Richard R. Jaros, 42. Mr. Jaros has been a director of CECI since March
1991. Mr. Jaros served as Chairman of the Board from April 19, 1993 to May 5,
1994 and served as President and Chief Operating Officer of CECI from January
8, 1992 to April 19, 1993. From 1990 until January 8, 1992, Mr. Jaros served as
a Vice President of PKS and is currently an Executive Vice President and a
<PAGE>
director of PKS. Mr. Jaros serves as a director of MFS Communications Company,
Inc. and C-TEC Corporation, both of which are publicly traded companies in
which PKS holds a majority ownership interest. From 1986 to 1990, Mr. Jaros
served as a Vice President for Mergers and Acquisitions for Kiewit Holdings, a
subsidiary of PKS.
Everett B. Laybourne, 82. Mr. Laybourne has been a director of CECI
since May 1988. For many years he served as counsel for a number of major
publicly-held corporations. He also presently serves as a Vice President and
Trustee of The Ralph M. Parsons Foundation and as National Board Chairman of
WAIF, Inc. From 1969 to 1988, Mr. Laybourne was senior partner in the law firm
of MacDonald, Halsted & Laybourne in Los Angeles, California, whose successor
firm was Baker & McKenzie to which he acted for five years in an of counsel
capacity. He continues in the practice of law in Los Angeles.
Herbert L. Oakes, Jr., 47. Mr. Oakes has been a director of CECI since
October 1987. In 1982, Mr. Oakes founded and became President of H.L. Oakes &
Co., Inc., a corporate advisor and dealer in securities. From 1988 to the
present, Mr. Oakes has served as a Managing Director of Oakes, Fitzwilliams,
Co., Limited, a member of the Securities and Futures Authority Limited and The
London Stock Exchange. Mr. Oakes is a director of Shared Technologies, Inc.,
Harcor Energy Inc. and New World Power Corporation.
Walter Scott, Jr., 62. Mr. Scott has been a director of CECI since June
1991. Mr. Scott was the Chairman and Chief Executive Officer of CECI from
January 8, 1992 until April 19, 1993. Mr. Scott is Chairman and President of
PKS, a position he has held since 1979. Mr. Scott is a director of Berkshire
Hathaway, Inc., Burlington Resources, Inc., ConAgra, Inc., FirsTier Financial,
Inc., and Valmont Industries, Inc. Mr. Scott also serves as a director of MFS
Communications Company, Inc. and C-TEC Corporation, both publicly traded
companies in which PKS holds a majority ownership interest.
Barton W. Shackelford, 73. Mr. Shackelford has been a director of CECI
since June 1986. Mr. Shackelford served as President and a director of Pacific
Gas & Electric Company from 1979 until his retirement in 1985. He is a director
of Harding Associates, Inc.
David E. Wit, 32. Mr. Wit has been a director of CECI since April 1987.
He is co-founder and Co-Chief Executive Officer of Logicat, Inc., a software
development/publishing firm. Prior to working at Logicat, Inc. Mr. Wit worked
at E.M. Warburg, Pincus & Company, where he analyzed seed-stage financing and
technology investments.
The CECI Board And Its Committees
The CECI Board of Directors currently consists of twelve members.
Immediately following the Merger, the CECI Board of Directors will consist of
two additional directors designated by Magma pursuant to the terms of the
Merger Agreement.
The CECI Board has an Audit Committee, a Compensation Committee, an
Environmental Committee, an Executive Committee, a Nominating Committee, and a
Stock Option Committee.
Audit Committee. The Audit Committee (Messrs. Aronson, Brush,
Shackelford and Wit) is empowered to recommend to the CECI Board independent
public accounting firms for selection as auditors of CECI; to make
recommendations to the Board on auditing matters; to examine and make
recommendations concerning the scope of audits; and to review the terms of
transactions between CECI and related entities. The Audit committee met four
times during 1993.
Compensation Committee. The Compensation Committee (Messrs. Brush,
Crowe, Laybourne, Shackelford and Wit) is authorized to make recommendations to
the Board with respect to executive salaries and bonuses and directors'
compensation. The Compensation Committee met once during 1993.
Compensation Committee Interlocks and Insider Participation. Mr. Brush
served as President, Vice Chairman and Chief Operating Officer of CECI during
portions of January and February 1991. Mr. Crowe is the Chairman and Chief
Executive Officer of MFS Communications Company, Inc. Mr. Crowe serves on the
Board of CECI as a nominee of Kiewit Energy Company ("Kiewit Energy") under an
agreement entered into in connection with Kiewit Energy's investment in the
Company in early 1991. Mr. Crowe also owns Peter Kiewit & Sons' Inc.
("Kiewit") stock. Kiewit Energy is a wholly owned subsidiary of Kiewit. Mr.
Laybourne was of counsel to the Los Angeles office of the law firm Baker &
McKenzie until August 1993. CECI paid Baker & McKenzie a total of
approximately $615,000 in legal fees in 1993. CECI believes that the fees of
Baker & McKenzie are comparable to fees that would be payable for similar work
performed by unaffiliated third parties. Messrs. Shackelford and Wit have not
been employees of CECI or otherwise participated in activities constituting
compensation committee interlocks or insider participation requiring disclosure
under this caption.
Environmental Committee. The Environmental Committee (Mr. Aronson, Ms.
Ayres, Mr. Brush, Mr. Jaros, and Adm. Murphy) addresses issues and provides
advice concerning environmental regulations and compliance. The Environmental
Committee met three times during 1993.
Executive Committee. The Executive Committee (Messrs. Davidson, Jaros,
Scott, Shackelford and Sokol) was established to act for the Board in between
regularly scheduled Board meetings. The Executive Committee met once during
1993.
Nominating Committee. The Nominating Committee (Ms. Ayres and Messrs.
Brush, Jaros, Oakes and Sokol) was established to provide the CECI Board with
<PAGE>
advice regarding potential nominees to the CECI Board. The Nominating
Committee did not meet during 1993.
Stock Option Committee. The Stock Option Committee (Messrs. Laybourne
and Shackelford) was established to provide disinterested administration of
CECI's Amended and Restated 1986 Stock Option Plan ("Employee Option Plan")
pursuant to the requirements of the SEC's Rule 16b-3. The Stock Option
Committee acted by written consent four times during 1993.
CECI Compensation Committee Report
CECI's executive compensation is determined by the CECI Compensation
Committee of the CECI Board. The CECI Compensation Committee believes that
compensation of CECI's key executives should be sufficient to attract and
retain highly qualified and productive personnel and also to provide meaningful
incentives for enhanced productivity and superior performance. It is the
policy of CECI that the three components of CECI's total compensation package
(salary, bonus and stock options) will be considered in the aggregate in
determining the amount of any one component. CECI seeks to reward achievement
of long and short-term individual performance goals, viewed in the context of
both individual power project and company performance. However, given the
unique nature of each independent development project (particularly considering
the context of the different legal, regulatory, financial, accounting, tax,
political and cultural systems, issues and structures found in various
countries in which CECI develops projects internationally) and the resulting
flexible adaptation required in the duties and tasks performed by CECI's key
executives, the CECI Compensation Committee's criteria for assessing executive
performance in any year is inherently subjective and not subject to specific
enumeration of factors, relative weighting or formulae calculations. CECI did
not specifically use any companies in the same industry as a basis for
comparison when establishing executive compensation.
During 1993, CECI's executive compensation included a base salary, a
cash bonus and long-term incentive compensation in the form of stock options
awarded under CECI's Employee Option Plan, all dependent on subjective
evaluations of performance as noted above. The cash bonus compensation of
executives is designed to compensate executives for the CECI Compensation
Committee's assessment of superior performance and meritorious and diligent
individual efforts, and such assessments usually relate to individual and
unique projects. The long term incentive option grants are intended to align
the interests of employees and stockholders and thereby to motivate executives
as equity owners to contribute at superior levels in the future and to allow
them to share in increased value developed for stockholders generally.
CECI's President and Chief Executive Officer, David Sokol, was hired in
April 1993. Mr. Sokol had previously served in that position from February
1991 through January 1992 and brought with him a considerable amount of senior
management experience, as well as many years of experience in the independent
power industry, having founded and served as President and Chief Executive
Officer of Ogden Projects, Inc. for eight years as well as his prior successful
one year tenure as President and Chief Executive Officer of CECI. In order to
induce Mr. Sokol to return to CECI as President and Chief Executive Officer,
CECI entered into a three year employment agreement with Mr. Sokol at a base
salary of $350,000 per annum, a minimum annual bonus of $75,000 and a grant of
250,000 options at a fair market value exercise price on the date of grant,
100,000 options to vest immediately and the remainder to vest over four years.
The employment contract also provides for the payment of two years base salary
and minimum bonus in the event of termination without cause.
At its December 1993 meeting, the CECI Compensation Committee
determined to make no increase to Mr. Sokol's base salary but to award Mr.
Sokol a cash bonus of $350,000 and recommended that the CECI Stock Option
Committee make an option grant to Mr. Sokol of 750,000 options having an
exercise price equal to the fair market value on the date of grant, 200,000
options to vest immediately and the remaining 550,000 options to vest in equal
monthly increments over six years. In addition, at the December 1993 meeting
other executives received salary increases, cash bonuses and recommendations
for stock option grants commensurate with the CECI Compensation Committee's
subjective assessment of their relative individual performance.
In reviewing Mr. Sokol's compensation, the CECI Compensation Committee
subjectively considered Mr. Sokol's significant contribution to the management
of CECI during his eight months in office, including the favorable settlements
of the outstanding material construction and transmission litigations involving
CECI's Coso Project, the issuance of CECI's 5% convertible subordinated
debentures due 2000, the CECI's successfully obtaining two power sales
contracts for an aggregate 300 MW of geothermal power in the Philippines,
CECI's other promising project development activities internationally, record
production levels at Coso, the CECI Common Stock listing on the New York Stock
exchange and the acquisition of the Ben Holt co. to strengthen CECI
technically. Mr. Sokol contributed significantly to CECI's current success and
the Compensation Committee believed his overall compensation was wholly
justified and moreover, expressly approved of by Kiewit Energy, CECI's largest
stockholder.
At the December 1993 meeting, the CECI Compensation Committee also
noted its deep appreciation for the outstanding efforts of Richard Jaros, who
served as President and Chief Operating Officer during 1992 and a portion of
1993. Mr. Jaros successfully completed the significant restructuring of CECI
which commenced in 1991, completed the long-term debt refinancing of CECI's
Coso Project and initiated the efforts that eventually led, under Mr. Sokol's
direction, to a favorable resolution of material litigation affecting the Coso
Project.
Accordingly, the CECI Compensation Committee determined to recognize
Mr. Jaros for his efforts during the first four months of 1993 with a combined
<PAGE>
cash bonus and severance payment in connection with the mutual termination of
his three year contract of $250,000 in the aggregate. In addition, the CECI
Compensation Committee determined that commencing in 1994, Mr. Jaros, as
Chairman of the CECI Board would receive a $25,000 annual retainer fee instead
of the $15,000 annual retainer fee paid to other outside directors.
COMPENSATION COMMITTEE
JAMES CROWE
EVERETT LAYBOURNE
BARTON SHACKELFORD
DAVID WIT
Summary Compensation Table
The following table sets forth the compensation of CECI's five most
highly compensated executive officers who were employed as of the last day in
1994. Information is provided regarding these individuals for the last three
fiscal years during which they were executive officers of CECI, if applicable.
<TABLE>
<CAPTION>
Securities All Other
Other Annual Underlying Compensation
Name and Year Ended Salary Bonus Compensation Options (401(k) Plan
Principal Positions December 31, ($) ($) ($) (#) Contributions)($)
<S> <C> <C> <C> <C> <C> <C>
David L. Sokol (1) 1994 350,000 612,482 N/A 0 3,472
Chairman, President and 1993 246,794 350,000 1,000,000 2,800
Chief Executive Officer 1992 27,083 4,167 0 0
Thomas R. Mason 1994 169,359 100,949 N/A 75,000 3,472
Senior Vice President, 1993 164,359 30,000 5,000 3,398
Engineering and Operations 1992 155,447 50,000 25,000 3,318
Steven A. McArthur 1994 156,538 119,915 N/A 110,000 3,472
Senior Vice President, 1993 156,538 70,000 10,000 3,398
General Counsel and 1992 150,000 40,000 20,000 3,215
Secretary
Donald M. O'Shei, Sr. (2) 1994 160,000 111,852 N/A 75,000 3,472
Senior Vice President, Asia 1993 160,000 50,000 5,000 3,398
1992 105,102 40,000 20,000 1,500
John G. Sylvia 1994 138,782 112,670 N/A 100,000 3,472
Senior Vice President, 1993 130,449 45,000 10,000 2,216
Chief Financial Officer 1992 125,000 40,000 15,000 1,451
and Treasurer
<FN>
- -------------
(1) Mr. Sokol's compensation for 1992 is through January 8, 1992, the date of his termination of employment. Mr. Sokol rejoined
CECI on April 19, 1993.
(2) Mr. O'Shei left the employment of CECI in September of 1991 and rejoined CECI in August of 1992. From September 1991 to August
1992 Mr. O'Shei performed consulting services to CECI. Accordingly, the 1992 salary includes payments for such consulting as well
as salary.
</TABLE>
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth options granted to each of the named
executive officers of CECI during 1994:
<TABLE>
<CAPTION>
Potential Realized
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term (1)
% of Total
Date of Grant Options Granted Exercise
and Options to Employees Price Expiration 5% 10%
Name Granted In Fiscal Year ($/Share) Date ($) ($)
<S> <C> <C> <C> <C> <C> <C>
David L. Sokol --- --- --- --- --- ---
Thomas R. Mason 05/12/94-75,000(2) 8.8% 16.625 05/11/2004 784,153 1,987,198
Steven A. McArthur 05/12/94-110,000(3) 12.9% 16.625 05/11/2004 1,150,091 2,914,557
Donald M. O'Shei,
Sr. 05/12/94-75,000(4) 8.8% 16.625 05/11/2004 784,153 1,987,198
John G. Sylvia 05/12/94-100,000(5) 11.7% 16.625 05/11/2004 1,045,537 2,649,597
</TABLE>
(1) As required by the Commission, potential values stated are based on the
prescribed assumption that the CECI Common Stock will appreciate in value from
the date of grant to the end of the option term (ten years from the date of
grant) at annualized rates of 5% and 10% (total appreciation of 63% and 159%),
respectively, and therefore are not intended to forecast possible future
appreciation, if any, in the price of the CECI. The total of all stock options
granted to employees, including executive officers, during fiscal 1993 was
approximately 3.59% of total shares outstanding during the year. Accordingly,
the potential value of such options for all optionees under the prescribed
assumptions is approximately 3.59% of the potential realizable value of all
shareholders for the same period under the same assumptions. As an alternative
to the assumed potential realizable values stated above, Commission rules would
permit stating the present value of such options at the date of grant. Methods
of computing present value suggested by different authorities can produce
significantly different results. Moreover, since stock options granted by CECI
are not transferable, there are no objective criteria by which any computation
of present value can be verified. Consequently, the CECI's management does not
believe there is a reliable method of computing the present value of such stock
options and that all assumptions as to annualized appreciation rates are
inherently speculative.
(2) 18,780 shares exercisable immediately and 937 shares exercisable per month
commencing on May 1, 1994
(3) 27,500 shares exercisable immediately and 1375 shares exercisable per month
commencing on May 1, 1994
(4) 18,780 shares exercisable immediately and 937 shares exercisable per month
commencing on May 1, 1994
(5) 25,000 shares exercisable immediately and 1250 shares exercisable per month
commencing on May 1, 1994
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
The following table sets forth the option exercises and the value of
in-the-money unexercised options held by each of the named executive officers
of CECI at December 31, 1994, calculated as being equal to the difference
between the exercise price of the options and the closing price of the CECI
Common Stock on the NYSE of $15.625 per share on December 31, 1994.
<TABLE>
<CAPTION>
Value of Unexercised
In-the-Money Options
Shares Acquired Value Options Held at FY End at FY end
Name on Exercise Realized Exercisable($) Unexercisable($) Exercisable($) Unexercisable($)
<S> <C> <C> <C> <C> <C> <C>
David L. Sokol --- --- [464,983 535,017 --- ---
Thomas R. Mason --- --- 85,169 79,831 84,722 34,028
Steven A. McArthur --- --- 109,364 90,636 117,320 1,430
Donald M. O'Shei, Sr. --- --- 68,462 61,100 238,138 11,362
John G. Sylvia --- --- 94,712 84,032 406,502 2,860]
</TABLE>
Compensation of Directors
For 1994, directors who were not employees of CECI were paid an annual
retainer fee of $15,000 and a fee of $500 per day for attendance at CECI Board
and committee meetings. Directors who are employees of CECI will not receive
such fees. All directors are reimbursed for their expenses incurred in
attending CECI Board meetings.
Description of Amended and Restated 1986 Stock Option Plan
The Employee Option Plan permits the issuance of CECI Common Stock
pursuant to grants of incentive stock options ("ISOs") and non-qualified stock
options ("NSOs") to selected employees, including officers and directors of
CECI, designated by the Compensation Committee. Under the Employee Option
<PAGE>
Plan, NSOs may also be granted to non-employee directors, independent
contractors or consultants to CECI.
The Employee Option Plan is administered by a committee of
disinterested directors appointed by the CECI Board. Members of the committee
are not eligible for the discretionary grant of options under the Employee
Option Plan, but instead receive an automatic annual grant of an NSO to
purchase 100 shares of CECI Common Stock at a price equal to 100% of the fair
market value of the CECI Common Stock on the date the NSO is granted.
The exercise price of ISOs granted under the Employee Option Plan may
not be less than 100% of, and the exercise price of NSOs granted under the
Employee Option Plan may not be less than 85% of, the fair market value of the
CECI Common Stock on the date of the grant. The exercise price of any ISO
granted to any holder of more than 10% of the CECI Common Stock and the CECI
Preferred Stock must be at least equal to 110% of fair market value on the
grant date. Options granted under the Employee Option Plan may have terms of
up to ten years and are exercisable in one or more installments as determined
by the CECI Board. Some or all shares of CECI Common Stock may be purchased
upon exercise of options under the Employee Option Plan only after such shares
have become fully exercisable and nonforfeitable under the vesting provisions
of the option agreement and other terms and conditions of the Employee Option
Plan.
CECI Common Stock acquired pursuant to the exercise of an option can be
paid for in cash, or subject to approval by the Committee, any one or a
combination of the following methods: (i) by surrendering shares of CECI
Common Stock to CECI, if the individual is a former employee of CECI and has
owned the shares to be surrendered for at least six months, (ii) by directing
CECI to withhold a number of shares of CECI Common Stock from the option if the
individual is a former employee and has held the option for at least six
months, or (iii) by a promissory note.
Outstanding options will become immediately vested and exercisable upon
the occurrence of any of the following events (unless the agreement governing
the event provides for the assumption of outstanding options): (i) approval by
the CECI Board of a dissolution of CECI or a merger or consolidation of CECI
where CECI is not the surviving corporation, (ii) the sale of all or
substantially all of the assets of CECI, or (iii) a change in control of more
than 50% of the outstanding shares of all classes of stock of CECI.
All of the options granted to date under the existing Employee Option
Plan have a term of not more than ten years. The existing Employee Option Plan
terminates April 3, 1996.
The following table sets forth information with respect to all options
to purchase CECI Common Stock which were granted to certain executive officers,
all current executive officers as a group, all current directors who are not
executive officers as a group, and all current employees as a group, during the
last fiscal year.
Amended and Restated 1986 Option Plan
Number of
Dollar Shares
Value Underlying
($)(1) Options(2)
David L. Sokol N/A ---
Thomas R. Mason N/A 75,000
Steven A. McArthur N/A 110,000
Donald M. O'Shei, Sr. N/A 75,000
John G. Sylvia N/A 100,000
All current executive officers,
as a group (5 persons) N/A 360,000
All current directors who are not executive
officers, as a group (11 persons) N/A 80,000
All current employees as a group (other than
current executive officers, persons) N/A 492,500
(1) The benefits on amounts that will be received by the participants under the
Employee Option Plan cannot be calculated, as they are dependent upon the
increase in the market price of CECI's Common Stock.
(2) The number of shares of Common Stock underlying the options listed in this
table are redundant of the number of shares underlying options set forth on
previous tables.
1994 Stock Employee Stock Purchase Plan
The Employee Stock Purchase Plan is intended to qualify as an employee
stock purchase plan as defined in Section 423 of the Internal Revenue Code of
1986, as amended (the "Code"), and each eligible employee's right to purchase
shares under the Employee Stock Purchase Plan is taxed in accordance with
Sections 421 and 423 of the Code and the regulations issued thereunder.
The following summary of the effect of federal income taxation upon the
employee and CECI with respect to participants in the Employee Stock Purchase
Plan does not purport to be complete and reference is made to the applicable
provisions of the Code.
1. If the provisions of Section 423 are met, the employee will not
realize taxable income either at the time of election to participate in the
Employee Stock Purchase Plan or at the time the employee purchases shares
<PAGE>
pursuant to the Plan.
2. If the employee disposes of shares of CECI Common Stock after the
later of two years after the election to participate or one year from the date
of receipt of the stock pursuant to the election, then upon such disposition
the employee will recognize as ordinary income an amount equal to the lesser
of: (a) the excess of the fair market value of the shares of CECI Common Stock
on the date of disposition over the amount the employee paid for the shares
under the Employee Stock Purchase Plan; or (b) the excess of the fair market
value of the shares at the time of election to participate over the purchase
price under the Employee Stock Purchase Plan price. The employee will also
recognize a long-term capital gain or loss in an amount equal to the difference
between (i) the amount realized upon the sale of the CECI Common Stock and (ii)
the sum of the amount the employee paid for the shares plus the amount, if any,
taxed to the employee as ordinary income under (a) or (b) above.
3. If the employee disposes of shares of CECI Common Stock before the
later of two years after the election to participate or one year from the date
of receipt of the stock pursuant to the Employee Stock Purchase Plan, then upon
this disposition the employee will recognize as ordinary income an amount equal
to the excess of the fair market value of the shares of CECI Common Stock on
the date of receipt of the stock over the amount the employee paid for the
shares. The employee will also recognize a capital gain or loss in an amount
equal to the difference between (i) the amount realized upon the sale of the
shares of CECI Common Stock and (ii) the sum of the amount the employee paid
for the shares plus the amount, if any, taxed to the employee as ordinary
income. If the employee holds the shares for more than one year, this gain or
loss will be a long-term capital gain or loss.
4. Generally, CECI will not receive any deduction for federal income
tax purposes with respect to the opportunity to purchase shares or the shares
of CECI Common Stock issued under the Employee Stock Purchase Plan. If,
however, the employee disposes of stock acquired under the Employee Stock
Purchase Plan before the later of two years after the employee's election to
participate or one year from the date of the transfer of the stock to the
employee, CECI will be entitled to a deduction in an amount equal to the amount
which is considered ordinary income to the employee.
The benefits or amounts that will be received by the participants under
the Employee Stock Purchase Plan cannot be presently calculated, as they are
dependent on each individual's decision regarding the amount of stock to be
purchased and on the price at which the stock is purchased under the Employee
Stock Purchase Plan.
Termination of Employment Arrangements
Under the terms of his employment contract, Mr. Sokol is entitled to
receive two times his base salary and minimum bonus in the event of the
termination of his employment by CECI other than for cause. If Mr. Sokol were
terminated without cause, the $850,000 would be currently payable.
Certain Transactions and Relationships
Stock Purchase and Related Agreements. CECI and Kiewit Energy are
parties to a stock purchase agreement and related agreements, dated as of
February 18, 1991, pursuant to which Kiewit Energy purchased 4,000,000 shares
of CECI Common Stock at $7.25 per share and received options to buy 3,000,000
shares of CECI Common Stock at a price of $9.00 per share exercisable over
three years, and an additional 3,000,000 shares of CECI Common Stock at a price
of $12.00 per share exercisable over five years (subject to customary
adjustments).
In connection with such stock purchase, CECI and Kiewit Energy also
entered into certain other agreements pursuant to which, among other things,
(i) Kiewit Energy and its affiliates agreed, subject to certain conditions, not
to acquire more than 34% of the outstanding CECI Common Stock (the "Standstill
Percentage") for a five-year period, (ii) Kiewit Energy became entitled to
nominate at least three of CECI's directors, (ii) Kiewit Energy agreed that
Kiewit and its affiliates would present to CECI any opportunity to acquire,
develop, operate or own a geothermal resource or geothermal power plant, and
(iv) CECI and Kiewit Energy agreed to use their best efforts to negotiate and
execute a definitive joint venture agreement relating to the development of
certain geothermal properties in Nevada and Utah Messrs. Crowe, Jaros and
Scott are the current CECI Board nominees of Kiewit Energy.
On June 19, 1991, the CECI Board approved a number of amendments to the
stock purchase agreement and the related agreements. Pursuant to such
amendments, CECI reacquired from Kiewit Energy the rights to develop the Nevada
and Utah properties, and Kiewit Energy agreed to exercise options to acquire
1,500,000 shares of CECI Common Stock at $9.00 per share, providing the Company
with $13.5 million in cash. CECI also extended the term of the $9.00 and
$12.00 options to seven years, modified certain of the other terms of these
options, granted to Kiewit Energy an option to acquire an additional 1,000,000
shares of the outstanding CECI Common Stock at a price of $11.625 per share
exercisable over ten years (the closing price for the shares on the American
Stock Exchange on June 18, 1991), and increased the Standstill Percentage from
34% to 49%.
CECI entered into a joint venture agreement with two subsidiaries of
Kiewit, Kiewit Diversified Group, Inc. and Kiewit Construction Group, Inc., on
December 14, 1993. The agreement provides a framework for the joint
development of power projects located in the Philippines, Indonesia and certain
other countries.
Commencing in 1991, Gilbert Industrial Corporation ("Gilbert"), a
wholly-owned subsidiary of Kiewit, constructed modifications to the geothermal
<PAGE>
power production facility owned by a partnership in which CECI holds a 48%
interest. Through the year ended December 31, 1993, CECI's portion of amounts
paid by the partnership to Gilbert under this contract was approximately $3.6
million.
CECI believes that the terms of the construction contracts described
above are comparable to terms that would be obtained in similar transactions
with unaffiliated third parties.
Mr. Scott, a director of CECI, is also the Chairman and President of
Kiewit and owns Kiewit stock. Mr. Crowe, a director of CECI, is the Chairman
and President of MFS Communications Company, Inc., a subsidiary of Kiewit and
owns Kiewit's common stock. Mr. Jaros, the Chairman and a director of CECI,
is an officer and director of Kiewit and also owns Kiewit's common stock. Mr.
Holt, a director of CECI, provides consulting and other services to CECI for an
annual fee of $75,000 pursuant to the terms of a consulting agreement which
expires in 1998. CECI believes the terms of this agreement are comparable to
those in similar transactions with unaffiliated third parties.
CECI retained the law firm of Baker & McKenzie in 1993. Everett B.
Laybourne, a director, was of counsel to the Los Angeles office of Baker &
McKenzie until August 1993. CECI paid to Baker & McKenzie a total of
approximately $615,636 in legal fees in 1993. CECI believes that the fees
payable to Baker & McKenzie are comparable to fees that would be payable in
similar transactions with unaffiliated third parties.
MAGMA MANAGEMENT INFORMATION
Certain Biographical Information Regarding Officers and Directors of Magma
Ralph W. Boeker, 61, was elected President and director of Magma
effective March 1, 1993. On January 11, 1994, Mr. Boeker was named CEO of
Magma. Mr. Boeker retired from Dow as of March 1, 1993, where he had been
employed since 1959, most recently as Group Vice President for Chemicals,
Performance Products and Hydrocarbons and as a member of the Operating Board of
Dow Chemical U.S.A., an operating unit of Dow, and the Dow Management
Committee.
Lester L. Coleman, 52, was elected to the Magma Board of Magma on March
30, 1994. Mr. Coleman is Executive Vice President and General Counsel for
Halliburton Company where he has worked in various capacities since 1983.
Halliburton Company is an oil field services company, located at 3600 Lincoln
Plaza, 500 North Akard Street, Dallas, TX 75201. Prior employment included
Vice President and General Counsel for Pickands Mater & Company, an iron ore
and coal mining and transport company formerly headquartered in Cleveland, Ohio
where he worked for five years, and 10 years of private law practice with Arter
& Hadden, Cleveland where he served as a partner.
Thomas C. Hinrichs, 60, has been a director of Magma since 1981. He
has been employed by Magma in various senior management positions since 1974,
and was named a Vice President of Magma in March 1987.
Roger L. Kesseler, 58, was elected a director of Magma on November 6,
1991. Mr. Kesseler has been employed by Dow since 1959. For more than the
last five years he has served as the Controller and a Vice President of Dow.
Mr. Kesseler is also a member of the Board of Directors of Univar Corporation,
& publicly traded, Kirkland, Washington-based chemical distribution company.
William R. Knee, 48, was elected a director of Magma on February 22,
1989. Mr. Knee has been employed by Dow in various management capacities since
1968, most recently as Director of Technology Centers for Dow.
Paul M. Pankratz, 62, was elected Chairman of the Magma Board,
President and Chief Executive Officer effective February 1, 1992, and
relinquished to Mr. Boeker the titles of President in March 1993 and CEO in
January 1994. Mr. Pankratz remains as Chairman of the Magma Board. He joined
Magma upon retirement from Dow, where he had been employed in various
capacities since 1957, most recently as Vice President, Corporate Products
Department. He has served as a director of Magma since 1984.
Bent Petersen, 48, was elected a director of Magma in 1990. Prior to
1990 he was the managing partner of the San Diego office of the accounting firm
of Coopers & Lybrand. Coopers & Lybrand has acted as Magma's independent
public accountants since 1981. Since his retirement from Coopers & Lybrand in
1990, Mr. Petersen has been a private investor and independent businessman. In
1994, he established and currently acts as President of Petersen Enterprises,
Inc., a franchise development company, located at 432 East Idaho No. 419,
Kalispell, MT 59901.
J. Pedro Reinhard, 49, was elected a director of Magma on June 18,
1992. Mr. Reinhard has been employed by Dow since 1970. For more than the
last five years he has served as Treasurer of Dow and was also named a Vice
President of Dow in October 1990.
John D. Roach, 51, was elected a director of Magma on January 11, 1994.
Since 1991, Mr. Roach has been employed as Chairman, President and CEO of
Fibreboard Corporation, a publicly traded building products company, located at
2121 N. California Blvd., Suite 560, Walnut Creed, CA 94576. From 1987 to
1991 Mr. Roach was employed in a variety of capacities by Manville Corporation,
a leading industrial products company based in Walnut Creek, California, most
recently as Executive Vice President of Manville.
James D. Shepard, 56, has been a director of Magma since 1981. He was
Vice President -- Finance and Treasurer of Magma from May 1981 until March
1987. Since 1988, he has been co-trustee of the B.C. McCabe Living Trust and
the B. C. McCabe Foundation. Mr. Shepard is a shareholder relations consultant
<PAGE>
to Magma.
Louis A. Simpson, 58, was elected a director of Magma on March 30,
1994. Mr. Simpson is President and CEO of Capital Operations (investments),
GEICO Corporation where he has worked in various capacities since 1979. GEICO
Corporation is an insurance company located at GEICO Plaza, Washington DC
20076. Mr. Simpson also serves on the board of GEICO Corporation, Potomac
Electric Power Company and Salomon, Inc. Salomon Brothers Inc., a subsidiary of
Salomon Inc., provided financial advisory and underwriting services to Magma
for the financing of Magma's proposed 216 MW (net) geothermal electric
generating facility on the island of Leyte in the Republic of the Philippines.
Jon R. Peele, 51, joined Magma in March 1987 as Secretary and General
Counsel. He was also named a Vice President of Magma in February 1988, a
Senior Vice President in February 1988 and Executive Vice President in March
1993. He was Senior Staff Counsel in Dow's Legal Department from 1983 through
May 1988.
Wallace C. Dieckmann, 51, joined Magma in June 1988 as Vice President
and Controller, and was also named Treasurer and Assistant Secretary on June
15, 1990. Mr. Dieckmann relinquished the controller position and title when he
was named Chief Financial Officer in June 1993.
Trond Aschehoug, 51, became Director of Operations for Magma and
President of Magma Operating Company in May 1992 under an employment agreement
between Magma, Dow and Mr. Aschehoug, wherein Magma reimbursed Dow for Mr.
Aschehoug's direct and indirect compensation and paid certain relocation
expenses. On June 15, 1993, Mr. Aschehoug was named Vice President, North
American Operations, and on July 1, 1993 became an employee of Magma. Prior to
joining Magma, Mr. Aschehoug spent 25 years with Dow, most recently as Section
Manager having responsibility for multiple operating units.
Kenneth J. Kerr, 51, joined Magma in June 1993 as Senior Vice
President, Commercial Development and became an executive officer of Magma in
April 1994. Mr. Kerr is currently an employee of Dow. Mr. Kerr, Magma, and
Dow entered into an employment contract dated March 12, 1993 wherein Magma
reimburses Dow for direct and indirect compensation expenses until
approximately July 1, 1997, at which time Mr. Kerr will retire from Dow and
become an employee of Magma. Prior to June 1993, Mr. Kerr spent 28 years with
Dow, where he most recently was Commercial Vice President, Plastics for Dow's
Pacific Area, residing in Tokyo.
The Magma Board Committees
The six regularly constituted committees of the Magma Board are: (1)
the Audit Committee, which is comprised of Messrs. Kesseler, Petersen and
Roach; (2) the Compensation Committee which is comprised of Messrs. Kesseler,
Pankratz, Roach, and Shepard (with Messrs. Roach and Shepard comprising an
Option sub-Committee of the Compensation Committee); (3) the Environmental,
Health and Safety Committee, which is comprised of Messrs. Hinrichs, Pankratz
and Knee; (4) the Executive Committee, which is comprised of Messrs. Boeker and
Pankratz; (5) the Finance Committee, which is comprised of Messrs. Boeker,
Coleman, Reinhard and Simpson; and (6) the Nomination Committee, which is
comprised of Messrs. Boeker and Pankratz.
The Audit Committee monitors Magma's basic accounting policies, reviews
Magma's audit and management reports, reviews Magma's systems for internal
control, monitors compliance with Magma's code of conduct and the Foreign
Corrupt Practices Act, and makes recommendations regarding the appointment of
independent auditors. The Compensation Committee establishes salaries and
other compensation for directors, executive officers and management level
officers of Magma. The Compensation Committee also reviews all employee
compensation programs including approval of merit budgets, establishment of
short and long-term incentive plans, benefits, and compliance with 1934 Act
reporting of Executive Compensation in Magma's proxy. The Option sub-committee
of the Compensation Committee administers the stock incentive programs of Magma
with full power for all grants and awards under the 1987 Stock Option Plan and
under the 1994 Equity Participation Plan. The Environmental, Health and Safety
Committee oversees the environmental compliance and other environmental, health
and safety policies and programs of Magma. The Executive Committee has broad
discretionary authority to make all executive decisions which are not expressly
reserved to the Magma Board by resolution or otherwise. The Finance Committee,
established in April 1994, oversees the financial affairs of Magma and makes
recommendations to the Magma Board as to financial policies formulated by
management of Magma. The Nomination Committee recommends nominees for election
as directors, officers and members of committees, and also from time to time
makes recommendations concerning enlarging or reducing the size of the Magma
Board.
As of December 31, 1993, the six regularly constituted committees of
the Magma Board were: (1) the Audit Committee, which was comprised of Messrs.
Kesseler and Petersen; (2) the Compensation Committee, which was comprised of
Messrs. Kesseler, Petersen and Shepard; (3) the Environmental, Health and
Safety Committee, which was comprised of Messrs. Knee and Hinrichs; (4) the
Executive Committee, which was comprised of Messrs. Boeker and Pankratz; (5)
the Nomination Committee which was comprised of Messrs. Boeker and Pankratz;
and (6) the Stock Option Committee, which was comprised of Messrs. Petersen and
Shepard.
During 1993 (a) the Magma Board met nine times (including regularly
scheduled, special and telephonic meetings); (b) the Audit Committee met three
times; (c) the Compensation Committee met four times; (d) the Environmental,
Health and Safety Committee met three times; (e) the Executive Committee took
action once by unanimous written consent; (f) the Nomination Committee took
action once by unanimous written consent; (g) the Stock Option Committee met
four times; and (h) a Special Independent Committee met twice. Each incumbent
<PAGE>
director who was a director during 1993 attended more than 75% of the Magma
Board meetings and meetings of standing committees of which he was a member.
Compensation of Directors
Directors of Magma may be reimbursed for necessary expenses incurred in
connection with their attendance at Magma Board and committee meetings. Each
"outside" director receives a $15,000 annual fee, $1,500 for each Magma Board
meeting he attends, and $750 for each committee meeting he attends (if such
committee meeting is not held the same day as a Magma Board meeting). The
members of the Magma Board deemed to be "outside" directors for this purpose
(since they are neither employed by Magma nor affiliated with a major
stockholder of Magma) are currently Messrs. Coleman, Petersen, Roach and
Simpson.
On December 3, 1993, concurrent with Mr. Arnold L. Johnson's
resignation from the Magma Board, Magma accelerated the remaining payments he
otherwise would have received in 1994 under the agreement Mr. Johnson and Magma
entered into in connection with Mr. Johnson's resignation as an officer of
Magma in June 1991 (the "June 1991 Agreement"). Such accelerated payment to
satisfy Magma's obligations to Mr. Johnson under the June 1991 Agreement
amounted to approximately $1,164,000, which included a cash payment for Mr.
Johnson's supplemental benefit plan accounts. Mr. Shepard receives an annual
payment of $15,000 for serving as a shareholder relations consultant to Magma.
Family Relationships
There are no family relationships between any director, executive
officer or person nominated or chosen to become a director or executive officer
and any other director, executive officer or person nominated or chosen to
become a director or executive officer of Magma.
<PAGE>
Summary Compensation Table
The following table presents information about compensation awarded
over Magma's last three fiscal years to Mr. Pankratz and Magma's other four
most highly compensated executive officers as of December 31, 1994.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
Name and Principle Position Year Salary ($) Bonus (1)($)Other Annual
Compensation
($)(2) Restricted
Stock Awards ($)(2)
Options/ SARs
(#)(4)
All Other
Compensation ($)(5)
<S> <C> <C> <C> <C> <C> <C> <C>
Paul M. Pankratz (6)(7) 1994 $263,250 $251,250 _____ _____ 0 [ ]
Chairman of the Board of Directors 1993 263,250 389,688 _____ _____ 48,000 69,226
1992 229,166 301,250(8) _____ _____ 66,000(9) 44,217
Ralph W. Boeker (6)(10) 1994 299,037 276,375 _____ _____ 0 [ ]
President and Chief Executive
Officer 1993 206,731 289,688 _____ 167,500(11) 65,000453,309(12)
1992 N/A N/A N/A N/A N/A N/A
Kenneth J. Kerr (13) 1994 174,000 100,500 _____ 333,000(14) 0 [ ]
Senior Vice President 1993 N/A N/A N/A N/A N/A N/A
1992 N/A N/A N/A N/A N/A N/A
Jon R. Peele 1994 172,817 108,875 _____ _____ 0 [ ]
Executive Vice President, Corporate
Secretary, General Counsel 1993 153,346 125,531 _____ N/A 7,500 31,760
1992 145,000 87,750 _____ _____ 30,000 26,305
Trond Aschehoug (15) 1994 152,462 83,750 _____ 266,400(16) 0 [ ]
Vice President & Director of North
American Operations 1993 139,356 86,906 _____ 65,625(17) 0 17,554
1992 N/A N/A N/A N/A N/A N/A
</TABLE>
Footnotes appear on the following page: Footnotes to Summary Compensation Table
<PAGE>
(1) Cash bonuses are paid to executive officers of Magma based upon their
individual contribution to Magma and Magma's overall financial performance.
Bonuses for 1994 were paid in December 1994 for 1994 performance.
(2) Excludes the value of perquisites and other personal benefits. The
incremental cost to Magma of providing such perquisites and other personal
benefits did not, during 1994, exceed the lesser of $50,000 or 10% of annual
salary and bonus for the respective individuals named in the Summary
Compensation Table.
(3) Company Deferred Stock is subject to vesting based on continuing
employment, and the holder of such Deferred Stock is not entitled to vote or
receive dividends until such Deferred Stock is vested. The grant date value
shown may overstate the value of Deferred Stock because it does not take into
account the negative effect of the lack of transferability, vesting
restrictions and potential loss of the Deferred Stock upon termination of
employment.
(4) There are currently no SARs outstanding.
(5) Represents amounts allocated by Magma for the accounts of the named
individuals to Magma Benefit Plans (as defined below) in 1994 as follows:
<TABLE>
<CAPTION>
Name
Employee Retirement
Savings Plan
Employees' Pension
Plan Executive Supplemental Plan
<S> <C> <C> <C>
Paul M. Pankratz [$6,855] [$14,043] [$48,328]
Ralph W. Boeker [4,400] [14,150] [29,901]
Kenneth J. Kerr
Jon R. Peele [6,855] [14,043] [10,862]
Trond Aschehoug [5,096] [8,903] [3,555]
</TABLE>
(6)Prior to January 11, 1994, Mr. Pankratz served as Chairman and CEO and Mr.
Boeker served in the capacity of President.
(7)Mr. Pankratz joined Magma as of February 1, 1992.
(8)Includes fair market value on the grant date ($98,750) of 5,000 Shares
granted to Mr. Pankratz, without restrictions, in conjunction with his initial
employment by Magma and annual bonus of $202,500 for Mr. Pankratz's
contribution to Magma and Magma's financial performance.
(9)Includes 30,000 options granted to Mr. Pankratz in conjunction with his
initial employment by Magma.
(10)Mr. Boeker joined the firm on March 1, 1993.
(11)Represents the value on the grant date of 5,000 shares of Deferred Stock
granted in conjunction with Mr. Boeker's initial employment by Magma on March
1, 1993. As of December 31, 1994 Mr. Boeker held 3,000 shares of Deferred
Stock which vest 1,000 shares on each of March 1, 1995, 1996 and 1997.
(12)Includes $404,858 associated with Mr. Boeker's relocation to Southern
California from Midland, Michigan.
(13)Mr. Kerr began serving in the capacity of an executive officer of Magma
during 1994. Includes amounts paid to The Dow Chemical Company for Mr. Kerr as
a "leased employee" serving in the capacity of an executive officer.
(14)Represents the value on the grant date of 9,000 shares of Deferred Stock.
As of December 31, 1994 Mr. Kerr held 10,000 shares of Deferred Stock which
vest 1,000 shares on each of June 1, 1995 and 1996 and 9,000 on November 15,
2003.
(15)Includes amounts paid to The Dow Chemical Company for Mr. Achehoug as a
"leased employee" from Dow. Mr. Aschehoug became an employee of Magma on July
1, 1993.
(16)Represents the value on the grant date of 7,200 shares of Deferred Stock.
As of December 31, 1994 Mr. Aschehoug held 8,600 shares of Deferred Stock which
vest 700 shares on each of July 1, 1995 and 1996 and 7,200 on November 15,
2003.
(17)Represents the value of 2,100 shares of Deferred Stock granted to Mr.
Aschehoug in conjunction with his employment on July 1, 1993.
Option Grant Table
No stock options were granted to the above named executive officers
during fiscal 1994.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table summarized for each of the named executive officers
the number of Shares received upon exercise of stock options, if any, during
<PAGE>
1994, the aggregate dollar value realized upon exercise, the total number of
Shares with respect to which unexercised options were held as of December 31,
1994, if any, and the aggregated dollar value of in-the-money, unexercised
options held as of December 31, 1994.
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year
any FY-End Option/SAR Values
<TABLE>
Number of
Unexercised Value of Unexercised
Options/SARs at In-the-Money Options/SARs
Shares FY-End (#)(1) at FY-End ($)(1)
Acquired on Value Exercisable Exercisable
Name Exercise(#1) Realized($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Paul M. Pankrantz 0 $0 114,000/0 $1,450,620/$0
Ralph W. Boeker 0 0 45,000/20,000 243,400/188,600
Kenneth J. Kerr 0 0 5,000/10,000 32,550/65,100
Jon R. Peele 10,000 154,500 27,500/10,000 244,050/188,250
Trond Aschehoug 0 $0 6,000/3,000 116,640/58,320
</TABLE>
(1)There are currently no SARs outstanding.
(2)These potential values have not been and may never be, realized, The
underlying options have not been, and may never be, exercised; actual gains, if
any, on exercise will depend on the value of Common Stock on the date of
exercise, if any.
Magma Benefit Plans
Employee Retirement Savings Plan. Magma provides a Retirement Savings
Plan (the "401(k)Plan") pursuant to Section 401(k) of the Internal Revenue Code
of 1986 (the "Code"). The 401(k) Plan became effective April 1, 1988, and
covers all of Magma's employees. Under the 401(k) Plan, Magma is obligated to
contribute 1% of each participating employee's eligible compensation and to
match 50% of the first 6% of the employee's contributions. In addition, Magma
may also make discretionary contributions. In fiscal year 1994, Magma made no
such discretionary contributions.
Employees' Pension Plan. The Magma Power Company Pension Plan (the
"Pension Plan") covers all of Magma's full-time regular employees who have
completed one year of service with Magma. The Pension Plan was effective as of
January 1, 1990. It is a qualified plan pursuant to Section 401(a) of the
Code. Under the Pension Plan, Magma is obligated to contribute an amount equal
to 6% of the eligible compensation of each of the participants in the Pension
Plan.
Executive Supplemental Plan. Magma maintains a Special Supplemental
Retirement Plan covering a select group of management and upper level
employees. The Supplemental Plan is an unfunded nonqualified plan under
Section 401(a) of the Code. It is designed to receive certain allocations of
funds that could not be contributed to the participants' 401(k) Plan or Pension
Plan accounts under current tax law limitations. Additionally, under the
Supplemental Plan, participating employees may defer income, and Magma may also
allocate amounts such as discretionary contributions.
1987 Stock Option Plan. The Magma Power Company 1987 Stock Option Plan
(which is a Rule 16b-3 Plan) provides that options to purchase an aggregate of
1,000,000 Shares may be granted to salaried employees and consultants of Magma
and its subsidiaries, as selected by the Stock Option Committee of the Magma
Board (the "Option Committee"). The purchase price which must be paid for
stock in exercise of an option granted under the 1987 Stock Option Plan will be
fixed by the Option Committee when the option is granted, but such price may
not be less than 90% of the fair market value of the stock on the grant date
and must be at least 100% of such fair market value for any option intended to
be an "incentive stock option" under federal tax law.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
On January 20, 1992, Magma entered into an agreement with Paul M.
Pankratz in connection with his initial employment with Magma. This agreement
provides for the payment of one year's base salary and the immediate vesting of
all previously unvested stock options held by Mr. Pankratz in the event that
Mr. Pankratz' employment with Magma should be terminated without cause after a
change-in-control. This agreement is scheduled to terminate January 31, 1995.
In November 1993 the Compensation Committee determined that, in order
to attract and retain key executives of Magma, from time to time it would be in
Magma's best interests to enter in to "change in control" agreements with key
executives. The Compensation Committee authorized Magma to enter into
agreements subject to the following parameters:
(i) provision for up to two times base and bonus salary;
(ii) accelerated vesting of options; and
(iii) continuation of health and insurance benefits.
Each of the items referred to in (i) through (iii) would be triggered
by a Change in Control (as defined below) of Magma followed by termination of
the relevant officer's employment by Magma within a specified period, other
<PAGE>
than for cause, disability or retirement.
On September 15, 1994 Magma entered into change in control agreements
with each of its six current executive officers (Paul Pankratz, Chairman of the
Magma Board, Ralph Bocker, President and Chief Executive Officer, Jon Peele,
Executive Vice President, General Counsel and Secretary, Ken Kerr, Senior Vice
President--Commercial Development, Trond Aschehoug, Vice President--North
American Operations, and Wallace Dieckmann, Vice President and Chief Financial
Officer) ("Agreement I") and with nine other officers (Tom Hinrichs, Vice
President--Government Affairs, David Olsen, Vice President--Marketing, Jim
Runchey, Vice President--Human Resources and Administration, Russ Tenney, Vice
President--Asian Operations, Steve Jaye, Vice President--Legal Affairs, Mark
Robinson, Vice President--Business Development, Paul Zapf, Corporate
Controller, Joe Asiala, Director--Resource Development and Management, and Jim
Turner, Director--Engineering and Technology) ("Agreement II").
The agreements provide for certain severance payments to those officers
in the event of the termination of their employment following a Change in
Control of Magma, consistent with the enabling resolutions passed by the
Compensation Committee in the fall of 1993. Each agreement has a term expiring
on December 31, 1997, renewable at the end of such term if mutually agreed to
by the officer and Magma. See "Certain Investment Considerations
- -Interests of
Certain Persons in the Merger."
Magma Compensation Committee Report on Executive Compensation
As members of the Magma Compensation Committee, it is our duty to
oversee Magma's overall compensation programs to ensure compliance with Magma's
compensation philosophy, to evaluate the performance of the Chief Executive
Officer (CEO), review the performance of the executive management group,
establish the compensation level of the CEO, review compensation levels for the
executive management group, and consider related matters.
The compensation programs of Magma are designed to align executive
officers' compensation with the strategic goals and performance of Magma. The
Compensation Committee strives to develop and administer programs that will:
-- Attract and retain key executive officers critical to the long-
term success of Magma;
-- Provide salary and total compensation levels for executive
officers which are competitive with the median salary and compensation levels
for Magma's competitors;
-- Motivate executive officers to enhance long-term stockholder
value in Magma; and
-- Integrate Magma's compensation programs with its strategic
planning and measurement processes.
The compensation philosophy of Magma, which is endorsed by the Magma
Compensation Committee, is to provide salary and total compensation levels
comparable to the median of Magma's compensation peer group, specifically,
those publicly traded independent power producers and growth companies similar
to Magma. This peer group includes substantially all of the members of the
Industry Peer Group reflected in the 1993 Proxy Performance graph plus an
additional group of publicly traded technology growth companies with annual
revenues, growth history, and other performance and business characteristics
similar to Magma but which may not directly compete with Magma in its
independent power business. The compensation philosophy also calls for a
substantial portion of the annual compensation of each executive officer to
relate to, and be contingent upon the performance of Magma and the individual
contribution of such executive officer to such performance. As a result, much
of an executive officer's compensation is "at risk" with annual incentive bonus
compensation amounting to a significant portion of total cash compensation.
The Compensation Committee retained in 1993 the services of an outside
executive compensation consulting firm to assist in the performance of its
various duties. The results of the consulting firm's study disclosed that
Magma's executive compensation levels, base salary, annual and long-term
incentives, were below the median of its peer group. As such, the Committee
approved a program to bring compensation levels in line with its philosophy
over a two-year period. The Committee takes into account Magma's performance
as well as the competitiveness of Magma's compensation levels to the comparable
levels paid by Magma's compensation peer group.
The base salary and target bonus for Magma's newly appointed Chief
Executive Officer, Mr. Ralph W. Boeker, were based principally on his rights
under his offer of employment as President of Magma as detailed in the letter
dated January 20, 1993 (the "January 20, 1993 Letter"). On January 11, 1994,
the Compensation Committee recommended to the Magma Board of Directors, and the
Magma Board of Directors approved, that Mr. Bocker's base annual salary be
increased to $300,000 concurrent with his appointment as Magma's Chief
Executive Officer. This increase was based on the compensation survey data
provided by Magma's executive compensation consulting firm and is in line with
Magma's compensation philosophy to compensate at the median level of its peer
group. The January 20, 1993 Letter also provided for (i) the grant by the
Stock Option Committee to Mr. Bocker of 30,000 options under Magma's 1987 Stock
Option Plan with an exercise price of 90% of the fair market value of the
Common Stock on the grant date and with three years vesting and (ii) the grant
of 5,000 shares of restricted Common Stock vesting 1,000 shares on date of hire
and 1,000 shares per year on the succeeding four anniversaries of the date of
hire. The terms of the January 20, 1993 Letter were designed to provide Mr.
Boeker with total compensation levels comparable to the median of Magma's
compensation peer group.
<PAGE>
The base salary and target bonus for Magma's former Chief Executive
Officer and current Chairman of the Magma Board of Directors, Mr. Paul M.
Pankratz, were unchanged from the levels reported last year.
Under Magma's annual management incentive bonus plan, bonuses are based
one-half on the individual's performance and one-half on the performance of
Magma, with target bonuses of approximately 35% to 50% of total cash
compensation, except in extraordinary circumstances. Magma's performance for
purposes of compensation decisions is measured under the annual incentive bonus
plan against goals established for a given fiscal year by the Compensation
Committee. The 1993 goals consisted of performance objectives for both the
individuals and Magma. Company performance was measured by actual 1993 income
before taxes (net income plus provision for taxes) compared to targeted 1993
income before taxes ("IBT"). In 1993 Magma materially exceeded the targeted
IBT goal and in 1992, Magma substantially met the targeted IBT objective. The
Committee evaluated individual performance, so that, on average, together with
the over achievement on Company performance, total 1993 annual incentive
bonuses represented approximately 43% of total cash compensation for the
executive officers. In assessing the individual performances of Messrs.
Pankratz and Boeker, the Committee was influenced by (a) the successful
integration of the acquired geothermal assets from Union Oil of California into
Magma's operation, (b) the successful consummation of an energy conversion
agreement with the Philippine National Oil Company for a 231 MW(gross)
geothermal generating facility on the island of Leyte, and (c) Magma's record
results in 1993 with net income up 51% and revenues 53% greater than the
previous year.
In addition to the annual incentive bonus plan, Magma's 1987 Stock
Option Plan is an integral part of Magma's long-term compensation program.
Such long-term compensation is designed to encourage and create ownership and
retention of Magma's stock by key employees and to provide incentives to
increase the profits and long-term profitable growth of Magma. This program is
designed to align the long range interests of key employees with those of the
stockholders. The 1987 Stock Option Plan is administered by the Option Sub-
Committee of the Compensation Committee. In November of 1993, under the 1987
Stock Option Plan, Mr. Boeker was granted by the Option Sub-Committee a
performance award of 35,000 options, and Mr. Pankratz was granted by the Option
Sub-Committee a performance award of 48,000 options, all at an exercise price
of 90% of the fair market value of the Common Stock on the grant date. Such
options were based on an evaluation of these executives' performance and their
contributions to Magma, their options granted previously, and the long-term
compensation and total compensation levels provided that Magma's compensation
peer group. Such options fully vest one year after the grant date. In
addition, Jon R. Peele received 7,500 options fully vested after one year from
the date of grant. These option grants were structured to provide these
executive officers with total compensation levels comparable to the median of
Magma's compensation peer group.
Roger L. Kesseler, Chairman
Bent Petersen
James D. Shepard
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee during 1993 were Mr.
Kesseler, Mr. Petersen and Mr. Shepard. As of the Record Date, the members of
the Compensation Committee are Messrs. Kesseler, Pankratz, Roach and Shepard,
with Messrs. Roach and Shepard serving as members of the Option Sub-Committee.
Mr. Shepard is a former Vice President and Treasurer of Magma.
Certain Relationships and Related Transactions
Dow Services. Under two technical services agreements between Magma
and Dow, Dow agreed to furnish certain technical and other services in
connection with the operation of Magma's geothermal power plants. Magma, in
turn, agreed to pay for such services in cash payments or through the issuance
of previously authorized but unissued shares of Common Stock. In 1993, Magma
entered into a new agreement with Dow (the "1993 Technical Services Agreement")
which amends, restates and supersedes the prior technical services agreements.
Under the 1993 Technical Services Agreement, Dow has agreed to provide
technical services for Magma's geothermal power plants until January 1, 2000.
Magma, in turn, has agreed to make payments for such technical services in the
amounts of $575,000 for 1993 and $550,000 for 1994 and thereafter in annual
amounts reduced by $50,000 each year to $300,000 for 1999. Such annual
payments entitle Magma each year to receive technical services from Dow
equivalent in value to such year's payment, invoiced at Dow's internal
interdepartmental charge rates. Magma may obtain additional technical services
from Dow (if available), invoiced and paid for by Magma at such scheduled
rates. Magma is also entitled to receive from Dow technical services for
additional power plants by increasing the annual payments to Dow by $50,000 for
each such plant, subject to certain limitations. Payments under the 1993
Technical Services Agreement are to be made exclusively in cash -- there is no
provision for payment in Company Stock. In 1993, Magma paid Dow $575,000 under
the 1993 Technical Services Agreement. In addition, in March 1994 Magma signed
a five-year agreement (the "1994 Engineering and Construction Management
Services Agreement") with Dow Engineering Company ("DEC"). Under the
Agreement, DEC will provide engineering, procurement and construction
management services to Magma, including process engineering, project design,
procurement and construction management services for Magma's existing and
future geothermal power projects in North America. Magma believes that the
1993 Technical Services Agreement and the 1994 Engineering and Construction
Management Services Agreement are on terms at least as favorable to Magma as
would be available from an unaffiliated third party.
Dow Options. In October 1993 Magma acquired at a discount Dow's option
to purchase for an exercise price of $21 per share two million shares of Magma
<PAGE>
Common Stock. Magma purchased the options for 857,143 shares of newly issued
and unregistered shares of its stock (the "Dow Shares"). The closing price of
Magma's common stock on the date the acquisition was consummated was $38.50 per
share. J.P. Morgan Securities Inc. was retained by an independent committee of
Magma's Board of Directors to assist in valuing the option. Under the Option
Surrender Agreement, Dow agreed not to sell the newly issued shares before
September 30, 1994 (the "Lock-up"). The purposes for this acquisition included
lessening the magnitude of the overhang caused by the two million shares
subject to the option. The newly issued shares did not materially impact
Magma's 1993 earnings per share calculations since the option shares were
already reflected in the number of shares used in calculating primary earnings
per share.
On July 26, 1994, Magma agreed to release Dow from the Lock-up in
consideration of Dow's agreement to (i) sell the Dow Shares in a single block
transaction in a private placement outside of the Nasdaq National Market, (ii)
cause the purchaser of the Dow Shares to agree in writing to refrain from
reselling the Dow Shares until after September 29, 1994 and (iii) give Magma
the opportunity to review the final form of any Dow public disclosure regarding
this matter at least three business days prior to public release or filing.
On September 12, 1994, Dow sold 857,143 shares of Common Stock to
Garantia Banking Limited, a Bahamian corporation ("Garantia"), for
$24,214,289.75. On September 12, 1994, Dow acquired an option (the "Option")
to purchase 857,143 shares of Common Stock from Garantia for an exercise price
of $24,214,289.75. The Option was acquired in consideration of $150,000.
According to a filing by Dow with the SEC, the purpose of this transaction was
to match Dow's book and tax basis for the Dow Shares. On September 30, 1994,
Dow exercised the Option in full and reacquired the 857,143 shares from
Garantia for $24,214,289.75.
Following these transactions, Dow holds over 5 million Shares,
approximately 4 million of which are currently held in escrow for exchangeable
notes. By virtue of such remaining percentage ownership of the Shares, Dow may
still be deemed to control the management and policies of Magma.
1993 Stock Offering. Pursuant to a registration rights agreement, Dow
requested that Magma facilitate a registered public offering by Dow of certain
of its Shares. Accordingly, Magma filed, and in June 1993 the Commission
declared effective, a registration statement covering the sale by Dow of
3,635,000 shares of Company Common Stock and the sale by J. P. Morgan & Co.
Incorporated of 365,000 shares of Company Common Stock. Pursuant to the
registration rights agreement, Magma paid the first $100,000 of its accounting,
printing, legal and other expenses of the offering, and the two selling
shareholders paid the remainder of such expenses.
1991 Stock Offering. In April 1991, Magma registered 4,000,005 Shares
(the "Registered Shares") owned by Dow. The Registered Shares were placed in
escrow by Dow for delivery upon exchange of the Notes. The Notes are
exchangeable at any time into shares of Common Stock at an exchange rate of
26,6667 shares per $1,000 principal amount of the Notes. Dow retains the right
to vote the shares placed in escrow. A registration statement covering the
Registered Shares (the "Registration Statement") was filed by Magma on behalf
of Dow pursuant to existing registration rights agreements between Magma and
Dow. Magma has agreed to keep the Registration Statement current until the
earlier of (i) the maturity of the Notes in 2001 or (ii) the date on which all
of the Notes have been exchanged or redeemed. Magma and Dow have agreed to
indemnify each other against certain liabilities, including liabilities under
the 1933 Act in connection with the Registration Statement and another
registration statement concurrently filed by Dow in connection with its
issuance of the Notes.
Aschehoug Home Purchase. In September 1994, Magma sold a residential
home to Mr. Aschehoug and his wife (the "Aschehougs") for $250,000. The
purchase price of $250,000 was determined by an independent appraisal of the
property. The Aschehougs financed the purchase with a 90-day note (the "Note")
from Magma in the amount of $200,000 bearing interest at a rate of 6.49% per
annum. In November 1994, the Aschehougs refinanced the Note and paid Magma in
full.
Kerr Relocation Loan. In July 1993, Magma made an interest-free
employee relocation loan (the "Loan") to Mr. Kerr and his wife (the "Kerrs") in
the amount of $100,000 for the purpose of financing the purchase of a new
residence. The Loan is secured by a deed of trust granted by the Kerrs to the
Company relating to their new residence. Mr. Kerr is obligated to make annual
reduction payments on the Loan in an amount equal to one-half the annual cash
bonus paid to him for services rendered in the preceding fiscal year, less any
taxable portion thereof. Currently, $77,000 remains outstanding under the Loan
and the final balance is due and payable in full on July 16, 1998.
Halliburton Services. Halliburton Energy Services ("Halliburton
Energy") provides Magma Operating Company, a subsidiary of Magma, with various
maintenance services for Magma's well fields. Mr. Coleman is the Executive
Vice President and General Counsel of Halliburton Company, the parent of
Halliburton Energy. While the terms by which Halliburton Energy provides
services are currently determined on a case-by-case basis, Magma Operating
Company is considering negotiating a long term maintenance service agreement
with Halliburton Energy. For the nine-month period ended September 30, 1994
and for fiscal 1993, Magma Operating Company made payments to Halliburton
Energy of approximately $225,000 and $700,000, respectively.
<PAGE>
DESCRIPTION OF CECI CAPITAL STOCK
CECI Common Stock
As of September 30, 1994, there were 32,229,584 shares of CECI Common
Stock outstanding (not including shares issuable pursuant to outstanding stock
options and upon conversion of all outstanding shares of CECI Preferred Stock).
The holders of CECI Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of stockholders. Holders of the
CECI Common Stock and holders of the CECI Preferred Stock vote together as a
single class on all matters other than certain matters affecting the class of
CECI Preferred Stockholders or upon the occurrence of any default in the
payment of any required dividends to the CECI Preferred Stockholders. Subject
to preferences that may be applicable to any outstanding CECI Preferred Stock,
holders of CECI Common Stock are entitled to receive ratably such dividends as
may be declared by CECI's Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of CECI,
holders of CECI Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding CECI Preferred Stock. Subject to certain exceptions, Kiewit Energy
has the right to purchase its pro rata share of any securities convertible into
CECI Common Stock or any other equity securities offered or sold by CECI at a
price less than the greater of the current market price of the CECI Common
Stock or the exercise price of certain options granted to Kiewit Energy. No
other holders of CECI Common Stock have preemptive rights and holders of CECI
Common Stock have no rights to convert their CECI Common Stock into any other
securities. The outstanding shares of CECI Common Stock are, and the CECI
Common Stock to be issued upon conversion of the Debentures will be, fully paid
and nonassessable.
As of September 30, 1994, CECI had outstanding $100,000,000 principal
amount of 5% Convertible Subordinated Debentures due July 31, 2000 (the
"Convertible Debentures"). The Convertible Debentures are convertible into
shares of CECI Common Stock at any time at or prior to maturity at a conversion
price of $22.50 per share, subject to adjustment in certain events, including
(i) dividends (and other distributions) payable in CECI Common Stock on any
class of capital stock of CECI, (ii) subdivisions, combinations and
reclassifications of CECI Common Stock, (iii) the issuance to all holders of
CECI Common Stock of rights or warrants entitling them to subscribe for or
purchase CECI Common Stock at less than the then current market price and (iv)
distributions to all holders of CECI Common Stock of evidence of indebtedness
of CECI or assets (including shares of its capital stock (other than CECI
Common Stock) and other securities, but excluding those rights, warrants,
dividends and distributions referred to in clauses (i) and (iii) above,
subdivisions of shares referred to in clause (ii) above and dividends and
distributions paid in cash out of funds legally available for distribution to
stockholders under the laws of CECI's state of incorporation). In addition to
the foregoing adjustments, CECI will be permitted to make such reductions in
the conversion price as it considers to be advisable in order that any event
treated for federal income tax purposes as a dividend of stock or stock rights
will not be taxable to the holders of the CECI Common Stock.
On December 1, 1988, CECI distributed a dividend of one Preferred Share
Purchase Right (a "CECI Right") for each outstanding share of CECI Common
Stock. The CECI Rights are not exercisable until ten days after a person or
group acquires, or has the right to acquire, beneficial ownership of 20% or
more of CECI Common Stock or announces a tender or purchase offer for 30% or
more of CECI Common Stock. Each CECI Right entitles the holder to purchase one
one-hundredth of a share of Series A Junior Preferred Stock, no par value (the
"Series A Preferred Stock"), for $52.00. The CECI Rights may be redeemed by
CECI's Board of Directors up to ten days after an event triggering the
distribution of certificates for the CECI Rights. The CECI Rights Plan
pursuant to which such CECI Rights were issued was amended in February 1991 so
that Kiewit Energy's purchase of CECI Common Stock would not trigger the
exercise of such Rights. The CECI Rights will expire, unless previously
redeemed or exercised, on November 30, 1998. The CECI Rights are automatically
attached to, and trade with, each share of CECI Common Stock.
CECI Preferred Stock
The CECI Board has the authority to issue 1,534,009 shares of CECI
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without any further action by the stockholders.
The issuance of additional shares of CECI Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of CECI without
further action by the stockholders. The issuance of additional shares of CECI
Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of CECI Common Stock, including the loss of voting
control to others. CECI has no present plans to issue any additional shares of
CECI Preferred Stock. As of September 30, 1994, 1,247 shares of CECI Preferred
Stock were outstanding.
The CECI Preferred Stock has a dividend rate of 8.125%, commencing
March 15, 1992 through the conversion date or December 15, 2003. The
dividends, which are cumulative, are currently payable quarterly in kind
through March 15, 1995 and in cash on subsequent dividend dates.
DESCRIPTION OF MAGMA CAPITAL STOCK
The authorized capital stock of Magma includes 30,000,000 Shares and
1,000,000 shares of preferred stock, par value $.10 per share (the "Magma
<PAGE>
Preferred Stock"). As of September 30, 1994, there were 24,042,915 Shares
issued and outstanding and no shares of Magma Preferred Stock issued or
outstanding.
The Shares
The holders of Shares are entitled to one vote per share for the
election of the directors of Magma and for all other matters to be voted upon
by the stockholders of Magma. The holders of Shares have no cumulative voting
rights.
The holders of Shares are entitled to share ratably in such dividends
and other distributions as may be declared by Magma's Board of Directors and
paid by Magma out of funds legally available therefor (subject to prior rights
of Magma Preferred Stock, if any). In the event of any liquidation,
dissolution or winding up of Magma, holders of Shares are entitled to share
ratably in the assets available for distribution to such stockholders after the
payment of all prior claims.
Holders of Shares have no redemption, preemptive or subscription
rights, nor do they have any conversion privileges.
Magma Preferred Stock
The authorized capital stock of Magma includes 1,000,000 shares of
Magma Preferred Stock, par value $.10 per share, none of which is issued or
outstanding. Magma's Board is authorized to issue, from time to time by
resolution and generally without further action by the stockholders of Magma,
shares of Magma Preferred Stock in one or more series and to determine, subject
to the provisions of Nevada law, the voting powers, designations, preferences,
limitations, restrictions and relative rights (including rights, if any, with
respect to dividends, conversion privileges, redemption, sinking funds and
liquidation) of such series of Magma Preferred Stock.
COMPARISON OF STOCKHOLDER RIGHTS
Upon consummation of the Merger and assuming CECI elects to pay the
Merger Consideration with a combination of cash and CECI Common Stock, the
stockholders of Magma will become stockholders of CECI and their rights will be
governed by CECI's Certificate of Incorporation and Bylaws, which differ in
certain material respects from Magma's Articles of Incorporation and Bylaws.
As stockholders of CECI, the rights of former Magma stockholders will be
governed by the DGCL instead of by the NGCL. Delaware is the jurisdiction of
incorporation of CECI and Nevada is the jurisdiction of incorporation of Magma.
The following comparison of the DGCL and CECI's Certificate of
Incorporation and Bylaws, on the one hand, and the NGCL and Magma's Articles of
Incorporation and Bylaws, on the other, is not intended to be complete and is
qualified in its entirety by reference to CECI's Certificate of Incorporation
and Bylaws and Magma's Articles of Incorporation and Bylaws. Copies of CECI's
Certificate of Incorporation and Bylaws are available for inspection at the
offices of CECI and copies will be sent to the holders of Magma Common Stock or
CECI Common Stock upon request. Copies of Magma's Articles of Incorporation
and Bylaws are available for inspection at the principal executive offices of
Magma and copies will be sent to holders of Magma Common Stock upon request.
Directors. Both the DGCL and the NGCL provide that a corporation's
board of directors shall consist of at least one member and that the number of
directors may be fixed in either the corporation's certificate of incorporation
or articles of incorporation, as the case may be, or in the bylaws. CECI's
Bylaws provide that the CECI Board shall consist of 13 directors and shall be
classified into three classes of directors each serving three-year terms.
Magma's Articles of Incorporation provide that the number of directors
constituting the Magma Board will be fixed from time to time by resolution of
Magma's Board or Magma's stockholders, and that the number of directors may not
be less than three nor more than 15. Magma's Board currently consists of
eleven directors and in also classified into three classes of directors each
serving three-year terms.
Removal of Directors; Filling Vacancies on the Board of Directors.
Under the DGCL, any director of a classified board of directors may be removed
only for cause by the holders of a majority of the shares entitled to vote at
an election of directors. Under the NGCL, any director may be removed from
office upon the vote of stockholders representing not less than two-thirds of
the voting power of the issued and outstanding stock entitled. Although CECI's
Certificate of Incorporation is silent as to the filling of vacancies on the
CECI Board, its Bylaws provide that any director or the entire CECI Board may
be removed only for cause by the holders of not less than two-thirds of shares
entitled to vote at an election of directors. Magma's Articles of
Incorporation and Bylaws are silent as to the removal of directors.
Both the DGCL and the NGCL generally provide that all vacancies on the
board of directors, including vacancies caused by an increase in the number of
authorized directors, may be filled by a majority of the remaining directors
even if they are less than a quorum. Both CECI's and Magma's Bylaws follow
this language and further provide that any such elected director shall hold
office for a term expiring at the annual meeting at which the term of the class
to which he has been elected expires.
Limitation on Directors' Liability. Both the DGCL and the NGCL permit
a corporation to include a provision in its certificate or articles of
incorporation eliminating or limiting the personal liability of a director for
damages for breach of the director's fiduciary duty subject to certain
limitations. CECI's Certificate of Incorporation provides that a director will
not be personally liable to CECI or its stockholders for monetary damages for
<PAGE>
breach of fiduciary duty as a director, although it does not eliminate the
liability of the director for breaches of the duty of loyalty, acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law, the unlawful repurchase or redemption of stock or payment of
unlawful dividends or any transaction from which a director derives an improper
personal benefit. Magma's Articles of Incorporation provide that a director or
officer of Magma shall not be personally liable to Magma or its stockholders
for damages for breach of fiduciary duty as a director or an officer, but do
not eliminate or limit the liability of a director or an officer for (a) acts
or omissions which involve intentional misconduct, fraud or a knowing violation
of law or (b) the unlawful payment of distributions.
Indemnification. Both the DGCL and the NGCL permit a corporation to
indemnify officers, directors, employees and agents for actions taken in good
faith and in a manner they reasonably believed to be in, or not opposed to, the
best interests of the corporation, and with respect to any criminal action,
which they had no reasonable cause to believe was unlawful. Both states' laws
provide that a corporation may advance expenses of defense (upon receipt of a
written undertaking to reimburse the corporation if indemnification is not
appropriate) and must reimburse a successful defendant for expenses, including
attorney's fees, actually and reasonably incurred, and both states permit a
corporation to purchase and maintain liability insurance for its directors and
officers. Both the DGCL and the NGCL provide that indemnification may not be
made for any claim, issue or matter as to which a person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation, unless and only to the extent a court determines
that the person is entitled to indemnify for such expenses as the court deems
proper. Both CECI's Bylaws and Magma's Bylaws provide indemnification to the
fullest extent permitted by applicable law.
Restrictions on Business Combinations/Corporate Control. The DGCL
contains provisions restricting the ability of a corporation to engage in
business combinations with an interested stockholder. Under the DGCL, except
under certain circumstances, a corporation is not permitted to engage in a
business combination with any interested stockholder for a three-year period
following the date such stockholder became an interested stockholder. The DGCL
defines an interested stockholder, generally, as a person who owns 15% or more
of the outstanding shares of such corporation's voting stock. Kiewit Energy
would be considered an interested stockholder. However, because Kiewit Energy
has been an interested stockholder for more than three years, the moratorium on
a business combination involving Kiewit Energy does not apply.
Certain provisions of the NGCL disallow the exercise of voting rights
with respect to "control shares" of an "issuing corporation" held by an
"acquiring person," unless such voting rights are conferred by a majority vote
of the disinterested stockholders or if, prior to the acquiring person's
acquisition of the control shares, the articles of incorporation or bylaws of
the issuing corporation state that such provisions of the NGCL do not apply to
the issuing corporation. Magma's Bylaws contain such a statement with regard
to the transactions contemplated by the Merger Agreement.
The NGCL also contains provisions restricting the ability of a
corporation to engage in any combination with an interested stockholder (i)
unless three years have elapsed since the time such interested stockholder
becomes such and the combination complies with certain fair price
specifications or (ii) unless the board of directors of the corporation
approved of the interested stockholder's acquisition of shares. The NGCL
defines an interested stockholder, generally, as a person who owns 10% or more
of the outstanding shares of such corporation's voting stock. CECI would be
considered an interested stockholder of Magma under the NGCL. However, because
the Magma Board approved the acquisition of the Shares by CECI, the provisions
of the NGCL restricting a combination involving CECI do not apply.
Stockholder Action by Written Consent: Special Meetings. Under the
DGCL and the NGCL, unless otherwise provided in the Certificate of
Incorporation or Articles of Incorporation, as the case may be, stockholders
may take action without a meeting, without prior notice and without a vote,
upon the written consent of stockholders having not less than the minimum
number of votes that would be necessary to authorize the proposed action at a
meeting at which all shares entitled to vote were present and voted. CECI's
Certificate of Incorporation provides that any action that may be taken or is
required to be taken at any annual or special meeting of stockholders, may not
be taken without a meeting. Magma's Bylaws have a similar provision.
CECI's Bylaws provide that special meetings of stockholders may be
called by the CECI Board or the President. Magma's Bylaws provide that special
meetings of the stockholders may be called by the President or Secretary of
Magma and must be called by the President or Secretary at the request, in
writing, of a majority of Magma's Board or stockholders owning at least a
majority of Magma's shares issued and outstanding and entitled to vote.
Amendment or Repeal of the Certificate of Incorporation and Bylaws.
Under the DGCL and the NGCL, unless the Certificate of Incorporation or
Articles of Incorporation, as the case may be, or Bylaws otherwise provide,
amendments to the Certificate of Incorporation or Articles of Incorporation
generally require the approval of the holders of a majority of the outstanding
stock entitled to vote thereon, and if such amendments would increase or
decrease the number of authorized shares of any class or series or the par
value of such shares or would adversely affect the shares of such class or
series, the holders of the outstanding shares of a class shall be entitled to
vote as a class to approve the amendment. CECI's Certificate of Incorporation
requires the affirmative vote of the holders of at least two-thirds of the
voting power of all shares of CECI entitled to vote generally in the election
of directors, voting together as a single class to amend its Certificate of
Incorporation. CECI's Bylaws provide that CECI's Board may amend its Bylaws by
a majority vote and that CECI stockholders may amend its Bylaws by an
<PAGE>
affirmative vote of at least two-thirds of the voting power of all shares of
CECI entitled to vote, except when stockholders are required to vote by class,
in which event two-thirds of the voting power of that class shall be required.
Magma's Articles of Incorporation provide that Magma reserves the right
to amend, alter, change or repeal any provision contained in the Articles of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders in the Articles of Incorporation are subject
to such reservation. Magma's Articles of Incorporation provide that the
affirmative vote of the holders of at least 75% of the outstanding shares of
common stock shall be required to amend, alter, change, repeal, or adopt any
provision inconsistent with, certain provisions of its Articles of
Incorporation that concern directors. Magma's Bylaws provide that the
affirmative vote of a majority the outstanding capital stock entitled to vote
thereon or a majority of the entire Magma Board shall be required to amend its
Bylaws.
Cumulative Voting. Under both the DGCL and the NGCL, cumulative voting
of stock applies only when so provided in the Certificate of Incorporation or
the Articles of Incorporation, as the case may be, of a corporation. Neither
CECI's Certificate of Incorporation nor Magma's Articles of Incorporation
provide for cumulative voting rights in the election of directors.
Stockholder Vote for Mergers. Except with respect to certain mergers
between parent and subsidiary corporations, under both the DGCL and the NGCL, a
merger generally requires the affirmative vote of a majority of the outstanding
shares entitled to vote thereon. Under the DGCL and the NGCL, holders of stock
which is not by its terms entitled to vote on such a transaction are entitled
to notice of the meeting at which the proposed transaction is considered.
Neither the DGCL nor the NGCL requires a stockholder vote of the surviving
corporation in a merger, however, if (a) the merger agreement does not amend
the existing certificate of incorporation, (b) each outstanding or treasury
share of the surviving corporation before the merger is unchanged after the
merger, and (c) the number of shares to be issued by the surviving corporation
in a merger does not exceed 20% of the shares outstanding immediately prior to
such issuance.
Dissenters' Rights in Mergers. Both the DGCL and the NGCL provide the
stockholders have the right, in some circumstances, to dissent from certain
corporate reorganizations and to instead demand payment of the fair cash value
of their shares. Unless a corporation's certificate of incorporation provides
otherwise, the DGCL does not provide for such dissenters' rights of appraisal
with respect to (a) a sale-of-assets reorganization, (b) a merger or
consolidation by a corporation, the shares of which are either listed on a
national securities exchange or widely-held (by more than 2,000 stockholders),
if stockholders receive shares of the surviving corporation or of such a listed
or widely-held corporation; or (c) stockholders of a corporation surviving a
merger if no vote of the stockholders of the surviving corporation is required
to approve the merger. Like the DGCL, the NGCL generally does not provide for
dissenters' rights if no vote of the stockholders of the surviving corporation
is required.
Dividends. Under both the DGCL and the NGCL, corporations may pay
dividends out of surplus, or if no surplus exists, out of net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF CECI
The following table sets forth certain information with respect to all
stockholders known by CECI to beneficially own more than 5% of either the CECI
Common Stock or the Series C Preferred Stock and certain information with
respect to the beneficial ownership of each director and the five most highly
compensated executive officers of CECI (and all directors and executive
officers of CECI, as a group) of CECI Common Stock. All information is as of
September 30, 1994, unless otherwise indicated.
Number of
Shares
Name (and address if required) Beneficially Percentage
of Beneficial Owner Owned (1) Class (1)
Series C Preferred Stock:
Kiewit Energy Company
1000 Kiewit Plaza
Omaha, Nebraska 68131. . . 1,247 100%
CECI Common Stock:
Kiewit Energy Company(2) . . 18,154,272 43.84%
Merrill Lynch & Co. Inc.(3). 2,249,210 6.98%
The Equitable Companies, Inc.(4) 2,027,182 6.29%
Forstmann-Leff Associates, Inc. (5) 1,829,235 5.68%
Neuberger & Berman . . . . . 1,668,475 5.18%
Edgar D. Aronson . . . . . . 47,000 .15%
Judith E. Ayres. . . . . . . 60,000 .19%
Harvey F. Brush. . . . . . . -0- -0-
James Q. Crowe . . . . . . . 10,000 .03%
Richard K. Davidson. . . . . 40,000 .12%
Ben Holt . . . . . . . . . . 124,365 .39%
Richard R. Jaros . . . . . . 309,179 .95%
Everett B. Laybourne . . . . 27,790 .09%
Daniel J. Murphy . . . . . . 30,000 .09%
Herbert L. Oakes, Jr.(6) . . 66,355 .21%
Walter Scott, Jr.. . . . . . 10,000 .03%
Barton W. Shackelford. . . . 12,860 .04%
David E. Wit(7). . . . . . . 47,875 .15%
David L. Sokol . . . . . . . 459,509 1.41%
Thomas R. Mason. . . . . . . 92,440 .29%
Steven A. McArthur . . . . . 111,703 .35%
Donald M. O'Shei, Sr.. . . . 68,137 .21%
John G. Sylvia . . . . . . . 101,055 .31%
All directors and executive
officers as a group (18 persons) 1,618,268 4.81%
- ---------------
(1) Includes shares of CECI Common Stock which the listed beneficial owner
is deemed to have the right to acquire beneficial ownership under Rule 13d-3(d)
under the Exchange Act, including, among other things, shares of CECI Common
Stock which the listed beneficial owner has the right to acquire within 60
days.
(2) Includes the 7,436,112 shares of CECI Common Stock Kiewit Energy held
on October 29, 1992, the date of Amendment No. 6 to their Schedule 13D, options
to purchase an additional 5,789,163 shares of CECI Common Stock and 3,393,197
shares of CECI Common Stock in to which the 1,247 shares of Series C Preferred
Stock held by Kiewit Energy are convertible, and 1,535,800 shares purchased in
the open market.
(3) According to a Schedule 13G filed by such parties in February 1994,
includes shares of CECI Common Stock registered in the names of Merrill Lynch &
Co., Inc., Merrill Lynch Group, Inc., Princeton Services, Inc. and Merrill
Asset Management, L.P.
(4) According to a Schedule 13G filed by such parties in February 1994,
includes shares of CECI Common Stock registered in the names of The Equitable
Companies Incorporated, Axa Assurances L.A.R.D. Mutuelle, Axa Assurances Vie
Mutuelle, Alpha Assurances L.A.R.D. Mutuelle, Alpha Assurances Vie Mutuelle,
Uni Europe Assurance Mutuelle and Axa.
(5) According to a Schedule 13G filed by such parties in February 1994,
includes shares of CECI Common Stock registered in the name of Forstmann-Leff
Associates Inc., FLA Asset Management, Inc. and Stamford Advisors Corp.
(6) Includes 9,093 shares registered in the name of H.L. Oakes & Co., Inc.,
a company of which Mr. Oakes is a director and of which his wife is a principal
stockholder, 4,746 shares owned by Mr. Oakes' wife and 4,996 shares registered
to H.L. Oakes, trustee for Harrison Oakes, Mr. Oakes' minor son. Mr. Oakes
disclaims beneficial ownership of all of those shares.
(7) Includes 3,748 shares of CECI Common Stock held jointly with his
spouse.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF MAGMA
The following table sets forth certain information with respect to all
stockholders known by Magma to beneficially own more than 5% of the Shares and
certain information with respect to the beneficial ownership of each director
and the five most highly compensated executive officers of Magma (and all
directors and executive officers of Magma, as a group) of Shares. All
information is as of October 1, 1994, unless otherwise indicated.
<TABLE>
<CAPTION>
Name (and address if required)
of Beneficial Owner(1) Number of Shares
Beneficially Owned (2) Percentage Class (3)
<S> <C> <C>
The Dow Chemical Company
2030 Dow Center
Midland, MI 48674 5,032,430(4) 21.0%
B.C. McCabe Foundation
7624 S. Painter Ave., Suite A
Whittier, CA 90602-2313 2,752,641(5) 11.5%
Firstar Investment Research
& Management Company
777 E. Wisconsin Avenue
Milwaukee, WI 53202 1,975,500 8.2%
James D. Shepard 221,134(6) *
Paul M. Pankratz 114,100(7) *
Ralph W. Boeker 50,000(8) *
Jon R. Peele 32,000(9) *
Wallace C. Dieckmann 19,859(10) *
Thomas C. Hinrichs 17,618(11) *
Kenneth J. Kerr 16,000(12) *
Trond Aschehoug 15,450(13) *
Louis A. Simpson 10,819(14) *
John D. Roach 2,250(15) *
Lester L. Coleman 819(16) *
Roger L. Kesseler 200 *
Directors and executive officers
as a group (15 persons). . . . . 500,249(17) 2.1%(18)
</TABLE>
- ---------------
* Represents less than one percent.
(1) Except as otherwise indicated, the address of each of the persons named
below is c/o Magma Power Company, 4365 Executive Drive, Suite 900, San Diego,
California 92121.
(2) For purposes of this table, a person is deemed to have "beneficial
ownership" of (i) any security which such person has the right to acquire
within 60 days after October 1, 1994, (ii) any security which is held by such
person's spouse or other immediate family member sharing such person's
household, (iii) securities held in certain trusts, partnerships and other
legal entities affiliated with such person, and (iv) individual retirement
accounts of such person. Beneficial ownership has been disclaimed by certain
of the named persons with respect to certain of such shareholdings. The
amounts set forth under this column exclude shares held for the benefit of the
named person in the Magma 401(k) Plan. All information with respect to the
beneficial ownership of the shares referred to in this table is based upon
filings made by the respective beneficial owners,with the Commission or
information provided to Magma by such beneficial owners.
(3) Unless otherwise noted, the number of Shares outstanding for this
purpose is 24,014,714.
(4) Includes 4,000,005 shares which were placed in escrow, pursuant to an
escrow agreement dated April 1, 1991 between The Dow Chemical Company, a
Delaware corporation ("Dow"), and Morgan Guaranty Trust Company of New York, as
Escrow Agent, for delivery upon exchanges of $150,000,000 aggregate principal
amount of 5 3/4% Subordinated Exchangeable Notes Due 2001 of Dow (the "Notes").
The Notes are exchangeable at any time into Shares at an exchange rate of
26.6667 Shares per $1,000 principal amount of Notes. Dow retains the right to
vote the shares placed in escrow.
(5) Does not includes Shares held by Mr. Shepard, a director of Magma, who
is a co-trustee of the B.C. McCabe Foundation.
<PAGE>
(6) Does not include shares owned by the B. C. McCabe Foundation for which
Mr. Shepard is a co-trustee, and with regard to which beneficial ownership is
disclaimed.
(7) Includes Mr. Pankratz's options to purchase 114,000 Shares.
(8) Includes 3,000 shares of deferred stock which are subject to vesting
requirements based on continuing employment, and which the holder is not
entitled to vote or receive dividends on until vested. Also includes Mr.
Boeker's options to purchase 45,000 Shares.
(9) Includes 4,500 shares of deferred stock subject to vesting requirements
based on continuing employment, and which the holder is not entitled to vote or
receive dividends on until vested. Also includes Mr. Peele's options to
purchase 27,500 Shares.
(10) Includes 6,000 shares of deferred stock subject to vesting requirements
based on continuing employment, and which the holder is not entitled to vote or
receive dividends on until vested. Also includes Mr. Dieckmann's options to
purchase 5,750 Shares.
(11) Includes 6,000 shares of deferred stock subject to vesting requirements
based on continuing employment, and which the holder is not entitled to vote or
receive dividends on until vested. Also includes Mr. Hinrichs' options to
purchase 5,750 Shares.
(12) Includes 10,000 shares of deferred stock subject to vesting
requirements based on continuing employment. The holder of such deferred stock
is not entitled to vote such shares or receive dividends until vested. Also
includes Mr. Kerr's options to purchase 5,000 Shares.
(13) Includes 8,600 shares of deferred stock which are subject to vesting
requirements based on continuing employment, and which the holder is not
entitled to vote or receive dividends on until vested. Also includes Mr.
Aschehoug's options to purchase 6,000 Shares.
(14) Includes Mr. Simpson's options to purchase 819 Shares.
(15) Includes Mr. Roach's options to purchase 1,250 Shares.
(16) Includes Mr. Coleman's options to purchase 819 Shares.
(17) Includes 38,100 shares of deferred stock held by all directors and
officers as a group. Also includes options to purchase 219,998 Shares held by
all directors and executive officers as a group. Does not include Shares held
by Dow, which is the employer of directors Knee, Kesseler and Reinhard.
(18) Includes the 38,100 shares of deferred stock and the options to
purchase 219,998 Shares referred to in Note 17 above. The number of
outstanding Shares for this purpose is 24,272,812.
OTHER MATTERS
It is not expected that any other matters other than those
described in this Information Statement will be brought before the Magma
Special Meeting.
LEGAL MATTERS
Certain legal matters with respect to the validity of the
securities offered hereby will be passed upon for CECI by Willkie Farr &
Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022.
EXPERTS
The annual consolidated financial statements of CECI and
subsidiaries included in this Information Statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report (which
report expresses an unqualified opinion and includes an explanatory paragraph
referring to California Energy Company, Inc.'s adoption effective January 1,
1993, of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes") which are included herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
With respect to the unaudited interim financial information for the
period ended September 30, 1994 of CECI and subsidiaries, which is included
herein, Deloitte & Touche LLP have applied limited procedures in accordance
with professional standards for a review of such information. However, as
stated in their report included herein, they did not audit and they do not
express an opinion on that interim financial information. Accordingly, the
degree of reliance on their report on such information should be restricted in
light of the limited nature of the review procedures applied. Deloitte &
Touche LLP are not subject to the liability provisions of Section 11 of the
Securities Act of 1933 for their report on the unaudited interim financial
information because that report is not a "report" or a "part" of a registration
statement prepared or certified by an accountant within the meaning of Section
7 and 11 of the Act.
The consolidated balance sheets of Magma and subsidiaries as of
December 31, 1993 and 1992 and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for each of the
<PAGE>
three years in the period ended December 31, 1993 and the Statement of Net
Assets Acquired as of March 31, 1993 and the Historical Summaries of Gross
Revenues and Direct Operating Expenses for each of the three years in the
period ended December 31, 1992 of the Imperial Valley Geothermal Interests,
included in this Information Statement have been included herein in reliance on
the reports of Coopers & Lybrand, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
STOCKHOLDER PROPOSALS
Any Magma stockholder who had wished to submit a proposal for
presentation to Magma's 1995 Annual Meeting of Stockholders (if the Merger has
not been consummated prior to the date the meeting is to be held) must have
submitted the proposal to Magma Power Company, 4365 Executive Drive, Suite 900,
San Diego, California, 92121, Attention: Secretary, not later than January 11,
1995 for inclusion, if appropriate, in Magma's proxy statement and form of
proxy relating to its 1995 Annual Meeting.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CECI'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO . . . . . . F-2
Financial Statements for Period Ending December 31, 1993. . . .F-2
Independent Auditors' Report . . . . . . . . . . . .F-2
CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . .F-3
CONSOLIDATED STATEMENTS OF OPERATIONS. . . . . . . .F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY. . .F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . .F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . .F-7
Summarized CECI (Parent Only) Financial Statements . . . . . .F-24
Financial Statements for Period Ending September 30, 1994. . .F-28
INDEPENDENT ACCOUNTANTS' REPORT. . . . . . . . . . F-28
CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . F-29
CONSOLIDATED STATEMENTS OF OPERATIONS. . . . . . . F-30
CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . F-32
MAGMA'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO. . . . . .F-38
Financial Statements for Period Ending December 31, 1993. . . F-38
Report of Independent Accountants. . . . . . . . . F-38
CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . F-39
CONSOLIDATED STATEMENTS OF OPERATIONS. . . . . . . F-40
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY. . . . . . . . . . . . . . . . . . . . F-41
CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . F-43
Financial Statements for Period Ending September 30, 1994. . .F-53
CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . F-54
CONSOLIDATED STATEMENTS OF OPERATIONS. . . . . . . F-56
CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . F-57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . F-58
IMPERIAL VALLEY GEOTHERMAL INTERESTS (ACQUIRED BY MAGMA)
FINANCIAL STATEMENTS . .. . . . . . . . . . . . . . . . . . . F-60
Report of Independent Accountants . . . . . . . . . . . . . F-60
STATEMENT OF NET ASSETS ACQUIRED . . . . . . . . . . . . F-61
HISTORICAL SUMMARIES OF GROSS REVENUES AND
DIRECT OPERATING EXPENSES . . .. . . . . . . . . . . . . . . F-62
NOTES TO THE STATEMENT OF NET ASSETS ACQUIRED . . . . . . . . F-63
<PAGE>
CECI'S CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO
FINANCIAL STATEMENTS FOR PERIOD ENDING
DECEMBER 31, 1993
Independent Auditors' Report
Board of Directors and Shareholders
California Energy Company, Inc.
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of California
Energy Company, Inc. and subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of California Energy Company, Inc.
and subsidiaries at December 31, 1993 and 1992 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993 in conformity with generally accepted accounting principles.
As discussed in Note 8, the consolidated financial statements give effect to
the Company's adoption, effective January 1, 1993, of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Omaha, Nebraska
February 24, 1994
<PAGE>
CONSOLIDATED BALANCE SHEETS
(As of December 31, 1993 and December 31, 1992)
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Assets
Cash and investments $127,756 $ 54,671
Joint venture cash and investments (Note 5) 14,943 8,848
Restricted cash (Notes 4 and 5) 48,105 62,514
Accounts receivable 21,658 16,172
Transmission line deposit (Note 13) -- 7,684
Due from Joint Ventures 1,394 --
Geothermal power plant and development costs, net
(Notes 4 and 5) 458,974 389,646
Equipment, net of accumulated depreciation of $4,773
and $3,996 4,540 4,312
Notes receivable Joint Ventures (Note 13) 11,280 9,997
Deferred charges and other assets 27,334 26,706
-------- --------
Total assets $715,984 $580,550
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable $ 607 $ 3,146
Other accrued liabilities 19,866 18,111
Income taxes payable (Note 8) 4,000 --
Project finance loans (Note 5) 246,880 263,604
Due to Joint Ventures -- 469
Senior notes (Note 6) 35,730 35,730
Convertible subordinated debentures (Note 7) 100,000 --
Deferred income taxes 18,310 15,212
-------- --------
Total liabilities 425,393 336,272
-------- --------
Deferred income (Note 4) 20,288 21,164
-------- --------
Commitments and contingencies (Notes 3, 6, 9, 13 and 16)
Redeemable preferred stock (Note 10) 58,800 54,350
Stockholders' equity (Notes 11 and 12):
Preferred stock authorized 2,000 shares,
no par value (Note 10) -- --
Common stock authorized 60,000 shares,
par value $0.0675 per share, issued and outstanding
35,446 and 35,258 shares 2,404 2,380
Additional paid in capital 100,965 97,977
Retained earnings 111,031 68,407
Treasury stock 157 common shares at cost (2,897) --
-------- --------
Total stockholders' equity 211,503 168,764
-------- --------
Total liabilities and stockholders' equity $715,984 $580,550
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(For the three years ended December 31, 1993)
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Revenue:
Sales of electricity and steam $132,059 $117,342 $106,184
Interest and other income 17,194 10,187 9,379
--------- -------- -------
Total revenues 149,253 127,529 115,563
--------- -------- -------
Cost and expenses:
Plant operations 25,362 24,440 23,525
General and administration 13,158 13,033 12,476
Royalties 8,274 7,710 5,505
Depreciation and amortization 17,812 16,754 14,752
Interest 30,205 20,459 29,814
Less interest capitalized (6,816) (5,599) (5,375)
--------- -------- -------
Total expenses 87,995 76,797 80,697
--------- -------- -------
Income before provision for income taxes 61,258 50,732 34,866
Provision for income taxes (Note 8) 18,184 11,922 8,284
--------- -------- -------
Income before change in accounting principle
and extraordinary item 43,074 38,810 26,582
Cumulative effect of change in accounting
principle (Note 8) 4,100 -- --
Extraordinary item (Note 15) -- (4,991) --
--------- -------- -------
Net income 47,174 33,819 26,582
Preferred dividends 4,630 4,275 --
--------- -------- -------
Net income available to common stockholders $ 42,544 $ 29,544 $ 26,582
--------- -------- -------
--------- -------- -------
Income per share before change in
accounting principle and extraordinary item $ 1.00 $ 0.92 $ 0.75
Cumulative effect of change in accounting
principle (Note 8) 0.11 -- --
Extraordinary item (Note 15) -- (0.13) --
--------- -------- -------
Net income per share $ 1.11 $ 0.79 $ 0.75
--------- -------- -------
--------- -------- -------
Average number of shares outstanding 38,485 37,495 35,471
--------- -------- -------
--------- -------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(For the three years ended December 31, 1993)
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Outstanding Additional
Common Common Paid-in Retained Treasury
Shares Stock Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1991 23,218 $1,567 $39,353 $14,168 $ -- 55,088
Exercise of stock options 2,329 157 14,959 -- -- 15,116
Sale and private
placement of
common stock
(Note 12) 6,505 439 43,237 -- -- 43,676
Exercise of warrants 660 45 2,897 -- -- 2,942
Issue costs of sale
of preferred stock -- -- (276) -- -- (276)
Net income -- -- -- 26,582 -- 26,582
------- ------- -------- ------- ------- ---------
Balance December 31, 1991 32,712 2,208 100,170 40,750 -- 143,128
Exercise of stock options 1,544 67 2,764 -- -- 2,831
Exercise of warrants 612 41 1,206 -- -- 1,247
Issue costs on stock -- -- (96) -- -- (96)
Purchases/issuances
of treasury stock for
exercise of options
and warrants, net of
proceeds of $797 (565) -- (4,090) -- -- (4,090)
Preferred stock dividends,
series B & C, including
cash distributions of
$134 -- -- -- (6,162) -- (6,162)
Retirement of warrants -- -- (11,716) -- -- (11,716)
Tax benefit from stock
plan -- -- 3,420 -- -- 3,420
Net income before
preferred dividends -- -- -- 33,819 -- 33,819
Conversion of preferred
stock to common stock 955 64 6,319 -- -- 6,383
------- ------- -------- ------- ------- ---------
Balance December 31, 1992 35,258 2,380 97,977 68,407 -- 168,764
Exercise of stock
options 258 18 937 -- -- 955
Issuance of stock for
purchase of The Ben
Holt Co. 87 6 1,551 -- -- 1,557
Purchase of treasury
stock (157) -- -- -- (2,897) (2,897)
Preferred stock
dividends, Series C,
including cash
distributions of $100 -- -- -- (4,550) -- (4,550)
Tax benefit from stock
plan -- -- 500 -- -- 500
Net income before
preferred dividends -- -- -- 47,174 -- 47,174
------- ------- -------- ------- ------- ---------
Balance December 31, 1993 35,446 $2,404 $100,965 $111,031 $(2,897) $211,503
------- ------- -------- ------- ------- ---------
------- ------- -------- ------- ------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the three years ended December 31, 1993)
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1993 1992 1991
Cash flows from operating activities:
Net income $47,174 $33,819 $26,582
Adjustments to reconcile net cash flow from operating activities:
Depreciation and amortization 17,812 16,754 14,752
Amortization of deferred financing costs 1,013 967 1,054
Expense of previously deferred financing costs -- 3,895 --
Provision for deferred income taxes 3,098 3,645 5,889
Other -- -- (639)
Changes in other items:
Accounts receivable (5,486) 1,279 (3,701)
Accounts payable and other accrued liabilities (784) (7,082) (10,890)
Deferred income (876) (851) (589)
Income tax payable 4,000 (1,202) 713
Other assets (177) 814 (2,157)
-------- -------- -------
Net cash flows from operating activities 65,774 52,038 31,014
-------- -------- -------
Cash flows from investing activities:
Capital expenditures relating to power plants (10,295) (6,711) (112)
Well and resource development expenditures for
existing projects (16,565) (19,203) (20,564)
Acquisition of equipment (1,104) (1,093) (773)
Acquisition of Nevada and Utah properties -- -- (43,062)
Pacific Northwest, Nevada, and Utah exploration costs (19,060) (4,145) (3,866)
Yuma construction in progress (40,167) (1,294) --
Transmission line deposit 7,684 (118) (1,404)
Decrease (increase) in restricted cash 14,409 9,882 (2,217)
Decrease (increase) in other investments 941 (14,503) --
-------- -------- -------
Net cash flows from investing activities (64,157) (37,185) (71,998)
-------- -------- -------
Cash flows from financing activities:
Proceeds from sale of common, treasury and preferred
stocks and exercise of warrants and options 2,912 8,065 111,458
Repayment of project finance loans -- (17,098) (10,100)
Repayment of project loans (16,724) (6,277) --
Retirement of project finance loans -- (204,210) --
Payment of other senior notes -- -- (6,000)
Proceeds from refinancing -- 269,881 2,400
Proceeds from issue of convertible subordinated
debentures 100,000 -- --
Increase in restricted cash related to the refinancing (65,670)
Net change in short-term bank loan -- -- (15,000)
Deferred charges relating to debt financing (2,582) (2,937) (58)
Decrease (increase) in amounts due from Joint Ventures (3,146) 6,198 (6,180)
Purchase of warrants -- (11,716) --
Proceeds from pre-sale of steam -- -- 20,317
Purchase of treasury stock (2,897) (4,887) --
-------- -------- -------
Net cash flows from financing activities 77,563 (28,651) 96,837
-------- -------- -------
Net increase (decrease) in cash and investments 79,180 (13,798) 55,853
-------- -------- -------
Cash and investments at beginning of period 63,519 77,317 21,464
-------- -------- -------
Cash and investments at end of period $142,699 $63,519 $77,317
-------- -------- -------
-------- -------- -------
Interest paid (net of amounts capitalized) $20,136 $19,237 $24,435
-------- -------- -------
-------- -------- -------
Income taxes paid $ 6,819 $ 4,129 $ 1,682
-------- -------- -------
-------- -------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(For the three years ended December 31, 1993)
(Dollars and shares in thousands, except per share amounts)
1. BUSINESS
CECI was formed in 1971. It is primarily engaged in the exploration for and
development of geothermal resources and conversion of such resources into
electrical power and steam for sale to electric utilities, and the development
of other environmentally responsible forms of power generation.
CECI has organized several partnerships and joint ventures (herein referred to
as Coso Joint Ventures) in order to develop geothermal energy at the China Lake
Naval Air Weapons Station, Coso Hot Springs, China Lake, California.
Collectively, the projects undertaken by these Coso Joint Ventures are referred
to as the Coso Project. CECI is the operator and holds interests between 46.4%
and 50% in the Coso Joint Ventures after payout. Payout is achieved when a
Coso Joint Venture has returned the initial capital to the Coso Joint
Venturers. In addition, CECI is exploring geothermal resources in Northern
California, Washington and Oregon (collectively, the Pacific Northwest). In
January 1991, CECI acquired a power plant and an interest in steam fields in
Nevada and Utah (see Note 4 Nevada and Utah Properties). In 1992, CECI entered
into the natural gas-fired electrical generation market through the purchase of
a development opportunity in Yuma, Arizona. Commercial operation of the Yuma
project will commence in 1994. In 1993, CECI started developing a number of
international power project opportunities where private power generating
programs have been initiated, including the Philippines and Indonesia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of CECI, its
wholly-owned subsidiaries, and its proportionate share of the Coso Joint
Ventures in which it has invested. All significant inter-enterprise
transactions and accounts have been eliminated.
A. INVESTMENTS AND RESTRICTED CASH. Investments other than restricted cash
are primarily commercial paper and money market securities. The restricted
cash balance includes such securities and mortgage backed securities, and is
mainly composed of the Coso Joint Ventures' debt service reserve funds. The
debt service reserve funds are legally restricted to their use and require the
maintenance of specific minimum balances. The carrying amount of the
investments approximates the fair value based on quoted market prices as
provided by the financial institution which holds the investments.
B. WELL, RESOURCE DEVELOPMENT AND EXPLORATION COSTS. CECI follows the full
cost method of accounting for costs incurred in connection with the exploration
and development of geothermal resources. All such costs, which include dry
hole costs and the cost of drilling and equipping production wells, as well as
directly attributable administrative and interest costs, are capitalized and
amortized over their estimated useful lives when production commences. The
estimated useful lives of production wells are ten years each; exploration
costs and development costs, other than production wells, are generally
amortized over the weighted average remaining term of CECI's power and steam
purchase contracts. For purposes of current period visibility and disclosure,
all such costs are identified in the Consolidated Statements of Cash Flows as
they are incurred.
C. DEFERRED WELL AND REWORK COSTS. Well rework costs are deferred and
amortized over the estimated period between reworks. These deferred costs of
$1,305 and $1,592 at December 31, 1993 and 1992, respectively, are included in
other assets. Currently, both production and injection well reworks are
amortized over twelve months.
D. FIXED ASSETS AND DEPRECIATION. The cost of major additions and
betterments are capitalized, while replacements, maintenance, and repairs that
do not improve or extend the lives of the respective assets are expensed.
Depreciation of the operating power plants is computed on the straight-line
method over the estimated useful lives resulting in a composite rate of
depreciation of approximately 2.67% per annum. Depreciation of furniture,
fixtures and equipment, which are recorded at cost, is computed on the
straight-line method over the estimated useful lives of the related assets,
which range from three to ten years.
E. CAPITALIZATION OF INTEREST AND DEFERRED FINANCING COSTS. Prior to the
commencement of operations, interest is capitalized on the costs of the plants
and geothermal resource development to the extent incurred. Capitalized
interest and other deferred charges are amortized over the lives of the related
assets.
Deferred financing costs are amortized over the term of the related financing.
Loan fees are amortized using the implicit interest method; other deferred
financing costs are amortized using the straight-line method. Accumulated
amortization at December 31, 1993 and 1992 was approximately $1,954 and $950,
respectively.
F. REVENUE RECOGNITION. Revenues are recorded based upon service rendered
and electricity and steam delivered to the end of the month.
G. MANAGEMENT FEE AND INTEREST REVENUE RECOGNITION. CECI charges the Coso
Joint Ventures management fees, operator fees and interest on outstanding
advances. Recognition of fees and interest relating to power plants and
resource development of the Coso Joint Ventures in which CECI has invested is
deferred until each Coso Joint Venture commences operations. Revenue
<PAGE>
previously deferred is amortized over the lives of the related assets of the
Coso Joint Ventures as each Coso Joint Venture becomes operational.
H. DEFERRED INCOME TAXES. On January 1, 1993, CECI adopted Statement of
Financial Accounting Standard No. 109 (FAS 109), "Accounting for Income Taxes."
The adoption of FAS 109 changes CECI's method of accounting for income taxes
from the deferred method as required by Accounting Principles Board Opinion No.
11 to an asset and liability approach.
I. NET INCOME PER COMMON SHARE. Earnings per common share are based on the
weighted average number of common and dilutive common equivalent shares
outstanding during the period computed using the treasury stock method.
J. CASH FLOWS. The statement of cash flows classifies changes in cash
according to operating, investing, or financing activities. Investing
activities include capital expenditures incurred in connection with the power
plants, wells, resource development and exploration costs. CECI considers all
investment instruments purchased with a maturity of three months or less to be
cash equivalents. Restricted cash is not considered a cash equivalent.
K. RECLASSIFICATION. Certain amounts in the fiscal 1992 and 1991 financial
statements and supporting footnote disclosures have been reclassified to
conform to the fiscal 1993 presentation. Such reclassification did not impact
previously reported net income or retained earnings.
3. INTEREST RATE SWAP AGREEMENTS
In January 1993, the Coso Joint Ventures entered into five year deposit
interest rate swap agreements which effectively convert a notional deposit,
CECI's portion of the balance is $20,300 (restricted cash and investments),
from a variable rate to a fixed rate. CECI's proportion of the deposit amount
accretes annually to a maximum amount of approximately $29,300 in 1996. Under
the agreements, which mature on January 11, 1998, the Coso Joint Ventures make
semiannual payments to the counter party at variable rates based on LIBOR,
reset and compounded every three months, and in return receive payments based
on a fixed rate of 6.34%. The effective LIBOR rate ranged from 3.25% to 3.375%
during 1993 and was 3.375% at December 31, 1993. The counter party to this
agreement is a large multinational financial institution. CECI's proportionate
share of the carrying amount, representing accrued interest receivable, and the
fair value of the swap agreements are $277 and $1,281, respectively. The fair
value is based on quoted market prices provided by the counter party to the
swap.
In September 1993, CECI entered into a three year deposit interest rate swap
agreement, which effectively converts a notional deposit balance of $75,000
from a variable rate to a fixed rate. CECI makes semiannual payments to the
counter party at effectively the LIBOR rate, reset every six months, and in
return receives payments based on a fixed rate of 4.87%. The counter party to
this agreement is the same counter party to the Coso Joint Ventures. The
carrying amount is $286, representing accrued interest receivable. The fair
value of the interest rate swap is currently negative in the amount of $642,
which is based on quoted market prices provided by the counter party to the
swap and assumes CECI closes out the swap agreement prior to the stated
maturity.
4. PROPERTIES AND PLANTS
Properties and plants comprise the following at December 31:
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Project costs
Power plants $246,219 $235,924
Well and resource development 161,137 144,595
-------- ---------
Total operating facilities 407,356 380,519
Less accumulated depreciation and amortization (67,813) (51,054)
-------- ---------
Net operating facilities 339,543 329,465
Wells and resource development in progress 939 916
-------- ---------
Total project costs 340,482 330,381
Pacific Northwest geothermal exploration costs 41,539 25,882
Nevada and Utah properties 35,492 32,089
Yuma construction in progress 41,461 1,294
-------- -------
Total $458,974 $389,646
-------- ---------
-------- ---------
</TABLE>
A. OPERATING FACILITIES. The Coso operating facilities comprise CECI's
proportionate share of the assets of three of its Joint Ventures; Coso Finance
Partners (Navy I Joint Venture), Coso Energy Developers (BLM Joint Venture),
and Coso Power Developers (Navy II Joint Venture). With respect to the Coso
Project, distributions from its project accounts are made semiannually to each
Coso Joint Venture partner for profit sharing under a prescribed calculation
subject to mutual agreement by the partners and compliance with the Coso Joint
Ventures' financing documents. As of December 31, 1993, payout had only been
reached on Units 2 and 3 of the Navy I power plant.
I. NAVY I PLANT. The Navy I plant consists of three turbines, of which one
unit commenced delivery of firm power in August 1987, and the second and third
units in December 1988. The 80 NMW power plant is located on land owned by and
leased from the U.S. Navy through December 2009, with a 10-year extension at
<PAGE>
the option of the Navy. Under terms of the Navy I Joint Venture, profits and
losses were allocated approximately 49% before payout of units 2 and 3 and
approximately 46.4% thereafter to CECI.
II. BLM PLANT. The BLM plant consists of two turbines at one site (BLM
East), which commenced delivery of firm power in March and May, 1989,
respectively, and one turbine at another site (BLM West) which commenced
delivery of firm power in August, 1989. The BLM plant is situated on lands
leased from the U.S. Bureau of Land Management under a geothermal lease
agreement that extends until October 31, 2035. The lease may be extended to
2075 at the option of the BLM. Under the terms of the BLM Joint Venture
agreement, CECI's share of profits and losses before and after payout is
approximately 45% and 48%, respectively. During 1990, CECI upgraded the
cooling tower and turbines to increase the plant's capacity to 80 NMW from the
initial level of 70 NMW.
III. NAVY II PLANT. The Navy II plant consists of three turbines, of which
two units commenced delivery of firm power in January 1990, and the third in
February 1990, respectively. The 80 NMW power plant is on the southern portion
of the Navy lands. Under terms of the Joint Venture, all profits, losses and
capital contributions for Navy II are divided equally by the two partners.
B. SIGNIFICANT CUSTOMER. All of CECI's sales of electricity from the Coso
Project, which comprise approximately 94% of 1993 electricity and steam
revenues, are to Southern California Edison (SCE) and are under long-term power
purchase contracts. Under the terms of these contracts, SEC pays firm prices
for the energy portion of the contract. The energy payment escalates pursuant
to the contracts at an average rate of approximately 7.0% per year for the
delivery of electricity for ten years, commencing with the initial delivery of
electricity at firm power; thereafter, the energy payment adjusts to the actual
avoided energy cost experienced by SCE at that time. The capacity payment,
which initially represented approximately 25% of CECI's revenue, remains fixed
during the entire period of the contract. In addition, CECI is eligible for
bonus payments based on the amount by which the actual output exceeds the
contract capacity of each power plant. Bonus payments aggregated $3,050,
$3,257 and $2,635 in the years ended December 31, 1993, 1992 and 1991.
CECI has three contracts for terms of 24, 30 and 20 years, expiring in 2011,
2019 and 2010, respectively. Delivery of electricity by the Navy I Joint
Venture, the BLM Joint Venture and the Navy II Joint Venture commenced under
those contracts in 1987, 1989 and 1990, respectively.
See Note 13 for a description of litigation involving SCE.
C. ROYALTIES. Royalties comprise the following for the years ended:
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Navy I, Unit 1 $1,556 $2,014 $1,787
Navy I, Units 2 and 3 2,924 2,628 1,160
BLM 1,868 1,268 1,033
Navy II 1,717 1,509 1,486
Other 209 291 39
------ ------- ------
Total $8,274 $7,710 $5,505
------ ------- ------
------ ------- ------
</TABLE>
The amount of royalties paid by CECI to the U.S. Navy to develop geothermal
energy for Navy I, Unit 1 on the lands owned by the Navy comprises (i) a fee
payable during the term of the contract based on the difference between the
amounts paid by the Navy to SCE for specified quantities of electricity and the
price as determined under the contract (which currently approximates 65% of
that paid by the Navy to SCE), and (ii) $11,600 payable in December 2009. The
$11,600 payment is secured by funds placed on deposit monthly, which funds,
plus accrued interest, will aggregate $11,600. The monthly deposit is
currently $23. As of December 31, 1993, the balance of funds deposited
approximated $1,283, which amount is included in restricted cash and accrued
liabilities.
Units 2 and 3 of Navy I and the Navy II power plants are on Navy lands, on
which the Navy receives a royalty based on electric sales revenue at the
initial rate of 4% escalating to 22% by the end of the contract in December
2019. The BLM is paid a royalty of 10% of the value of steam produced by the
geothermal resource supplying the BLM plant.
D. Pacific Northwest Geothermal Exploration Costs. In the Pacific Northwest,
CECI has acquired leasehold rights and has performed certain geological
evaluations to determine the resource potential of the underlying properties.
Recovery of those costs is ultimately dependent upon CECI's ability to prove
geothermal reserves and sell geothermal steam, or to obtain financing, build
power plants, gain access to high voltage transmission lines, and sell the
resultant electricity at favorable prices, or sell its leaseholds. In the
opinion of management, CECI will be able to realize its exploration costs
through the generation of electricity for sale.
E. Nevada and Utah Properties. On May 3, 1990, CECI entered into a
definitive purchase agreement with a subsidiary of Chevron Corporation
(Chevron) for the acquisition of certain geothermal operations, including
interests in approximately 83,750 acres of geothermal properties in Nevada and
Utah, for an aggregate purchase price of approximately $51,100. These property
interests consist largely of leasehold interests, including properties leased
from the BLM and from private landowners.
<PAGE>
The property acquired from Chevron includes a 9 MW power plant at Desert Peak,
Nevada ("Desert Peak"), and a 70% interest in a steam field at Roosevelt Hot
Springs, Utah (Roosevelt Hot Springs"). The facility at Desert Peak is
currently selling electricity to Sierra Pacific Power Company under a contract
that runs through 1995 and then may be extended on a year-to-year basis as
agreed by the parties. The price for electricity under this contract is 6.5
cents per kWH, comprising an energy payment of 2.0 cents per kWH (which is
adjustable pursuant to an inflation based index) and a capacity payment of 4.5
cents per kWH. The Roosevelt Hot Springs site has a contract to sell steam to
a 25 MW power plant owned by Utah Power and Light Company (UP&L) and to dispose
of the brine that is a by-product of the electricity production process.
As part of the Nevada and Utah properties acquisition, CECI acquired leasehold
interests in an aggregate of approximately 20,000 acres at the Roosevelt Hot
Springs site in Utah and approximately 63,750 acres at four sites in Nevada.
The Roosevelt Hot Springs and Desert Peak properties have been the subject of
exploration and testing by Chevron and its predecessors. Based on these tests
and reports of independent engineering companies, CECI believes that there are
significant geothermal resources available for commercial development at these
sites. Other tests conducted by Chevron and its predecessors indicate that
commercially viable amounts of geothermal resources may underlie the other
Chevron properties.
CECI financed the acquisition of Roosevelt Hot Springs through an equity
offering, a $20,317 pre-sale of steam from the Roosevelt Hot Springs field to
the utility-owned power plant located at the site, and seller financing. The
acquisition of Roosevelt Hot Springs and certain of the Nevada properties
closed on January 22, 1991 for an aggregate amount of approximately $35,000.
The remainder of the transaction closed on March 28, 1991 and was financed with
seller financing and the proceeds of the sale of common stock to Kiewit Energy
Company (Kiewit Energy); see Note 12.
5. PROJECT LOANS
Project loans, which are non-recourse to CECI, comprise the following at
December 31:
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Project loans with fixed interest rates
(weighted average interest rates of
8.04% and 7.88% at December 31, 1993
and 1992, respectively) with scheduled
repayments through December 2001 $246,880 $263,604
-------- --------
-------- --------
</TABLE>
The project loans are from Coso Funding Corp. ("Funding Corp."). Funding
Corp. is a single-purpose corporation formed to issue notes for its own account
and as an agent acting on behalf of Navy I, BLM, and Navy II Joint Ventures,
collectively the "Coso Joint Ventures." Pursuant to separate credit agreements
executed between Funding Corp. and each Coso Joint Venture on December 16,
1992, the proceeds from Funding Corp.'s note offering were loaned to the Coso
Joint Ventures. The proceeds of $560,245 were used by the Coso Joint Ventures
to (i) purchase and retire project finance debt comprised of the term loans and
construction loans in the amount of $424,500, (ii) fund contingency funds in
the amount of $68,400, (iii) fund debt service reserve funds in the amount of
$40,000, and (iv) finance $27,345 of capital expenditures and transaction
costs. The contingency fund and debt service reserve fund were required by the
project loan agreements.
The contingency fund represented the approximate maximum amount, if any, which
could theoretically have been payable by the Coso Joint Ventures to third
parties to discharge all liens of record and other contract claims encumbering
the Coso Joint Ventures' plant at the time of the project loans (See Note 13).
The contingency fund was established in order to obtain investment-grade
ratings to facilitate the offer and sale of the notes by Funding Corp., and
such establishment did not reflect the Coso Joint Ventures' view as to the
merits or likely disposition of such litigation or other contingencies. On
June 9, 1993, MPE and the Mission Power Group, subsidiaries of SCE Corp., and
the Coso Joint Ventures reached a final settlement of all of their outstanding
disputes and claims relating to the construction of the Coso Project. As a
result of the various payments and releases involved in such settlement, the
Coso Joint Ventures agreed to make a net payment of $20,000 to MPE from the
cash reserves of the Coso Project contingency fund and MPE agreed to release
its mechanics' liens on the Coso Project. After making the $20,000 payment,
the remaining balance of the Coso Project contingency fund (approximately
$49,300) was used to increase the Coso Project debt reserve fund from
approximately $43,000 to its maximum fully-funded requirement of $67,900. The
remaining $24,400 balance of contingency fund was retained within the Coso
Project for future capital expenditures and for Coso Project debt service
payments. Since the Coso Project debt service reserve is fully funded in
advance, Coso Project cash flows otherwise intended to fund the Coso Project
debt service reserve fund, subject to satisfaction of certain covenants and
conditions contained in the Coso Joint Ventures' refinancing documents, may be
available for distribution to CECI in its proportionate share.
The loans are collateralized by, among other things, the power plants,
geothermal resource, debt service reserve funds, contingency funds, pledge of
contracts, and an assignment of all such Coso Joint Ventures' revenues which
will be applied against the payment of obligations of each Coso Joint Venture,
including the project loans. Each Coso Joint Venture's assets will secure only
its own project loan, and will not be cross-collateralized with assets pledged
<PAGE>
under other Coso Joint Venture's credit agreements. The project loans are non-
recourse to any partner in the Coso Joint Ventures and Funding Corp. shall
solely look to such Coso Joint Venture's pledged assets for satisfaction of
such project loans. However, the loans are cross-collateralized by the
available cash flow of each Coso Joint Venture. Each Coso Joint Venture after
satisfying a series of its own obligations has agreed to advance support loans
(to the extent of available cash flow and, under certain conditions, its debt
service reserve funds) in the event revenues from the supporting Coso Joint
Ventures are insufficient to meet scheduled principal and interest on their
separate project loans.
The annual repayments of the project loans for the years beginning January 1,
1994 and thereafter are as follows:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
1994 $ 27,599
1995 32,109
1996 38,826
1997 41,729
1998 38,912
Thereafter 67,705
---------
Total $246,880
---------
---------
</TABLE>
Based on quoted market rates of the Funding Corp. notes, the fair value of the
project loan was approximately $260,276 at December 31, 1993.
In connection with the aforementioned refinancing, CECI entered into an
agreement with Community Energy Alternatives Incorporated ("CEA") for CECI to
purchase at the close of the Coso Project refinancing CEA's interest in the
Coso Project. Until the close of the Coso Project refinancing, CEA had been a
partner in a partnership structure organized by CECI's Joint Venture Partner in
the BLM project. CECI purchased the CEA interest under certain terms and
conditions which are designed to provide CECI with a 17% per annum return on
the CEA interest purchase price of $9,800. CECI's 17% per annum return is
secured in part by a pledge and assignment to CECI of certain cash flows to be
received by CECI's Coso Project Joint Venture Partner (and certain affiliates)
from Coso Project distributions. CECI has granted its Coso Project Joint
Venture Partner the right to purchase the CEA interest for a price which will
provide CECI a 17% per annum return for the duration CECI owns the CEA
interest.
6. SENIOR NOTES
The Senior Notes are due in March 1995, and bear interest at the rate of 12%
per annum, plus 10% of CECI's share of the cash flow from the Coso Project,
commencing July 1, 1989 and terminating December 31, 1994. The Senior Notes
prohibit the payment of cash dividends unless CECI has a net worth of at least
$50,000 after payment of such dividends, and dividends do not exceed 50% of
accumulated net income subsequent to December 31, 1987. The Senior Notes also
place restrictions on capital expenditures not related to the Coso Project.
The fair value of the Senior Notes approximates the carrying value.
7. CONVERTIBLE SUBORDINATED DEBENTURES
In June of 1993, CECI issued $100,000 principal amount of 5% convertible
subordinated debentures (debentures) due July 31, 2000. The debentures are
convertible into shares of CECI'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 semiannually in
arrears on July 31 and January 31 of each year, commencing on July 31, 1993.
The debentures are redeemable for cash at any time on or after July 31, 1996 at
the option of CECI. 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% in 1996, 1997, 1998 and 1999,
respectively. The debentures are unsecured general obligations of CECI and
subordinated to all existing and future senior indebtedness of CECI. The fair
value of the debentures as of December 31, 1993 was approximately $103,250,
which is based on quoted market rates.
8. INCOME TAXES
On January 1, 1993, CECI adopted Statement of Financial Accounting Standard
No. 109 (FAS 109), "Accounting for Income Taxes." The adoption of FAS 109
changes CECI's method of accounting for income taxes from the deferred method
as required by Accounting Principles Board Opinion 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 is reflected in 1993
income as the cumulative effect of a change in accounting principle. It
primarily represents the recognition of CECI's tax credit carryforwards as a
deferred tax asset. There was no cash impact to CECI upon the required
adoption of FAS 109. Under FAS 109, the effective tax rate increased to
approximately 30% from 23.5% in 1992. This increase was due to CECI's tax
credit carryforward being recognized as an asset and unavailable to reduce the
current period's effective tax rate for computing CECI's provision for income
taxes.
<PAGE>
Provision for income tax was comprised of the following at December 31:
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Currently payable:
State $ 3,300 $ 2,300 $2,134
Federal 7,686 4,444 261
10,986 6,744 2,395
Deferred:
State 385 1,607 929
Federal 6,813 2,038 4,960
7,198 3,645 5,889
------ ------ ------
Total after benefit of extraordinary item 18,184 10,389 8,284
Tax benefit attributable to
extraordinary item -- 1,533 --
------ ------ ------
Total before benefit of extraordinary item $18,184 $11,922 $8,284
------ ------ ------
------ ------ ------
</TABLE>
The deferred expense is primarily temporary differences associated with
depreciation and amortization of certain assets.
A reconciliation of the federal statutory tax rate to the effective tax rate
applicable to income before provision for income taxes follows:
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Federal statutory rate 35.00% 34.00% 34.00%
Percentage depletion in excess of cost
depletion (6.70) (6.81) (6.89)
Investment and energy tax credits (4.62) (10.52) (10.93)
State taxes, net of federal tax effect 3.90 5.83 6.32
Cumulative effect of change in
federal tax rate 1.90 -- --
Other .20 1.00 1.26
------- ------- -------
29.68% 23.50% 23.76%
------- ------- -------
------- ------- -------
</TABLE>
Deferred tax liabilities (assets) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1993
<S> <C>
Depreciation and amortization, net $111,117
Other 1,733
---------
112,850
Deferred income (2,415)
Loss carryforwards (39,529)
Energy and investment tax credits (40,106)
Alternative minimum tax credits (12,018)
Other (472)
---------
(94,540)
---------
Net deferred taxes $ 18,310
---------
---------
</TABLE>
In 1992, the significant components of the deferred tax liability were timing
differences in the computation of depreciation and amortization of the power
plants and exploration and development costs for financial reporting purposes
versus income tax purposes.
As of December 31, 1993, CECI has an unused net operating loss (NOL) carryover
of approximately $113,000 for regular federal tax return purposes which expires
primarily between 2001 and 2007. In addition, CECI has unused investment and
geothermal energy tax credit carryforwards of approximately $40,106 expiring
between 2002 and 2008. CECI also has approximately $12,018 of alternative
minimum tax credit carryforwards which have no expiration date.
9. COMMITMENTS
CECI's former office space lease, which requires annual rental of $660 through
April 1994, has been partially sublet at annual rentals of $261 and remaining
future rental costs were previously provided for in a restructuring charge.
CECI also leases an aircraft under a lease that expires on August 1, 1995, at
an annual rental of approximately $464. The aircraft has been subleased at an
annual rental of approximately $300. Rental expense for the aircraft,
vehicles, geothermal leases, and other equipment leases for the years ended
December 31, 1993, 1992 and 1991 was approximately $1,143, $1,018 and $986
respectively.
Total projected lease commitments (net of sublease contracts) at December 31,
1993, are as follows:
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31 Amount
<S> <C>
1994 $318
1995 186
1996 8
-----
Total $512
-----
</TABLE>
10. PREFERRED STOCK
A. SERIES A. On December 1, 1988, CECI distributed a dividend of one
preferred share purchase right (right) for each outstanding share of common
stock. The rights are not exercisable until ten days after a person or group
acquires or has the right to acquire, beneficial ownership of 20% or more of
CECI's common stock or announces a tender or exchange offer for 30% or more of
the CECI's common stock. Each right entitles the holder to purchase one one-
hundredth of a share of Series A junior preferred stock for $52. The rights
may be redeemed by the Board of Directors up to ten days after an event
triggering the distribution of certificates for the rights. The rights plan
was amended in February 1991 so that the agreement with Kiewit Energy (see Note
12) would not trigger the exercise of the rights. The rights will expire,
unless previously redeemed or exercised, on November 30, 1998. The rights are
automatically attached to, and trade with, each share of common stock.
B. SERIES B. On November 15, 1990, CECI sold 357.5 shares of convertible
preferred stock, Series B at $14 per share. Each share of the convertible
preferred stock was convertible into two shares of common stock, and had a
dividend rate of 15% through November 15, 1992, 10% from November 16, 1992 to
November 15, 1994 and 5% from November 16, 1994 to November 15, 1996. The
dividends were payable semiannually in convertible preferred stock, Series B.
On November 15, 1992, CECI called the preferred stock for conversion into
common stock. Each Series B preferred stock was converted into two shares of
common stock; accordingly, CECI issued 954.9 shares of common stock.
C. SERIES C. On November 19, 1991, CECI sold one thousand shares of
convertible preferred stock, Series C at $50,000 per share to Kiewit Energy, in
a private placement. Each share of the Series C preferred stock is convertible
at any time at $18.375 per common share into 2,721 shares of common stock
subject to customary adjustments. The Series C preferred stock has a dividend
rate of 8.125%, commencing March 15, 1992 through conversion date on December
15, 2003. The dividends, which are cumulative, are payable quarterly in
convertible preferred stock, Series C, through March 15, 1995 and in cash on
subsequent dividend dates.
CECI is obligated to redeem 20% of the outstanding preferred stock, Series C
each December 15, commencing 1999 through 2003 at a price per share equal to
$50,000, plus accrued and unpaid dividends.
At any time after December 15, 1994, upon 20 days written notice, CECI may
redeem all, or any portion consisting of at least $5,000, of the preferred
stock, Series C. then outstanding, provided that the CECI's common stock has
traded at or above 150% of the then effective conversion price, for any 20
trading days out of 30 consecutive trading days ending not more than five
trading days prior to notice of redemption.
CECI may also exchange the preferred stock, Series C, in whole or part on any
dividend date commencing December 15, 1994, for 9.5% Convertible Subordinated
Debentures of CECI due 2003.
Each share of preferred stock, Series C shall be entitled to the number of
votes equal to $50,000 per share divided by the then effective conversion
price. If cash dividends are in arrears six consecutive quarters, Kiewit
Energy shall have the exclusive right, voting separately as a class, to elect
two directors of CECI.
No cash dividends shall be paid or declared on CECI's common stock unless all
accumulated dividends on the Series C preferred stock have been paid.
CECI has issued various stock options and warrants. As of December 31, 1993,
a total of 8,953 shares are reserved for stock options, of which 8,514 shares
have been granted and remain outstanding at prices of $3.00 to $19.00 per
share.
11. STOCK OPTIONS AND WARRANTS
CECI has stock option plans under which shares were reserved for grant as
incentive or non-qualified stock options, as determined by the Board of
Directors. As of December 31, 1993, the total options granted for the non-1986
plan and the 1986 plan are 5,778 and 6,354, respectively. The plans allow
options to be granted at 85% of their fair market value at the date of grant.
Generally, options are issued at 100% of fair market value at the date of
grant. Options granted under the 1986 Plan become exercisable over a period of
three to five years and expire if not exercised within ten years from the date
of grant or, in some instances a lesser term. Prior to the 1986 Plan, CECI
granted 256 options at fair market value at date of grant which had terms of
ten years and were exercisable at date of grant. In addition, CECI had issued
approximately 138 options to consultants on terms similar to those issued under
<PAGE>
the 1986 Plan. The non-1986 Plan options are primarily options granted to
Kiewit Energy; see Note 12.
A. Transactions in Stock Options.
<TABLE>
<CAPTION>
Options Outstanding
Shares Available ---------------------------------------------------
for Grant Under Option Price
1986 Option Plan Shares Per Share Total
---------------- ------- ------------- -------
<S> <C> <C> <C> <C>
Balance, December 31, 1991 72 3,361 $3.00 - $13.096 $12,658
Options granted (368) 8,268* $8.063 - $14.875 89,193
Options terminated 304 (331) $3.00 - $9.708 (3,065)
Options exercised -- (2,328)* $3.00 - $9.00 (15,116)
Additional shares reserved under
1986 Option Plan 1,230 -- -- --
------ ------- -------------- ----------
Balance, December 31, 1991 1,238 8,970* $3.00 - $14.875 83,670
Options granted (551) 751 $11.90 - $15.938 11,262
Options terminated 129 (780) $3.00 - $11.625 (7,839)
Options exercised -- (1,544) $3.00 - $11.625 (7,072)
------ ------- -------------- ----------
Balance, December 31, 1992 816 7,397 * $3.00 - $15.938 80,021
Options granted (1,396) 1,396 $17.75 - $19.00 26,209
Options terminated 19 (20) $3.00 - $14.875 (114)
Options exercised (259) $3.00 - $14.875 (1,185)
Additional shares reserved under
1986 Option Plan 1,000 -- -- --
------ ------- -------------- ----------
Balance, December 31, 1993 439 8,514 * $3.00 - $19.00 $104,931
------ ------- -------------- ----------
------ ------- -------------- ----------
Options which became exercisable during:
Year ended December 31, 1993 592 $3.00 - $19.00 $10,180
Year ended December 31, 1992 333 $3.00 - $15.938 $3,693
Year ended December 31, 1991 7,767 * $3.00 - $14.88 $79,890
Options exercisable at:
December 31, 1993 7,026 * $3.00 - $19.00 $78,644
December 31, 1992 6,708 * $3.00 - $15.9375 $69,739
December 31, 1991 8,070 * $3.00 - $14.88 $73,481
</TABLE>
* Includes Kiewit Energy options. See Note 12.
B. WARRANTS. CECI has granted warrants in connection with various financing
activities to purchase shares of common stock as follows:
<TABLE>
<CAPTION>
Warrants Outstanding
Warrant Price
Shares Per Share Total
<S> <C> <C> <C>
Balance, January 1, 1991 2,549 $2.04-$6.67 $6,804
Warrants exercised (660) $2.04-$6.67 (2,951)
------ ----------- --------
Balance, December 31, 1991 1,889 $2.04 3,853
Warrants exercised (612) $2.04 (1,247)
Warrants repurchased (1,277) $2.04 (2,606)
------ ----------- --------
Balance, December 31, 1992 -- $ -- $ --
------ ----------- --------
------ ----------- --------
</TABLE>
On October 13, 1992, CECI repurchased, and cancelled, certain warrants
exercisable for 1,025 shares of unregistered common stock at $2.04 per share,
for a purchase price of $9.16 per share or $9,389 in aggregate. Separately,
Kiewit Energy simultaneously purchased and exercised other warrants to purchase
600 shares of unregistered common stock at $2.04 per share, providing CECI with
proceeds of $1,224.
On October 27, 1992, CECI repurchased, and cancelled, certain warrants
exercisable for 250 shares of unregistered common stock at $2.04 per share, for
a purchase price of $9.316 per share or $2,329 in aggregate.
12. Common Stock Sales and Related Options
In January 1991, CECI sold 2,505 shares of unregistered common stock at $6.75
per share for an aggregate total of $16,909. The funds were used to repay a
portion of the seller financing related to CECI's acquisition of Chevron's
interest in Roosevelt Hot Springs, Utah.
CECI and Kiewit Energy signed a Stock Purchase Agreement and related
agreements, dated as of February 18, 1991. Kiewit Energy is a subsidiary of
<PAGE>
Peter Kiewit Sons', Inc. of Omaha, Nebraska, a large construction and mining
company with diversified operations. Under the terms of the agreements, Kiewit
Energy purchased 4,000 shares of common stock at $7.25 per share and received
options to buy 3,000 shares at a price of $9 per share exercisable over three
years and an additional 3,000 shares at a price of $12 per share exercisable
over five years (subject to customary adjustments).
In connection with this initial stock purchase, CECI and Kiewit Energy also
entered into certain other agreements pursuant to which (i) Kiewit Energy and
its affiliates agreed not to acquire more than 34% of the outstanding common
stock (the Standstill Percentage) for a five-year period, (ii) Kiewit Energy
became entitled to nominate at least three of CECI's directors, and (iii) CECI
and Kiewit Energy agreed to use their best efforts to negotiate and execute a
joint venture agreement relating to the development of certain geothermal
properties in Nevada and Utah.
On June 19, 1991, the board approved a number of amendments to the stock
purchase agreement and the related agreements. Pursuant to those amendments,
CECI reacquired from Kiewit Energy the rights to develop the Nevada and Utah
properties, and Kiewit Energy agreed to exercise options to acquire 1,500
shares of common stock at $9.00 per share, providing CECI with $13,500 in cash.
CECI also extended the term of the $9.00 and $12.00 options to seven years;
modified certain of the other terms of these options; granted to Kiewit Energy
an option to acquire an additional 1,000 shares of the outstanding common stock
at $11.625 per share (closing price for the shares on the American Stock
Exchange on June 18, 1991) for a ten year term; and increased the Standstill
Percentage from 34% to 49%.
On November 19, 1991, the Board approved the issuance by CECI to Kiewit Energy
of one thousand shares of Series C Preferred Stock for $50,000 per share, as
described in Note 10 above. In connection with the sale of the Series C
Preferred Stock to Kiewit Energy, the Standstill Agreement was amended so that
the 49% Standstill Percentage restriction would apply to voting stock rather
than just common stock.
13. Litigation
A. Settlement of Contractor Claims. In June 1990, Mission Power Engineering
Company (MPE), a subsidiary of SCECorp. and the general contractor for eight of
the nine facilities at the Coso Project recorded mechanics' liens (the Liens)
against two of the Coso Projects and filed suit to pursue claims for amounts
allegedly due from the Coso Joint Ventures in connection with the turnkey
contracts for the design and construction on eight of the units. In July 1990,
MPE, the Joint Venture Partners and CECI agreed to enter settlement discussions
during which period the suit was suspended. In January 1991, MPE terminated
settlement discussions and refiled its suit in the amount of approximately
$70,900 in contract claims. The Coso Joint Ventures counterclaimed on January
10, 1991, for performance and equipment related and other damages arising under
the turnkey contracts.
On June 9, 1993, MPE and the Mission Power Group, subsidiaries of SCECorp, and
the Coso Joint Ventures and CECI announced that the companies had reached a
final settlement of all of their outstanding disputes relating to the
construction of and the filing of mechanics' liens against the Coso Project.
Under the settlement agreement, MPE agreed to dismiss with prejudice its
$70,900 breach of contract suit against the Coso Joint Ventures and the Coso
Joint Ventures agreed to dismiss with prejudice their counterclaims against MPE
and related parties. As a result of the various payments and releases involved
in such settlement, the Coso Joint Ventures agreed to make a net payment of
$20,000 to MPE from the cash reserves of the Coso Project Contingency Fund and
MPE agreed to release its mechanics' liens on the Coso Project.
B. Settlement of Transmission Line Disputes. In September 1990, the
California Public Utilities Commission (CPUC) issued a decision which would fix
at approximately $10,500 the Coso Joint Ventures' maximum exposure for the cost
of the construction of a new 220 kV electric transmission line (Line) on the
SCE transmission system. The Coso Joint Ventures appealed the decision of the
CPUC to the Federal district court and intended to petition the CPUC to
reconsider its decision on the grounds that such line is not necessary. In a
related proceeding involving the cost allocation for existing and ancillary
interconnection facilities, the CPUC ruled that the Coso Joint Ventures' share
would be approximately $7,000. The Coso Joint Ventures appeal of such decision
to the California Supreme Court was denied in February 1993. In addition, SCE
alleged certain line losses that SCE deemed applicable to the existing 115 kV
line utilized by two of the Coso Joint Ventures and deducted amounts from
revenues payable under the power purchase contracts. The Coso Joint Ventures
dispute SCE's allegations, methodology and alleged ability to deduct amounts
under the interconnection contracts and filed a complaint alleging breach of
contract in the California State Court.
On May 3, 1993, SCE and the Coso Joint Ventures agreed to settle the
transmission line loss contract dispute and certain related interconnection
disputes involving the Coso Project under a separate agreement whereby, among
other things, the parties made certain cash payments to each other and agreed
to certain interconnection cost and historical line loss allocations and to the
release to the Coso Joint Ventures of certain funds previously deducted from
project revenues and held in escrow. The parties also agreed to jointly pursue
appropriate rate treatment by the CPUC of certain SCE financed interconnection
costs, including the one remaining cost allocation issue between them in the
amount of $5,900. As a result of the various payments, allocations and
releases involved in such partial settlement, SCE released $15,500 of Coso
Project funds (CECI's share was approximately $7,800) held in escrow in respect
of interconnection costs (transmission line deposit) and the Partners of Coso
Joint Ventures posted an irrevocable letter of credit to support their
contingent obligation of $5,900 on the cost allocation matter to be jointly
<PAGE>
pursued with SCE at the CPUC.
C. Settlement of Antitrust Lawsuit. On January 31, 1991, CECI filed an
antitrust lawsuit in San Francisco Federal Court against SCECorp., its
subsidiaries (MPE, Mission Power Group and SCE), Kidder-Peabody & Co., and
others alleging violations of the federal antitrust laws, unfair competition
and tortious interference. This lawsuit was settled in conjunction with the
transmission line disputes.
D. Settlement with Joint Venture Partner. CECI has served as managing
partner, project manager and field operator for the Coso Project since its
inception. It has been plant operator for the facilities since August 1988.
In April 1990, CECI's principal Coso Joint Venture partner (the J.V. Partner)
served CECI and certain of CECI's subsidiaries with a demand for arbitration
arising out of disagreements concerning primarily the operating budgets and the
allocation to the Joint Ventures of certain expenses incurred by CECI.
On March 19, 1991, CECI and its J.V. Partner executed a settlement agreement
which resolved all their outstanding disputes. The terms of the settlement
provide that if the Coso Project performs at capacity level in the future so
that certain formula-based contingencies related to the productivity of the
power plants are satisfied in any of the following eight years, then, out of
the excess cash flow generated from such performance levels, up to $1.4 million
may be paid in each such year to the J.V. Partner by CECI. During 1992, CECI
purchased the J.V. Partner's contingent payment for $5,000, which will be
amortized over the remaining seven years of the agreement.
In return for the original settlement, the J.V. Partner agreed to the
conversion of all prior advances made by CECI on behalf of the partnership into
a Coso Joint Venture note payable to CECI due on or before March 19, 1999. The
note bore interest at an adjustable rate tied to LIBOR and was subordinated to
the prior payment in full of all the senior bank debt on the project as well as
to the foregoing contingent payments to the J.V. Partner. On December 16, 1992
the Coso Joint Ventures paid $5,133 of their note payable plus accrued interest
to CECI. A new promissory note was then signed on December 16, 1992 for the
remaining principal balance. This note bears a fixed interest rate of 12.5%
and is payable on or before March 19, 2002. This note continues to be
subordinated to the senior project loan on the project. The fair value of this
note approximates the carrying value.
14. Related Party Transactions
CECI charged and recognized a management fee and interest on advances to its
Coso Joint Ventures, which aggregated approximately $5,354, $4,246 and $5,664
in the years ended December 31, 1993, 1992 and 1991.
15. Extraordinary Item
The refinancing of the Coso Joint Ventures' project financing debt in 1992
resulted in an extraordinary item in the amount of $4,991, after the tax effect
of $1,533. The extraordinary item represents the unamortized portion of the
deferred financing costs and related repayment costs associated with the
original Coso Joint Ventures' project financing debt.
16. Subsequent Event
CECI is currently in the process of arranging a proposed offering of $400,000
Senior Discount Notes (the "Notes"). The interest rate will be between
approximately 9% and 10%, with cash interest payment commencing in 1997. The
Notes will be senior unsecured obligations of CECI. CECI intends to use the
proceeds from the offering to: (i) fund equity commitments in, and the
construction costs of, geothermal power projects presently planned in the
Philippines and Indonesia, (ii) to fund equity investments in, and loans to,
other potential international and domestic private power projects and related
facilities, (iii) for corporate or project acquisitions permitted under the
indenture, and (iv) for general corporate purposes.
17. Quarterly Financial Data (Unaudited)
Following is a summary of CECI's quarterly results of operations for the years
ended December 31, 1993 and 1992:
<TABLE>
<CAPTION>
Three Months Ended*
March 31, June 30, Sept 30, Dec. 31,
1993 1993 1993 1993
<S> <C> <C> <C>
Revenue:
Sales of electricity and steam $27,617 $31,996 $41,433 $31,013
Other income 3,544 3,926 4,824 4,900
------- -------- ------- --------
Total revenue 31,161 35,922 46,257 35,913
Total costs and expenses 20,314 21,833 22,087 23,761
Income before provision for income taxes
and change in accounting principle 10,847 14,089 24,170 12,152
Provision for income taxes 3,363 3,439 7,493 3,889
------- -------- ------- --------
Net income before change in
accounting principle 7,484 10,650 16,677 8,263
Cumulative effect of change in
accounting principle 4,100
------- -------- ------- --------
Net income 11,584 10,650 16,677 8,263
Preferred dividends 1,107 1,143 1,179 1,201
<PAGE>
------- -------- ------- --------
Net income attributable to
common shares $10,477 $ 9,507 $15,498 $ 7,062
------- -------- ------- --------
------- -------- ------- --------
Net income per share before
change in accounting principle $ .16 $ .25 $ .41 $ .18
Cumulative effect of change in
accounting principle .11
------- -------- ------- --------
Net income per share $ .27 $ .25 $ .41 $ .18
------- -------- ------- --------
------- -------- ------- --------
<CAPTION>
Three Months Ended*
March 31, June 30, Sept. 30, Dec. 31,
1992 1992 1992 1992
<S> <C> <C> <C>
Revenue:
Sales of electricity and steam $24,147 $28,173 $37,977 $27,045
Other income 1,995 2,609 3,160 2,423
------- -------- ------- --------
Total revenue 26,142 30,782 41,137 29,468
Total costs and expenses 18,541 18,779 20,583 18,894
Income before provision for income taxes
and extraordinary item 7,601 12,003 20,554 10,574
Provision for income taxes 1,806 2,852 4,884 2,380
------- -------- ------- --------
Net income before extraordinary
item 5,795 9,151 15,670 8,194
Extraordinary item (4,991)
------- -------- ------- --------
Net income 5,795 9,151 15,670 3,203
Preferred dividends 1,020 1,056 1,089 1,110
------- -------- ------- --------
Net income attributable to
common shares $ 4,775 $ 8,095 $ 14,581 $ 2,093
------- -------- ------- --------
------- -------- ------- --------
Net income per share before
extraordinary item $ .13 $ .22 $ .39 $ .19
------- -------- ------- --------
Extraordinary item (.13)
Net income per share $ .13 $ .22 $ .39 $ .06
------- -------- ------- --------
------- -------- ------- --------
</TABLE>
* CECI's operations are seasonal in nature with a disproportionate percentage
of income earned in the second and third quarters.
<PAGE>
Summarized CECI (Parent Only) Financial Statements
CECI (PARENT ONLY) BALANCE SHEETS
As of December 31, 1993 and 1992
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Assets 1993 1992
<S> <C> <C>
Cash and Investments $126,824 $ 53,321
Restricted cash 13,535 634
Development projects in progress 44,272 21,428
Investment in and advances to
subsidiaries and joint ventures . . . 215,660 168,949
Equipment, net of accumulated depreciation 2,587 1,575
Notes receivable joint ventures 21,558 19,098
Deferred charges and other assets 16,458 17,214
--------- ---------
Total assets $440,894 $282,219
--------- ---------
--------- ---------
Liabilities and Stockholders Equity
Liabilities:
Accounts payable $ 86 $ 937
Other accrued liabilities 10,550 5,061
Income taxes payable 4,000
Senior notes 35,730 35,730
Convertible subordinated debenture 100,000
Deferred income taxes 18,310 15,212
--------- ---------
Total liabilities 168,676 56,940
--------- ---------
Deferred income relating to joint
ventures 1,915 2,165
--------- ---------
Redeemable preferred stock $58,800 54,350
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 35,446 and
35,258 shares . . . . . . . . . . . 2,404 2,380
Additional paid-in capital 100,965 97,977
Retained earnings 111,031 68,407
Treasury stock, 157 common
shares at cost. . . . . . . . . . . (2,897)
--------- ---------
Total stockholders' equity 211,503 168,764
--------- ---------
Total liabilities and
stockholders equity $440,894 $282,219
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CECI (PARENT ONLY) STATEMENTS OF OPERATIONS
For the three years ended December 31, 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Revenues:
Equity in earnings of subsidiary companies
and joint ventures before extraordinary
items $61,412 $53,685 $38,364
Interest and other income 8,756 4,557 4,923
------- ------- -------
Total revenues 70,168 58,242 43,287
------- ------- -------
Expenses:
General and Administration 6,564 6,796 5,585
Interest, net of capitalized interest 2,346 714 2,83
------ ------ ------
Total expenses 8,910 7,510 8,421
------- ------- -------
Income before provision for income taxes 61,258 50,732 34,866
Provision for income taxes 18,184 11,922 8,284
------- ------- -------
Income before change in accounting
principle and extraordinary item 43,074 38,810 26,582
Cumulative effect of change in accounting
principle 4,100 -- --
Equity in extraordinary item of joint ventures
(Less applicable income taxes of $1,533) (4,991) --
------- ------- -------
Net income 47,174 33,819 26,582
Preferred dividends 4,630 4,275 --
------- ------- -------
Net income available to common
stockholders $42,544 $29,544 $26,582
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CECI (PARENT ONLY) STATEMENTS OF OPERATIONS
For the three years ended December 31, 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Cash flows from operating activities $ 45,671 $ 22,597 $ 631
-------- -------- -------
Cash flows from investing activities:
Increase in development projects in progress (22,844) (4,218) (3,458)
Decrease (increase) in advances to and
investments in subsidiaries and joint ventures (36,812) 12,155 (41,162)
Other (9,945) (15,711) 251
-------- -------- -------
Cash flows from investing activities (69,601) (7,774) (44,369)
-------- -------- -------
Cash flows from financing activities:
Proceeds from sale of common, treasury and
preferred stocks, and exercise of warrants and
stock options 2,912 8,065 111,458
Payment of senior notes (6,000)
Purchase of treasury stock (2,897) (4,887)
Net change in short-term bank loan (15,000)
Proceeds from issue of subordinated debentures 100,000
Purchase of warrants (11,716)
Deferred charges relating to debt financing (2,582)
-------- -------- -------
Cash flows from financing activities 97,433 (8,538) 90,458
-------- -------- -------
Net increase in cash and investments 73,503 6,285 46,720
Cash and investments at beginning of period 53,321 47,036 316
-------- -------- -------
Cash investments at end of
period. . . . . . . . . . . $126,824 $ 53,321 $ 47,036
-------- -------- -------
-------- -------- -------
Interest paid (net of amounts capitalized) $ (897) $ 464 $ 3,342
-------- -------- -------
-------- -------- -------
Income taxes paid $ 6,819 $ 4,129 $ 1,682
-------- -------- -------
-------- -------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CECI (PARENT ONLY)
SUPPLEMENTAL NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
Related Party Transactions
The Company bills the Coso Project partnership and joint ventures for
management, professional and operational services. Billings for the years
ended December 31, 1993, 1992 and 1991 were $18,285, $19,629 and $18,316,
respectively. Dividends received from subsidiaries for the years ended
December 31, 1993, 1992 and 1991 were $49,053, $33,524 and $18,935
respectively.
Reclassification
Certain amounts in the fiscal 1992 and 1991 financial statements have been
reclassified to conform to the fiscal 1993 presentation. Such
reclassifications do not impact previously reported net income or retained
earnings.
<PAGE>
Financial Statements for Period Ending
September 30, 1994
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.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
October 19, 1994
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993 (Unaudited)
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
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
------ ------ ------ ------
Cost 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
stockholders $13,138 $15,498 $ 25,681 $ 35,482
------ ------ ------ ------
Income per share before extraordinary
item and change in accounting principle $ 0.38 $ 0.41 $ 0.77 $ 0.81
Extraordinary item (Note 8) (0.06)
Cumulative effect of change in
accounting principle 0.11
------ ------ ------ ------
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
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
*Reflects dividends on CECI's Series C Redeemable Convertible Preferred Stock,
which are payable in kind.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1994 1993
(Unaudited)
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars 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 (consisting only of 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 statement include the accounts of CECI 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 CECI's most recently issued annual report that included
information necessary or useful to the understanding of CECI's business and
financial statement presentations. In particular, CECI's significant
accounting policies and practices were presented as Note 2 to the consolidated
financial statements included in that report.
3. Properties and Plants
Properties and Plants comprise the following:
<TABLE>
<CAPTION>
September 30 December 31
1994 1993
(unaudited)
<S> <C> <C>
Project costs:
Power plants and gathering systems
Wells and resource development $304,030 246,219
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
Manhanagdong - construction in progress 11,053
Other foreign project development 1,204
Pacific Northwest costs 45,922 41,910
Nevada and Utah properties cost 38,262 35,492
-------- --------
Total $522,268 $458,974
-------- --------
-------- --------
</TABLE>
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, CECI issued $400,000 of 101/4% 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 CECI.
5. Commitments and Contingencies
In April 1994, CECI 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. CECI 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
<PAGE>
providing the construction financings. 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 CECI totalled $12,712, and CECI has
invested $1,236. The Overseas Private Investment Corporation ("OPIC") is
providing political risk insurance on the equity investment by CECI 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 CECI'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 CECI 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 CECI 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 CECI 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 CECI 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 CECI, 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 CECI (with a 20% interest).
In August 1994, CECI 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. The Mahanagdong
project has commenced construction and as of September 30, 1994, CECI's
proportionate share of draws on the construction loan totalled $443, equity
investments made by a subsidiary of CECI totalled $3,899, and CECI has invested
$6,711.
CECI 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 CECI'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 CECI,
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 CECI common stock, which when completed would result in an
aggregate blended consideration of $28.50 in cash and $10.00 in market value of
CECI's common stock for each share of Magma purchased by CECI. 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 CECI's $38.50
per share Offer.
In order to facilitate consummation of its acquisition offer, CECI 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. CECI 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
CECI's special meeting proposals which, if approved, would result in certain
bylaw amendments that would facilitate CECI'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. CECI also intends to call a
special meeting of its shareholders to approve the issuance of CECI's stock in
connection with the transaction. Kiewit, CECI's largest shareholder, which
beneficially owns approximately 43.8% of the common shares, has already
approved the proposed transaction.
CECI 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. CECI 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 CECI's general
corporate funds, will be sufficient to pay the cash portion of the
consideration for the Offer and proposed merger and related expenses.
<PAGE>
The commitment letter contemplates (i) a facility of up to $250,000 to
capitalize CECI 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 CECI 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
CECI 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 CECI 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 CECI in the
Second Judicial District Court of the State of Nevada in and for the County of
Washoe. The complaint seeks a declaratory judgment 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.
CECI subsequently removed this action to the United States District Court for
the District of Nevada.
On October 17, 1994, CECI 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. CECI's counterclaims seek primarily: (i) a declaratory
judgment 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 judgment that the Merger Moratorium Statute is unconstitutional
under the Supremacy Clause and the Commerce Clause of the United States
Constitution; (v) 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 CECI'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 CECI'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, CECI 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, CECI 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, CECI 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.
CECI 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 CECI,
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
<PAGE>
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 CECI's request for a special meeting of stockholders of Magma and
otherwise to communicate with the other stockholders of Magma concerning CECI'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 CECI without payment by either party. YCA, a wholly owned subsidiary
of CECI, received all outstanding amounts due from SDG&E.
6. Income Taxes
On January 1, 1993, CECI adopted Statement of Financial Accounting Standard
No. 109 ("FAS 109"), Accounting for Income Taxes. The adoption of FAS 109
changed CECI'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 CECI's tax credit carryforwards as a deferred
tax asset. There was no cash impact to CECI upon the required adoption of FAS
109. Under FAS 109, the effective tax rate has increased due to CECI'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
CECI's provision for income taxes.
CECI'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 CECI of CECI'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 CECI'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 CECI's share of available cash flow from the Coso
Project, remains undefeased and outstanding through the end of the calculation
period, December 31, 1994.
<PAGE>
MAGMA'S CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO
Financial Statements for Period Ending
December 31, 1993
Report of Independent Accountants
To the Shareholders and Board of Directors of Magma Power Company
We have audited the accompanying consolidated balance sheets of Magma Power
Company and Subsidiaries (the "Company") at December 31, 1993 and 1992, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1993. The financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Magma Power
Company and Subsidiaries at December 31, 1993 and 1992, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993 in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand
Coopers & Lybrand
San Diego, California
March 18, 1994
<PAGE>
CONSOLIDATED BALANCE SHEETS
(As of December 31, 1993 and 1992)
(Dollars in thousands)
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Assets
Current Assets
Cash $18,017 $2,106
Marketable securities 32,086 37,501
Partnership cash and marketable securities 22,919 20,724
Accounts receivable:
Trade 18,199 11,258
Other 14,073 12,681
Prepaid expenses and other assets 11,922 8,955
------- --------
Total Current Assets 117,216 93,225
------- --------
Land 6,225 5,677
Property, plant and equipment, net of accumulated
depreciation of $53,166 and $36,932, respectively 265,215 113,922
Exploration and development costs, net of accumulated
amortization of $13,682 and $10,445, respectively 107,069 52,001
Acquisition and new project costs 13,721 26,291
Other investments 47,642 79,469
Power purchase contracts, net of accumulated amortization of
$946 and $88, respectively. 22,185 853
Other assets and deferred charges 22,762 16,083
Goodwill, net of accumulated amortization of $2,122 and
$1,757, respectively 9,276 9,129
------- --------
Total $611,311 $396,650
------- --------
Liabilities and Shareholders' Equity
Current Liabilities
Trade accounts payable $7,235 $4,635
Accrued and other liabilities 3,463 3,774
Current portion of loans payable 36,799 10,292
------- --------
Total Current Liabilities 47,497 18,701
------- --------
Loans payable 189,209 85,834
Deferred income taxes 11,387 8,350
Other long-term liabilities 11,300 1,505
------- --------
Total Non-Current Liabilities 211,896 95,689
------- --------
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.10 par value, 1,000,000 shares authorized,
none issued and outstanding __ __
Common stock, $.10 par value, 30,000,00 shares authorized,
issued and outstanding 23,989,763 and 22,980,647 shares
respectively 2,399 2,298
Additional paid-in capital 144,996 128,154
Unrealized gains from marketable securities 583
Retained earnings 203,940 151,808
------- --------
Total Shareholders' Equity 351,918 282,260
------- --------
$611,311 $396,650
------- --------
------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(For the Three Years Ended December 31, 1993, 1992 and 1991)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Revenues
Sales of electricity $137,882 $72,236 $66,015
Royalties 19,629 22,929 13,611
Interest and other income 4,195 8,653 10,756
Management services 5,432 5,148 4,509
-------- -------- --------
167,138 108,966 94,891
-------- -------- --------
Costs and Expenses
Plant operating costs 49,493 33,258 27,353
Depreciation and amortization 21,692 11,927 11,673
Other non-plant costs 471 800 200
General and administrative 10,943 6,483 5,934
Interest incurred 9,626 6,831 8,527
-------- -------- --------
92,225 59,299 53,687
-------- -------- --------
Income from operations 74,913 49,667 41,204
Provision for income taxes 22,778 13,309 7,263
-------- -------- --------
Income before cumulative effect of accounting change 52,135 36,358 33,941
Cumulative effect to January 1, 1992 of change in
accounting for income taxes -- 17,833 --
-------- -------- --------
Net income $52,135 $54,191 $33,941
-------- -------- --------
-------- -------- --------
Income before cumulative effect of accounting change
per Common Share
Assuming no dilution $2.17 $1.59 $1.44
-------- -------- --------
Assuming full dilution $2.17 $1.52 $1.44
-------- -------- --------
Cumulative effect of accounting change per Common Share
Assuming no dilution $-- $.77 $--
-------- -------- --------
Assuming full dilution $-- $.75 $--
-------- -------- --------
Income per Common Share
Assuming no dilution $2.17 $2.36 $1.44
-------- -------- --------
Assuming full dilution $2.17 $2.27 $1.44
-------- -------- --------
Average Common Shares Outstanding
Assuming no dilution 24,063 22,936 23,611
-------- -------- --------
Assuming full dilution 24,072 23,847 23,611
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(For the Three Years Ended December 31, 1993, 1992 and 1991)
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Stock Unrealized
---------------------- Additional Gains From Total
Paid-In Marketable Retained Shareholders'
Shares Amount Capital Securities Earnings Equity
------- ------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1990 22,902 $2,290 $126,660 $-- $63,676 $192,626
Other equity transactions, net 25 3 302 -- -- 305
Net income, 1991 -- -- -- -- 33,941 33,941
------- -------- -------- ---- --------- ----------
Balance, December 31, 1991 22,927 2,293 126,962 -- 97,617 226,872
Other equity transactions, net 54 5 1,192 -- -- 1,197
Net income, 1992 -- -- -- -- 54,191 54,191
------- -------- -------- ---- --------- ----------
Balance, December 31, 1992 22,981 2,298 128,154 -- 151,808 282,260
Purchase of Dow stock option
through issuance of shares 857 86 (86) -- -- --
Tax effect of Dow option
purchase -- -- 13,581 -- -- 13,581
Unrealized gains from
marketable securities -- -- -- 583 -- 583
Other equity transactions,
net 152 15 3,347 -- (3) 3,359
Net income, 1993 -- -- -- -- 52,135 52,135
------- -------- -------- ---- --------- ----------
Balance, December 31, 1993 23,990 $2,399 $144,996 $583 $203,940 $351,918
------- -------- -------- ---- --------- ----------
------- -------- -------- ---- --------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the Three Years Ended December 31, 1993, 1992 and 1991)
(Dollars in thousands)
<S> <C> <C> <C>
1993 1992 1991
Cash Flows From Operating Activities
Net income $52,135 $54,191 $33,941
-------- -------- -------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 21,692 11,927 11,673
Gain from the disposition of investments (771) (1,280) (832)
Realization of transmission line credits 2,538 1,444 1,260
Other, net (227) (76) (237)
Cumulative effect of adoption of SFAS 109 __ (17,833) __
Changes in components of working capital:
Accounts receivable (8,333) (8,529) 373
Partnership cash and marketable securities (2,195) (1,233) 1,293
Prepaid expenses and other assets (2,253) 585 (2,565)
Accounts payable and accrued liabilities 2,845 501 1,101
Accrued interest payable 719 (395) 4
Income taxes payable 7,605 (301) 439
Deferred taxes from operations 7,485 6,684 (842)
-------- -------- -------
Total adjustments 29,105 (8,506) 11,667
-------- -------- -------
Net cash provided by operating activities 81,240 45,685 45,608
Cash Flows From Investing -------- -------- -------
Activities
Proceeds from the sale of investments 223,479 150,271 180,113
Purchase of investments (184,784) (160,949) (193,767)
Capital expenditures (8,434) (12,043) (15,711)
Power plant acquisition costs (215,081) (22,527) __
New project development costs (12,345) (3,749) __
Other, net 1,893 (667) 43
-------- -------- -------
Net cash used in investing activities (195,272) (49,664) (29,322)
-------- -------- -------
Cash Flows From Financing Activities
Borrowing from banks 140,000 __ __
Proceeds from the issuance of common stock __ 691 __
Repayment of loans payable (10,081) (9,501) (5,669)
Commercial paper discounts and prepaid interest 359 1,353 __
Other, net (335) 841 (181)
-------- -------- -------
Net cash provided by (used) in financing
activities 129,943 (6,616) (5,850)
-------- -------- -------
Net (decrease) in cash 15,911 (10,595) 10,436
Cash at beginning of year 2,106 12,701 2,265
-------- -------- -------
Cash at end of year $18,017 $2,106 $12,701
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands, except per share amount)
1. Summary of Significant Accounting Principles
A. Basis of Consolidation. The consolidated financial statements
present the assets, liabilities, revenues, costs and expenses of Magma Power
Company (the "Company") and its 100% owned subsidiaries and partnerships,
Imperial Magma, Vulcan Power Company ("Vulcan"), Magma Operating Company
("MOC"), Desert Valley Company ("Desert Valley"), Fish Lake Power Company
("FLPC"), Magma Land I ("MLI"), Salton Sea Power Company, Salton Sea Brine
Processing, L.P., Salton Sea Power Generation, L.P., Peak Power Corporation
("Peak Power") and its pro-rata 50% share of the accounts of Del Ranch, L.P.,
Elmore, L.P., Leathers, L.P., Vulcan/BN Geothermal Power Company and Magma/GEO
'83 Joint Venture.
All significant intercompany transactions and accounts have been
eliminated.
B. Revenue Recognition. Sales of electricity represents Magma's pro-
rata 50% share of the revenue accrued by Del Ranch, L.P., Elmore, L.P.,
Leathers, L.P., and Vulcan/BN Geothermal Power Company (the "Partnerships") and
its 100% owned interest in Salton Sea Power Generation, L.P., from sales to
Southern California Edison Company ("SCE"). SCE is a subsidiary of SCEcorp.
SCEcorp is the parent corporation of Mission Energy Company which, through its
subsidiaries, owns 50% of the Partnerships. Royalties, management service fees
and rental income contractually payable to Magma by the Partnerships are
recorded on an accrual basis, net of Magma's pro-rata 50% share of the
corresponding partnership expense. Royalties earned from providing geothermal
resources to power plants operated by other geothermal power producers are
recorded on an accrual basis.
C. Property, Plant and Equipment. Land is carried at cost. Buildings
and equipment are carried at cost less accumulated depreciation. Exploration
and development costs are carried at cost less accumulated amortization. Such
capitalized costs include all costs of acquiring geothermal leases, recurring
lease rents, geological and geophysical studies and drilling and equipping
wells. These costs are not amortized until they can be directly associated
with energy production. Exploration and development costs associated with
abandoned wells and properties are amortized over the estimated remaining life
of the resource.
Depreciation and amortization are computed using the straight-line method over
the asset's useful life.
Useful lives are as follows:
Plant, plant equipment and buildings 20 years
Office furniture and equipment 5-10 years
Maintenance and other equipment 7-10 years
Exploration and development costs 20 years*
* Life of related plant facility.
When property, plant and equipment is sold or abandoned, the cost and
related accumulated depreciation/amortization are removed from the accounts and
the resulting gain or loss is recognized currently.
D. Deferred Well Rework Costs. Magma defers all rework costs and
amortizes them over the estimated period between reworks. Production wells are
amortized using a units of production method while injection wells are
amortized on a straight-line basis over 18 months. Deferred well rework costs
of $5,181,000 in 1993 and $3,010,000 in 1992 are included in prepaid expenses
and other current assets.
E. Power Purchase Contracts. Power purchase contracts are carried at
cost less accumulated amortization. Contract costs are amortized on a
straight-line basis over the shorter of the remaining contract life or 20
years. The amortization begins at the date of acquisition, for contracts in
service, or the date of firm operations. Amortization expense amounted to
$858,000 in 1993 and $25,000 in 1992 and 1991.
F. Goodwill. In a merger which was effective March 11, 1988, Magma
Power Company became successor in interest to all of the assets and obligations
of Magma Energy. The excess of the value of stock issued over the fair market
value of the assets acquired was recorded as goodwill and is being amortized on
the straight-line method over a period of thirty years. Amortization expense
amounted to $365,000 in 1993, 1992 and 1991.
G. Marketable Securities, Interest-Bearing Deposits and Other
Investments. Marketable securities and interest-bearing deposits are
classified as "available-for-sale" and are carried at their fair value.
Realized gains and losses are determined using the specific identification
method and are included in other income. Gross unrealized holding gains or
losses are excluded from earnings and reported, net of related tax effect, as a
separate component of Shareholders' Equity. Other investments are carried at
cost which approximates market value.
H. Retirement Plans. Magma maintains two defined contribution plans
covering all eligible employees. Contributions to the plans are funded
annually.
I. Income per Common Share. The calculation of primary earnings per
common share is based on the weighted average number of outstanding common
shares. In computing primary earnings per common share, adjustment has been
<PAGE>
made for common shares issuable for warrants and shares under option. Fully
diluted earnings per share reflects the dilutive effect of stock options and
warrants at the end of the reporting period.
J. Consolidated Statement of Cash Flows. For purposes of the
Statements of Cash Flows, Magma considers bank and money market deposits as
cash. Partnership cash and marketable securities are not considered cash
equivalents as these assets are segregated for exclusive use of the
Partnerships and restrictions in the Partnership Secured Credit Agreements
place limits on distributions of partnership cash to the partners.
Interest paid was $8,407,000 in 1993, $5,514,000 during 1992 and
$8,153,000 during 1991.
K. Reclassification. Magma has reclassified the presentation of
certain prior year information to conform with the current presentation format.
2. Geothermal Power Partnerships
The Vulcan partnership was formed in 1985 with equal ownership between
Vulcan Power Company, a 100% owned subsidiary of Magma Power Company and BN
Geothermal, Inc., a wholly owned subsidiary of Mission Energy Company.
Similarly, the Del Ranch, Elmore and Leathers partnerships were formed
in 1988 with equal ownership between Magma Power Company and Mission Energy
Company.
In March 1993 Magma formed Salton Sea Brine Processing L.P. to hold the
well field and brine processing equipment acquired from Union Oil Company of
California ("Unocal"). Ownership of Salton Sea Brine Processing, L.P. is 99%
Salton Sea Power Company and 1% Magma Power Company. Magma also formed Salton
Sea Power Generation L.P. to hold the power generating assets acquired from
Desert Power Company and Earth Energy Inc., both wholly owned subsidiaries of
Unocal. Ownership of Salton Sea Power Generation, L.P. is 99% Salton Sea Brine
Processing, L.P. and 1% Magma Power Company.
3. Marketable Securities and Other Investments
Effective December 31, 1993, Magma adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). As of December 31, 1993 all debt and equity
securities have been classified as available-for-sale and are carried at fair
value. Gross unrealized holding gains of $836,000 were recorded, net of tax
effect, as of December 31, 1993.
As of December 31, marketable securities and other investments
consisted of the following:
<TABLE>
<CAPTION>
Marketable
Securities
(maturing
within Other Other
one year) Investments Investments
<S> <C> <C> <C>
1993
Debt and equity securities
Commercial paper $ 4,986 $ __
Auction rate preferred stock 23,100
U.S. treasuries and agencies 4,000 12,986 2-5 years
U.S. treasuries and agencies 5,084 6-10 years
Corporate medium-term notes 7,093 2-5 years
Corporate medium-term notes 4,139 6-10 years
Municipal tax exempts 3,000 2-5 years
Other investments
Low income housing limited partnerships 8,333
Other 7,007
------- -------
Total $32,086 $47,642
======= =======
1992
Auction rate preferred stock $33,000 $ __
U.S. treasuries and agencies 17,572
Corporate medium-term notes 4,501 43,409
Low income housing limited partnerships 8,202
Municipal tax exempts 3,000
Other 7,286
------- -------
Total $37,501 $79,469
======= ========
</TABLE>
In 1992, marketable securities and other investments are carried at
cost, which approximates market value.
4. Property, Plant and Equipment
Property, plant and equipment at December 31 consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1993 1992
<PAGE>
<S> <C> <C>
Plant and equipment $297,013 $138,361
Maintenance equipment 8,914 6,069
Buildings 5,631 2,364
Office furniture and equipment 3,390 2,047
Other equipment 3,433 2,013
-------- --------
318,381 150,854
Less accumulated depreciation 53,166 36,932
-------- --------
Property, plant and equipment, net $265,215 $113,922
======== ========
</TABLE>
5. Acquisition and New Project Costs
On December 15, 1992, Magma signed a definitive agreement with Unocal
to purchase all of Unocal's geothermal interests in the Imperial Valley of
California including three operating geothermal power plants (the "Salton Sea
Plants") and 40,600 acres of geothermal leases, its Long Valley geothermal
leases, consisting of approximately 12,000 acres near Mammoth, California and
its 58,300 acres of geothermal leases in Nevada. On March 31, 1993 Magma
consummated its acquisition of the Imperial Valley geothermal interest. Total
cost includes (i) payments to Unocal consisting of the purchase price of $224
million, working capital of $7.3 million and an interest charge of $3.5 million
and (ii) advisory fees and transaction costs totaling $3.4 million and a
provision for $10 million of capital improvements. The total cost of the
acquisition is allocated as follows:
Land $ 388
Property, plant and equipment 164,366
Exploration and development costs 53,676
Power purchase contracts 22,217
Transmission line credits 6,254
Other 1,278
--------
Total $248,179
========
In addition to the initial acquisition price, Magma will make payments
to Unocal contingent on future development of new power generating capacity.
The Salton Sea Plants consist of a 10 MW unit, which started firm operation in
1982, a 20 MW unit, which started firm operation in 1990 and a 50 MW unit,
which started firm operation in 1989. All three plants deliver electricity to
Southern California Edison Company under 30 year power purchase contracts. The
contract for the 10 MW unit is a negotiated contract while the contracts for
the 20 MW and 50 MW units are ISO4's with levelized energy payments.
On March 11, 1992 Magma acquired a 30 year modified ISO4 contract to
supply SCE with 16 MWs of geothermal power from Fish Lake, Nevada. Magma is
currently engaged in exploratory and well field development activities, which
are preparatory to constructing a power plant.
Acquisition and new project costs as of December 31, 1993 and 1992 were
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Deposit paid Unocal toward asset acquisition price $ __ $22,400
Other Unocal asset acquisition costs __ 127
Fish Lake development costs 13,721 3,764
------- -------
Total $13,721 $26,291
======= =======
</TABLE>
6. Accrued and Other Current Liabilities
Accrued and other current liabilities at December 31 consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Payroll $ 1,187 $ 1,554
Interest 1,602 883
Other 674 1,337
------- -------
Total $ 3,463 $ 3,774
======= =======
</TABLE>
7. Loans Payable
At December 31, loans payable consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
<PAGE>
1993 1992
<S> <C> <C>
Pro-rata portion of partnership non-recourse debt $ 75,149 $84,177
Bridge loan 140,000 __
Other loans 10,859 11,949
-------- --------
226,008 96,126
Less amounts due within one year 36,799 10,292
-------- --------
Loans payable due after one year $189,209 $85,834
======== ========
</TABLE>
Loans payable at December 31, 1993 and 1992 included Magma's pro-rata
share of the debt of the Del Ranch, Elmore, and Leathers partnerships and is
non-recourse to Magma Power Company and subsidiaries, however, it is
collateralized by substantially all of the assets of these partnerships. A
Secured Credit Agreement with a group of international banks, with Morgan
Guaranty Trust Company ("Morgan") as the agent bank provides for direct bank
loans at specified premiums over a choice of either the bank's prime rate, the
London Interbank Offered Rate ("LIBOR") or the CD Base rate. As an
alternative, each partnership may elect to issue commercial paper and medium-
term notes supported by letters of credit issued by Fuji Bank, Limited, which
are secured, in turn, by the project debt facility with Magma.
The partnerships had no direct bank borrowings at December 31, 1993 and
1992. The weighted average interest rate of the commercial paper and medium-
term notes outstanding at December 31, was 5.5% in 1993 and 6.2% in 1992.
During 1993 and 1992 Magma's pro-rata share of the partnership weighted average
borrowings was $77,616,000 and $85,926,000, with a weighted average interest
rate of 5.6% and 6.7% for the corresponding periods.
The loans of each partnership are reduced by 25 semi-annual principal
payments in March and September of each year. The last principal payment is
scheduled for September 15, 2001 for the Del Ranch and Elmore loans and
September 15, 2002 for the Leathers loan.
On March 19, 1993 Magma entered into a one-year $140,000,000 term loan
("Bridge Loan") with a group of commercial banks. Proceeds of the loan were
used to finance the acquisition of the Imperial Valley geothermal interests.
Interest on the loan accrues at LIBOR plus .675%.
On February 28, 1994 Magma replaced the Bridge Loan with a $130,000,000
non-recourse project level debt which is collateralized by substantially all of
the assets of the newly acquired Salton Sea Plants. A secured credit agreement
with a group of international banks, with Credit Suisse as the agent bank,
provides for direct loans at LIBOR plus 1.25%.
The loans are reduced by 12 semi-annual principal payments in March and
September of each year. The last principal payment is scheduled for March 15,
2000.
Other loans consist of a 10-year $4,000,000 tax exempt debt financing
guaranteed by Magma Power Company on behalf of Desert Valley, and installment
obligations representing scheduled capital contributions for investments in low
income housing limited partnerships. The tax exempt bonds issued in October,
1990 have a coupon interest rate of 7.625% and a sinking fund requirement in
the seventh through tenth years. The installment obligations are non-interest
bearing and are payable through the year 2000 in varying amounts totalling
$6,467,000.
Magma's pro rata portion of annual maturities of loans payable for the
five years beginning January 1, 1994 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Pro Rata
Portion of
Salton Sea Plants Partnership Debt Other Total
<S> <C> <C> <C> <C>
1994 $ 25,692 $ 9,724 $ 1,383 $ 36,799
1995 25,072 10,718 1,388 37,178
1996 24,846 12,830 1,393 39,069
1997 26,108 13,348 2,211 41,667
1998 25,552 13,348 2,061 40,961
Thereafter 12,730 15,181 2,423 30,334
-------- -------- ------- --------
Total $140,000 $75,149 $10,859 $226,008
======== ======== ======= ========
</TABLE>
In addition, Magma Power Company has an unused and available
$25,000,000 line of credit with Morgan and since February 28, 1994, a
$5,000,000 working line of credit with two of the banks participating in the
Bridge Loan replacement.
8. Shareholders' Equity
In 1987 and 1993, Magma entered into technical, engineering and
management agreements with The Dow Chemical Company ("Dow"), a significant
shareholder of Magma Power Company. Magma agreed to pay for those services
either with shares of Magma Power Company common stock valued at the then
<PAGE>
market price or cash. Dow services totalling $575,000 in 1993, $799,000 in
1992 and $1,222,000 in 1991 were charged to the partnership and paid in cash.
The 1987 Agreement granted Dow an option for 2,000,000 shares of Magma
Power Company common stock at option prices that started at $17.00 per share, a
negotiated price that exceeded the then current market price, and which
escalated over a four year period commencing one year after operation of the
Hoch (formerly Del Ranch) plant to a maximum exercise price of $21.00 in 1993.
On October 12, 1993 Magma purchased the option by issuing 857,143 newly issued
and unregistered shares. The number of shares issued was based on the
difference between the exercise price of $21.00 per share and the market price
on October 12, 1993 discounted $1.00 to $37.50. Shareholders' equity has been
increased by $13,581,000 representing the tax effect of the shares purchased.
Reserved common stock at December 31 is as follows:
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Dow options __ 2,000,000
Stock Option Plan 655,331 796,390
Deferred Stock and Incentive Awards 19,925 10,800
-------- ---------
Total 675,256 2,807,190
======== =========
</TABLE>
9. Incentive Stock Option Plan
On September 25, 1987, the shareholders of Magma approved the Magma
Power Company Stock Option Plan of 1987 (the "Plan"). Under the Plan, options
to purchase an aggregate of 1,000,000 shares of common stock, $0.10 par value,
of Magma may be granted to salaried employees and consultants of Magma and its
subsidiaries, as selected by the Board of Directors or its compensation
committee (the "Committee"). The number of shares available under the Plan is
subject to adjustment in certain circumstances, including reorganizations,
recapitalizations, stock splits, reverse stock splits, and stock dividends.
The option price granted under the Plan will be established by the
Board of Directors or the Committee, when the option is granted. Such price
may not be less than 90% of the fair market value of the stock on the date the
option is granted. The options have a term of ten years and will become
exercisable in accordance with a vesting schedule starting one year from the
date of the grant.
Options outstanding have been granted to officers and employees to
purchase common stock at prices ranging from $9.25 to $32.50 per share. Option
transactions for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Options outstanding, beginning of year 475,034 302,561
Options granted 92,175 220,300
Options exercised (Exercise price $9.25 to $32.50) (141,059) (47,827)
-------- --------
Options outstanding, end of year of which 215,849
were exercisable at December 31, 1993 426,150 475,034
======== ========
</TABLE>
At December 31, 1993 and 1992, respectively, 229,181 and 321,356 shares
of common stock were available for future option grants.
10. Provision for Income Taxes
Magma provides for taxes on income in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, deferred tax assets and liabilities are determined
based on the difference between the financial statement and the tax basis of
the assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. The cumulative effect of the
adoption of SFAS 109 as of January 1, 1992 increased net income by $17,833,000
or $.77 per share, and is reported separately in the consolidated statement of
operations. Financial statements for 1991 were not restated to reflect SFAS
109.
The provision consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
Current Deferred Total
<S> <C> <C> <C>
1993
Federal $ 10,787 $ 6,861 $ 17,648
State 3,913 1,217 5,130
-------- --------- --------
Total $ 14,700 $ 8,078 $ 22,778
======== ========= ========
<PAGE>
1992
Federal $ 4,972 $ 4,783 $ 9,755
State 1,908 1,646 3,554
-------- --------- --------
Total $ 6,880 $ 6,429 $ 13,309
======== ========= ========
1991
Federal $ 6,082 $ (2,514) $ 3,568
State 2,633 1,062 3,695
-------- --------- --------
Total $ 8,715 $ (1,452) $ 7,263
======== ========= ========
</TABLE>
Amounts paid to federal and state authorities for income tax purposes
amounted to $7,707,000 in 1993, $7,244,000 in 1992 and $7,665,000 in 1991.
Deferred tax liabilities and assets for 1993 and 1992 as calculated in
accordance with SFAS 109 consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Deferred Liabilities:
Depreciation $17,727 $13,953
Intangible drilling costs 22,832 18,724
Other 270 1,872
------- -------
Gross deferred tax liabilities 40,829 34,549
------- -------
Deferred Assets:
Tax credits 26,318 23,075
Other 3,124 3,124
------- -------
Total deferred tax assets 29,442 26,199
------- -------
Net deferred tax liability $11,387 $ 8,350
======= =======
</TABLE>
Magma realized a tax benefit of $13,581,000 from the purchase of Dow's
option to acquire Magma Power Company common stock. This benefit resulted in a
decrease in current income taxes payable of $8,880,000, an increase in deferred
tax liabilities of $93,000 and an increase in deferred tax assets of
$4,794,000.
The deferred portion of the provision for income taxes for 1991 as
calculated in accordance with Accounting Principles Board Statement No. 11,
"Accounting for Income Taxes," consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
<S> <C>
1991
Depreciation $ 1,195
Intangible drilling costs (71)
Difference between regular and alternative minimum tax (2,463)
Other (113)
--------
$(1,452)
========
</TABLE>
Major differences between the statutory rate and the effective rate for
the years ended December 31 consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Taxes at federal statutory rate (35% in
1993 and 34% for 1992 and 1991) $ 26,220 $ 16,887 $ 14,009
State taxes 3,592 2,242 2,417
Amortization of goodwill 127 123 123
Percentage depletion (2,692) (1,321) (1,292)
Investment tax credit (520) -- (6,956)
Lease investments (4,268) (2,887) __
Capital gains -- (1,815) (585)
Other 319 80 (453)
-------- -------- --------
Provision for income taxes $ 22,778 $ 13,309 $ 7,263
======== ======== ========
Effective tax rate 30.4% 26.8% 17.6%
======== ======== ========
</TABLE>
11. Commitments and Contingencies
Magma and its subsidiary, Desert Valley Company, have issued
irrevocable letters of credit totalling $300,000 and $6,759,000, respectively,
<PAGE>
which guarantee repayment of tax-exempt bond financing, contingent
environmental liabilities and obligations for site clean-up upon cessation of
operations.
12. Quarterly Statistics (Unaudited) (dollars in thousands, except per
share data)
<TABLE>
<CAPTION>
First Second Third Fourth Year
<S> <C> <C> <C> <C> <C>
1993
Total revenues $22,458 $45,008 $57,315 $42,357 $167,138
Income from operations 7,826 19,348 30,783 16,956 74,913
Net income 5,477 13,539 20,453 12,666 52,135
Income per common share:
Assuming no dilution $ .23 $ .56 $ .85 $ .53 $ 2.17
Assuming full dilution .23 .56 .85 .53 2.17
1992
Total revenues $21,545 $24,174 $31,580 $31,667 $108,966
Income from operations 7,424 9,312 16,344 16,587 49,667
Income before cumulative effect
of accounting change(b) 5,434 6,816 11,966 12,142 36,358
Net income 23,267(a) 6,816 11,966 12,142 54,191
Income per common share:
Assuming no dilution $ 1.01(a) $ .30 $ .52 $ .53 $ 2.36
Assuming full dilution 1.01(a) .30 .52 .51 2.27
</TABLE>
(a) First quarter results were restated to include the cumulative effect of
change in accounting for income taxes as of January 1, 1992 of $17,833,000 or
$0.77 per common share assuming no dilution and $0.75 per common share assuming
full dilution due to Magma's adoption of SFAS 109.
(b) Quarterly results have been restated to reflect adoption of SFAS 109.
<PAGE>
Financial Statements for Period Ending
September 30, 1994
<PAGE>
The consolidated balance sheets of Magma and its subsidiaries
as of September 30, 1994 and December 31, 1993, the consolidated statements of
operations for the nine months ended September 30, 1994 and 1993, and cash
flows for the nine months ended September 30, 1994 and 1993, and the notes
thereto, are set forth below.
The unaudited interim financial statements reflect all adjustments (consisting
of normal recurring accruals) which, in the opinion of management, are
considered necessary for a fair presentation of the results of the periods
covered.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
Assets
Current Assets
Cash $5,111 $18,017
Marketable securities 43,609 32,086
Partnership cash and marketable
securities 25,478 22,919
Accounts receivable:
Trade 34,192 18,199
Other 20,012 14,073
Prepaid expenses and other assets 10,423 11,922
Total Current Assets 138,825 117,216
Land 6,361 6,225
Property plant and equipment, net of
accumulated depreciation of $64,828 and
$53,166, respectively 256,561 265,215
Exploration and development costs, net of
accumulated amortization of $18,490 and
$13,682, respectively 104,271 107,069
Acquisition and new project costs 28,367 13,721
Other investments 41,245 47,642
Power purchase contracts, net of accumulated
amortization of $1,818 and $946,
respectively 21,313 22,185
Other assets and deferred charges 24,480 22,762
Goodwill, net of accumulated amortization of
$2,419 and $2,122, respectively 8,999 9,276
-------- ----------
Total $630,422 $611,311
======== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities
Trade accounts payable $7,832 $7,235
Accrued and other liabilities 3,605 3,463
Current portion of loans payable 37,010 36,799
-------- --------
Total Current Liabilities 48,447 47,497
-------- --------
Loans payable 151,959 189,209
Deferred income taxes 22,376 11,387
Other long-term liabilities 12,354 11,300
-------- --------
Total Non-Current Liabilities 186,689 211,896
-------- --------
Shareholders' Equity
Preferred stock, $.10 par value,
1,000,000 shares authorized,
none issued and outstanding 2,401 2,399
Common stock, $.10 par value,
30,000,000 shares
authorized, issued and outstanding
24,042,915 and 23,989,763 shares,
respectively 142,765 144,996
Additional paid-in capital (677) 583
Unrealized gains (losses) from
marketable securities 250,797 203,940
-------- --------
Retained earnings 395,286 351,918
-------- --------
Total Shareholders' Equity $630,422 $611,311
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Revenues
Sales of electricity $50,592 $49,674 $124,086 $103,319
Royalties 5,628 5,569 15,062 14,885
Interest and other income 1,400 906 3,866 3,635
Management services 1,263 1,166 3,090 2,942
------ ------ ------- -------
Total 58,883 57,315 146,104 124,781
------ ------ ------- -------
Costs and Expenses
Plant operating costs 12,723 14,404 41,208 36,622
Depreciation and
amortization 5,875 6,374 17,737 15,449
Other non-plant costs 115 118 380 401
General and administrative 3,730 2,912 9,602 7,471
Interest incurred 3,301 2,724 9,262 6,881
------ ------ ------- -------
25,744 26,532 78,189 66,824
------ ------ ------- -------
Income from operations 33,139 30,783 67,915 57,957
Provision for income
taxes 10,290 10,330 21,072 18,488
------ ------ ------- -------
Net income $22,849 $20,453 $46,843 $39,469
======= ======= ======= =======
Income per Common Share
Assuming no dilution $0.95 $0.85 $1.95 $1.64
===== ===== ===== =====
Average Common Shares
Outstanding
Assuming no dilution 24,029 24,096 24,017 24,037
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1994 1993
<S> <C> <C>
Cash Flows From Operating Activities
Net income $46,843 $ 39,469
------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 17,737 15,449
Transmission credits realized 2,209 1,803
Other, net 1,848 (809)
Changes in components of working capital:
Accounts receivable (21,931) (25,326)
Partnership cash and marketable securities (2,559) 6,373
Prepaid expenses and other assets 87 (2,246)
Accounts payable and accrued liabilities 4,776 6,688
Accrued interest payable (1,102) 167
Income taxes payable (2,934) 8,646
Deferred taxes from operations 12,645 2,920
------- ----------
Total adjustments 10,776 13,665
------- ----------
Net cash provided by operating activities 57,619 53,134
------- ----------
Cash Flows From Investing Activities
Proceeds from the sale of investments 205,686 195,545
Purchase of investments (216,060) (148,655)
Capital expenditures (8,854) (5,718)
Power plant acquisition costs -- (215,718)
New project development costs (11,909) (11,932)
Other, net (1,198) 1,166
------- ----------
Net cash used in investing activities (32,335) (185,312)
------- ----------
Cash Flows From Financing Activities
Repayment of loans payable (166,101) (10,070)
Borrowing from banks 130,000 140,000
Loan fees (3,225) --
Proceeds from the issuance of common stock 816 2,519
Other, net 320 (278)
------- ----------
Net cash provided (used) by financing
activities (38,190) 132,171
------- ----------
Net increase (decrease) in cash (12,906) (7)
Cash at beginning of period 18,017 2,106
------- ----------
Cash at end of period $5,111 $ 2,099
======= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Consolidation - The consolidated financial statements present the
assets, liabilities, revenues, costs and expenses of Magma, its 100%-owned
subsidiaries and its proportionate share of partnerships in which Magma has
invested.
All significant intercompany transactions and accounts have been eliminated.
2. Loans Payable
Loans payable consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
<S> <C> <C>
Pro-rata share of partnership
non-recourse debt $ 65,157 $ 75,149
Bridge loan -- 140,000
Salton Sea debt 114,308 --
Other loans 9,504 10,859
------- -------
188,969 226,008
Less amounts due within one year 37,010 36,799
------- -------
Loans payable due after one year $151,959 $189,209
======= =======
</TABLE>
Loans payable at September 30, 1994 and December 31, 1993 included Magma's
pro-rata share of the debt of the Del Ranch, L.P., Elmore, L.P., and Leathers,
L.P. partnerships. The partnership loans are non-recourse to Magma and
subsidiaries, however, it is collateralized by substantially all of the assets
of these partnerships.
On March 19, 1993, Magma entered into a $140 million unsecured one-year term
loan ("Bridge Loan") with a group of commercial banks. Proceeds from the loan
were used to finance the acquisition of the Salton Sea Plants from Unocal. On
February 28, 1994, Magma replaced the Bridge Loan with a $130,000,000 non-
recourse project level loan which is collateralized by substantially all of the
assets and power purchase contracts of the newly acquired Salton Sea Plants.
Under the secured credit agreement for this loan, a group of international
banks loaned to Salton Sea Power Generating, L.P. and Salton Sea Brine
Processing, L.P. (the "Salton Sea Partnerships"), which own the Salton Sea
Plants, $130,000,000 in the form of a six (6) year loan at interest rates of
1.25% over LIBOR, secured by substantially all of the assets of the Salton Sea
Partnerships. Restrictions in the secured credit agreement place limits on
distribution of cash from the Salton Sea Plants to Magma.
3. Deferred Income Taxes
Deferred income taxes as of September 30, 1994 and December 31, 1993 represent
estimated income taxes payable in the future years as determined in accordance
with SFAS 109 "Accounting for Income Taxes."
4. Net Income per Common Share
The calculation of primary earnings per common share is based on the weighted
average number of outstanding common shares. In computing primary earnings per
common share, adjustment has been made for common shares issuable for shares
under option.
<PAGE>
IMPERIAL VALLEY GEOTHERMAL INTERESTS
(ACQUIRED BY MAGMA) FINANCIAL STATEMENTS
Report of Independent Accountants
To the Board of Directors of
Magma Power Company:
We have audited the accompanying Statement of Net Assets Acquired as of March
31, 1993 and Historical Summaries of Gross Revenues and Direct Operating
Expenses for each of the three years in the period ended December 31, 1992
(collectively, the "Statements") of the Imperial Valley Geothermal Interests
(acquired by Magma Power Company from Union Oil Company of California
["Unocal"]). The Statement of Net Assets Acquired is the responsibility of
Magma Power Company's management. The Historical Summaries of Gross Revenues
and Direct Operating Expenses are the responsibility of Unocal's management.
Our responsibility is to express an opinion on the Statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Statements. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying Statements were prepared for inclusion in the Form 8-K of
Magma Power Company on the basis of presentation as described in Note 1, and
are not intended to be a complete presentation of the Imperial Valley
Geothermal Interests' assets, liabilities, revenues and expenses.
In our opinion, the Statements referred to above present fairly, in all
material respects, the net assets acquired as of March 31, 1993 and the gross
revenues and direct operating expenses for each of the three years in the
period ended December 31, 1992 of the Imperial Valley Geothermal Interests on
the basis of presentation as described in Note 1, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand
San Diego, California
May 6, 1993
<PAGE>
IMPERIAL VALLEY GEOTHERMAL INTERESTS
(Acquired by Magma Power Company)
STATEMENT OF NET ASSETS ACQUIRED
March 31, 1993
(In Thousands)
<TABLE>
<S> <C>
Prepaid expenses $ 1,629
Land 388
Property, plant and equipment 178,050
Exploration and development costs 39,378
Power purchase agreements 22,217
Royalty - free use of technology 900
Transmission line credits 5,003
--------
Net assets acquired $247,565
========
</TABLE>
The accompanying notes are an integral part of
these statements.
<PAGE>
IMPERIAL VALLEY GEOTHERMAL INTERESTS
(Acquired by Magma Power Company)
HISTORICAL SUMMARIES OF GROSS REVENUES AND
DIRECT OPERATING EXPENSES
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31
1990 1991 1992
<S> <C> <C> <C>
Gross Revenues:
Sales of electricity $62,997 $73,442 $72,271
Other revenue 22 20 -
--------- -------- --------
Total gross revenues 63,019 73,462 72,271
--------- -------- --------
Direct operating expenses:
Plant operating costs 20,815 23,126 21,693
District office charges 4,123 4,389 3,868
Exploration operations 901 985 975
Rentals in lieu of drilling 1,115 1,036 661
--------- -------- --------
26,954 29,536 27,197
--------- -------- --------
Excess of gross revenues over
direct operating expenses $36,065 $43,926 $45,074
======== =======
</TABLE>
The accompanying notes are an integral part of
these statements.
<PAGE>
IMPERIAL VALLEY GEOTHERMAL INTERESTS
(Acquired by Magma Power Company)
NOTES TO THE STATEMENT OF NET ASSETS ACQUIRED AND
HISTORICAL SUMMARIES OF GROSS REVENUES AND
DIRECT OPERATING EXPENSES
(In Thousands)
1. Basis of Presentation:
On March 31, 1993 ("Acquisition Date"), Magma Power Company ("Magma") acquired
certain geothermal and other related assets located in the Imperial Valley of
California (the "Imperial Valley Geothermal Interests") from Union Oil Company
of California ("Unocal"). Magma has accounted for the acquisition under the
purchase method, and, accordingly, the purchase price allocation in the
accompanying Statement of Net Assets Acquired is based on the estimated fair
values of the assets purchased as of the Acquisition Date. Such allocation has
been based on certain estimates which may be revised at a later date. The
Statement of Net Assets Acquired is not intended to be a complete presentation
of the assets and liabilities of the Imperial Valley Geothermal Interests.
The consideration to Unocal and related liabilities assumed in determining
Magma's total cost of acquisition includes $224,000,000 consisting of
$22,400,000 paid on December 31, 1992 ("Initiation Date" of the transaction)
and a $201,600,000 note payable due to Unocal on March 31, 1993 for geothermal
and other related assets; certain current assets and liabilities assumed by
Magma as of the Initiation Date ("Adjusted Assets"), and an estimate of the net
of revenues and certain expenditures ("Adjustment Account") relating to the
operations of the Imperial Valley Geothermal Interests from the Initiation Date
to the Acquisition Date pursuant to the Sale and Purchase Agreement ("Purchase
Agreement") between Magma and Unocal; interest cost incurred during the
acquisition period from the Initiation Date to the Acquisition Date paid to
Unocal pursuant to the Purchase Agreement; an estimate of acquisition costs;
and an estimate of capital expenditures for necessary improvements to the
assets. These costs are summarized as follows:
Acquisition cost of geothermal and
other related assets $224,000,000
Adjusted Assets 6,686,000
Estimated Adjustment Account 590,000
Interest cost during acquisition period 3,489,000
Estimated acquisition costs 2,800,000
Estimated capital improvements 10,000,000
------------
Total cost of acquisition $247,565,000
============
Excluded from the Statement of Net Assets Acquired are certain contingent
payments of $100,000 per installed megawatt and revenue interests of one
percent on the gross revenues generated on the first 150 megawatts of new plant
capacity should Magma construct new geothermal electrical generating
facilities, as defined in the Purchase Agreement.
<PAGE>
IMPERIAL VALLEY GEOTHERMAL INTERESTS
(Acquired by Magma Power Company)
NOTES TO THE STATEMENT OF NET ASSETS ACQUIRED AND
HISTORICAL SUMMARIES OF GROSS REVENUES AND
DIRECT OPERATING EXPENSES, CONTINUED
1. Basis of Presentation, Continued:
The accompanying Historical Summaries of Gross Revenues and Direct Operating
Expenses ("Historical Summaries") include only the gross revenues and direct
operating expenses attributable to the production and sale of geothermal energy
from the Imperial Valley Geothermal Interests on Unocal's basis of accounting.
Prior to the acquisition, the Imperial Valley Geothermal Interests were
included in the consolidated financial statements of Unocal and were not
accounted for as a separate entity. Sales of electricity in the accompanying
Historical Summaries represent revenue accrued from Unocal's sales to Southern
California Edison Company. The Historical Summaries do not include certain
significant expenses that were incurred in connection with the operations of
the Imperial Valley Geothermal Interests and that were recorded in the Unocal
financial statements. Those expenses were either not included because the
information was not obtainable as Unocal did not allocate such expenses to
individual properties, or the basis of such amounts may be significantly
different as operated by Magma. Items excluded are depreciation, depletion and
amortization, transmission charges offset by credits from the Imperial
Irrigation District, interest expense which may have been incurred for any debt
directly or indirectly associated with the assets, allocated income taxes,
accounting, legal, marketing and other general and administrative costs. The
Historical Summaries also exclude any allocation of the total acquisition costs
resulting from the purchase of the Imperial Valley Geothermal Interest by Magma
as reflected in the accompanying Statement of Net Assets Acquired.
2. Related Parties:
Included in plant operating costs in the accompanying Historical Summaries are
certain technical support costs paid to a division of Unocal. Technical
support costs do not exceed $1,600,000 in any respective year.
<PAGE>
CALIFORNIA ENERGY COMPANY, INC.
AND
MAGMA POWER COMPANY
Annexes to the Information Statement/Prospectus
Annex A - Agreement and Plan of Merger
Annex B - Opinion of Goldman, Sachs & Co.
Annex C - Opinion of Gleacher & Co. Inc.
<PAGE>
ANNEX A
CALIFORNIA ENERGY COMPANY, INC.,
CE ACQUISITION COMPANY, INC.
and
MAGMA POWER COMPANY
AGREEMENT AND PLAN OF MERGER
Dated as of December 5, 1994
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
ARTICLE I
THE TENDER OFFER
SECTION 1.01. The Offer. . . . . . . . . . . . . . . . . 2
SECTION 1.02. Company Action . . . . . . . . . . . . . . 3
SECTION 1.03. Directors. . . . . . . . . . . . . . . . . 4
ARTICLE II
THE MERGER
SECTION 2.01. The Merger . . . . . . . . . . . . . . . . 5
SECTION 2.02. Effective Time . . . . . . . . . . . . . . 5
SECTION 2.03. Effect of the Merger . . . . . . . . . . . 6
SECTION 2.04. Subsequent Actions . . . . . . . . . . . . 6
SECTION 2.05. Certificate of Incorporation; By-Laws;
Directors and Officers . . . . . . . . . . 6
SECTION 2.06. Merger Consideration . . . . . . . . . . . 7
SECTION 2.07. Dissenting Company Common Stock. . . . . . 8
SECTION 2.08. Surrender of Company Common Stock; Stock
Transfer Books . . . . . . . . . . . . . . 8
SECTION 2.09. No Fractional Shares . . . . . . . . . . . 10
SECTION 2.10. Stock Options; Deferred Stock. . . . . . . 10
SECTION 2.11. Dividends; Transfer Taxes. . . . . . . . . 11
SECTION 2.12. Stockholders' Meetings . . . . . . . . . . 11
SECTION 2.13. Board Nominees; Assistance in
Consummation of the Merger . . . . . . . . 12
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB
SECTION 3.01. Corporate Organization; Subsidiaries . . . 12
SECTION 3.02. Certificate of Incorporation and
By-Laws. . . . . . . . . . . . . . . . . . 13
SECTION 3.03. Capitalization . . . . . . . . . . . . . . 13
SECTION 3.04. Authority Relative to this Agreement . . . 14
SECTION 3.05. No Conflict; Required Filings and
Consents . . . . . . . . . . . . . . . . . 14
SECTION 3.06. SEC Filings; Financial Statements. . . . . 15
SECTION 3.08. Title to Property. . . . . . . . . . . . . 17
SECTION 3.09. Litigation . . . . . . . . . . . . . . . . 17
SECTION 3.10. Financing Arrangements . . . . . . . . . . 17
SECTION 3.11. No Prior Activities. . . . . . . . . . . . 17
SECTION 3.12. Brokers. . . . . . . . . . . . . . . . . . 17
SECTION 3.13. Information in Disclosure Documents;
Registration Statement; Etc. . . . . . . . 17
SECTION 3.14. Conduct of Business. . . . . . . . . . . . 18
i
<PAGE>
SECTION PAGE
- ------- ----
SECTION 3.15. Environment. . . . . . . . . . . . . . . . 18
SECTION 3.16. Energy Regulatory Status . . . . . . . . . 19
SECTION 3.17. Employee Benefit Plans; Labor Matters. . . 19
SECTION 3.18. Insurance. . . . . . . . . . . . . . . . . 21
SECTION 3.19. Taxes. . . . . . . . . . . . . . . . . . . 21
SECTION 3.20. Trademarks, Licenses, Patents and
Copyrights . . . . . . . . . . . . . . . . 22
SECTION 3.21. Related Party Transactions . . . . . . . . 22
SECTION 3.22. Status of Development and Construction
Projects . . . . . . . . . . . . . . . . . 23
SECTION 3.23. Status of Operating Projects . . . . . . . 23
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 4.01. Corporate Organization; Subsidiaries . . . 24
SECTION 4.02. Articles of Incorporation and Bylaws . . . 25
SECTION 4.03. Capitalization . . . . . . . . . . . . . . 25
SECTION 4.04. Authority Relative to this Agreement . . . 26
SECTION 4.05. No Conflict; Required Filings and
Consents . . . . . . . . . . . . . . . . . 26
SECTION 4.06. SEC Filings; Financial Statements. . . . . 27
SECTION 4.07. Absence of Certain Changes or Events . . . 28
SECTION 4.08. Title to Property. . . . . . . . . . . . . 29
SECTION 4.09. Litigation . . . . . . . . . . . . . . . . 29
SECTION 4.10. Information in Disclosure Documents. . . . 30
SECTION 4.11. Fairness Opinion . . . . . . . . . . . . . 30
SECTION 4.12. Brokers. . . . . . . . . . . . . . . . . . 30
SECTION 4.13. Takeover Provisions Inapplicable; Rights
Agreement Amendment. . . . . . . . . . . . 30
SECTION 4.14. Conduct of Business. . . . . . . . . . . . 31
SECTION 4.15. Environment. . . . . . . . . . . . . . . . 31
SECTION 4.16. Energy Regulatory Status . . . . . . . . . 31
SECTION 4.17. Employee Benefit Plans; Labor Matters. . . 32
SECTION 4.18. Insurance. . . . . . . . . . . . . . . . . 34
SECTION 4.19. Taxes. . . . . . . . . . . . . . . . . . . 34
SECTION 4.20. Trademarks, Licenses, Patents and
Copyrights . . . . . . . . . . . . . . . . 35
SECTION 4.21. Related Party Transactions . . . . . . . . 35
SECTION 4.22. Status of Development and Construction
Projects . . . . . . . . . . . . . . . . . 35
SECTION 4.23. Status of Operating Projects . . . . . . . 36
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 5.01. Acquisition Proposals. . . . . . . . . . . 36
ii
<PAGE>
SECTION PAGE
- ------- ----
SECTION 5.02. Conduct of Business by the Parties
Pending the Merger . . . . . . . . . . . . 37
SECTION 5.03. No Shopping. . . . . . . . . . . . . . . . 40
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. Registration Statement/Proxy Statement . . 41
SECTION 6.02. Stock Exchange Listing . . . . . . . . . . 42
SECTION 6.03. Additional Agreements. . . . . . . . . . . 42
SECTION 6.04. Notification of Certain Matters. . . . . . 42
SECTION 6.05. Access to Information. . . . . . . . . . . 42
SECTION 6.06. Public Announcements . . . . . . . . . . . 43
SECTION 6.07. Best Efforts; Cooperation. . . . . . . . . 43
SECTION 6.08. Agreement to Defend and Indemnify. . . . . 43
SECTION 6.09. Disposition of Litigation. . . . . . . . . 44
SECTION 6.10. Employee Benefits. . . . . . . . . . . . . 45
SECTION 6.11. Certain Action of Parent and Merger Sub. . 46
ARTICLE VII
CONDITIONS OF MERGER
SECTION 7.01. Conditions to Obligation of Each Party
to Effect the Merger . . . . . . . . . . . 46
SECTION 7.02. Additional Conditions to Obligations of
the Company. . . . . . . . . . . . . . . . 47
SECTION 7.03. Additional Conditions to Obligations of
Parent and Merger Sub. . . . . . . . . . . 47
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. Termination. . . . . . . . . . . . . . . . 48
SECTION 8.02. Effect of Termination. . . . . . . . . . . 49
SECTION 8.03. Agreement Termination Fee. . . . . . . . . 49
SECTION 8.04. Offer Fee. . . . . . . . . . . . . . . . . 50
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01. Non-Survival of Representations,
Warranties and Agreements. . . . . . . . . 51
SECTION 9.02. Notices. . . . . . . . . . . . . . . . . . 51
SECTION 9.03. Expenses . . . . . . . . . . . . . . . . . 52
SECTION 9.04. Certain Definitions. . . . . . . . . . . . 52
SECTION 9.05. Headings . . . . . . . . . . . . . . . . . 52
iii
<PAGE>
SECTION PAGE
- ------- ----
SECTION 9.06. Severability . . . . . . . . . . . . . . . 52
SECTION 9.07. Entire Agreement; No Third-Party
Beneficiaries. . . . . . . . . . . . . . . 52
SECTION 9.08. Waiver . . . . . . . . . . . . . . . . . . 53
SECTION 9.09. Amendment. . . . . . . . . . . . . . . . . 53
SECTION 9.10. Assignment . . . . . . . . . . . . . . . . 53
SECTION 9.12. Counterparts . . . . . . . . . . . . . . . 53
Annex I
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of December 5,
1994 (this "Agreement"), among CALIFORNIA ENERGY COMPANY, INC., a
Delaware corporation ("Parent"), CE ACQUISITION COMPANY, INC., a
Delaware corporation and a wholly owned subsidiary of Parent
("Merger Sub"), and MAGMA POWER COMPANY, a Nevada corporation
(the "Company").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of Parent, Merger Sub
and the Company have each approved the acquisition of the Company
by Parent upon the terms and subject to the conditions set forth
in this Agreement;
WHEREAS, in furtherance thereof, it is proposed that
Merger Sub will make a cash tender offer (the "Offer") to acquire
12,400,000 shares of the issued and outstanding common stock,
$0.10 par value, of the Company, including the associated
Preferred Stock purchase rights (the "Rights") issued pursuant to
the Rights Agreement dated October 6, 1994 between the Company
and Chemical Trust Company of California, as Rights Agent (the
"Rights Agreement") (the "Company Common Stock"; all issued and
outstanding shares of Company Common Stock and the associated
Rights being hereinafter collectively referred to as the
"Shares") for $39.00 per Share, or such higher price as may be
paid in the Offer (the "Per Share Cash Amount"), net to the
seller in cash, subject to (i) there being validly tendered and
not withdrawn before the expiration of the Offer that number of
Shares which, together with Shares beneficially owned by Merger
Sub, represents at least a majority of the Shares outstanding on
a fully diluted basis (the "Minimum Tender Condition") and (ii)
Merger Sub having obtained sufficient financing to enable it to
consummate the Offer (the "Financing Condition");
WHEREAS, also in furtherance of such acquisition, the
Boards of Directors of the Company and Merger Sub have each
approved the merger (the "Merger") of Merger Sub with and into
the Company following completion of the Offer in accordance with
the General Corporation Law of the State of Delaware ("Delaware
Law") and the General Corporation Law of the State of Nevada
("Nevada Law") and upon the terms and subject to the conditions
set forth in this Agreement; and
WHEREAS, the Board of Directors of the Company has
resolved to recommend acceptance of the Offer and the Merger to
the holders of Shares and has determined that the consideration
to be paid for each Share in the Offer and the Merger is fair to
the holders of such Shares;
<PAGE>
2
NOW, THEREFORE, in consideration of the foregoing and
the mutual covenants and agreements herein contained, and
intending to be legally bound hereby, Parent, Merger Sub and the
Company hereby agree as follows:
ARTICLE I
THE TENDER OFFER
SECTION 1.01. The Offer. (a) Provided that this
Agreement shall not have been terminated in accordance with
Section 8.01 hereof and none of the events set forth in Annex I
hereto shall have occurred or be existing, Parent shall cause
Merger Sub to, and Merger Sub shall, commence the Offer as
promptly as practicable, but in no event later than five business
days after the date hereof. The obligation of Parent to accept
for payment any Shares tendered shall be subject to the
satisfaction of the conditions set forth in Annex I, including
the Minimum Tender Condition. Parent expressly reserves the
right to waive any such condition, to increase the price per
Share payable in the Offer, or to make any other changes in the
terms and conditions of the Offer (provided that no change may be
made that decreases the price per Share payable in the Offer or
that imposes additional conditions to the Offer from those set
forth in Annex I hereto). Merger Sub covenants and agrees that,
subject to the terms and conditions of this Agreement, unless the
Company otherwise consents in writing, Merger Sub will accept for
payment and pay for Shares as soon as it is permitted to do so
under applicable law. The Per Share Cash Amount shall be net to
the seller in cash, subject to reduction only for any applicable
Federal back-up withholding or stock transfer taxes payable by
the seller. The Company agrees that no Shares held by the
Company or any of its subsidiaries (as hereinafter defined) will
be tendered pursuant to the Offer.
(b) The Offer shall be made by means of an offer to
purchase (the "Offer to Purchase") having the conditions and
provisions set forth in Annex I hereto. As soon as practicable
on the date the Offer is commenced, Parent and Merger Sub shall
file with the Securities and Exchange Commission (the "SEC") a
Tender Offer Statement on Schedule 14D-1 (together with all
amendments and supplements thereto, the "Schedule 14D-1") with
respect to the Offer. The Schedule 14D-1 will comply in all
material respects with the provisions of, and satisfy in all
material respects the requirements of, such Schedule 14D-1 and
all applicable Federal securities laws and will contain
(including as an exhibit) or incorporate by reference the Offer
to Purchase (or portions thereof) and forms of the related letter
of transmittal (which documents, together with any supplements or
amendments thereto, and any other SEC schedule or form that is
filed in connection with the Offer and related transactions, are
<PAGE>
3
referred to collectively herein as the "Offer Documents"). Each
of Parent, Merger Sub and the Company represents and warrants
that the information provided and to be provided by it and/or by
its auditors, attorneys, financial advisors or other consultants
or advisors specifically for use in the Schedule 14D-1 and the
Offer Documents on the date filed with the SEC and on the date
first published, sent or given to the Company's stockholders
shall not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
Each of Parent, Merger Sub and the Company agrees promptly to
correct any information provided by it for use in the Schedule
14D-1 or the Offer Documents if and to the extent that it shall
have become false or misleading in any material respect and to
supplement the information provided by it specifically for use in
the Schedule 14D-1 or the Offer Documents to include any
information that shall become necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading, and Parent and Merger Sub further
agree to take all steps necessary to cause the Schedule 14D-1, as
so corrected or supplemented, to be filed with the SEC and the
Offer Documents, as so corrected or supplemented, to be
disseminated to holders of Shares, in each case as and to the
extent required by applicable Federal securities laws. The
Company and its counsel shall be given the right to review and
comment on the Schedule 14D-1 before filing with the SEC.
SECTION 1.02. Company Action. (a) The Company hereby
approves of and consents to the Offer and represents and warrants
that the Board of Directors of the Company, at a meeting duly
called and held on December 5, 1994, at which a majority of the
Directors were present, duly approved and adopted this Agreement
and the transactions contemplated hereby, including the Offer and
the Merger, recommended that the stockholders of the Company
accept the Offer and tender their Shares pursuant to the Offer,
and determined that this Agreement and the transactions
contemplated hereby, including the Offer and the Merger, are fair
to and in the best interests of the stockholders of the Company.
The Company further represents that Goldman, Sachs & Co.
("Goldman Sachs") has rendered to the Board of Directors of the
Company its opinion as of December 5, 1994, to the effect that
the consideration to be received by the stockholders of the
Company pursuant to the Offer and the Merger is fair to such
stockholders (other than Parent and its affiliates).
(b) The Company hereby agrees to file with the SEC, as
promptly as practicable after the filing by Parent and Merger Sub
of the Schedule 14D-1 with respect to the Offer, a Tender Offer
Solicitation/Recommendation Statement on Schedule 14D-9 (together
<PAGE>
4
with any amendments or supplements thereto, the "Schedule 14D-9")
that will comply in all material respects with the provisions of
all applicable Federal securities laws. The Company agrees to
mail such Schedule 14D-9 to the stockholders of the Company
promptly after the commencement of the Offer. The Schedule 14D-9
and the Offer Documents shall contain the recommendations of the
Board of Directors of the Company described in Section 1.02(a)
hereof. The Schedule 14D-9, on the date filed with the SEC and
on the date first published, sent or given to the Company's
stockholders, shall not contain any untrue statement of a
material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except
that no representation is made by the Company with respect to
written information supplied by Parent or Merger Sub specifically
for inclusion in the Schedule 14D-9. The Company agrees promptly
to correct the Schedule 14D-9 if and to the extent that it shall
become false or misleading in any material respect, and each of
Parent and Merger Sub, with respect to written information
supplied by it specifically for use in the Schedule 14D-9, shall
promptly notify the Company of any required corrections of such
information and cooperate with the Company with respect to
correcting such information and to supplement the information
contained in the Schedule 14D-9 to include any information that
shall become necessary in order to make the statements therein,
in light of the circumstances under which they were made, not
misleading, and the Company shall take all steps necessary to
cause the Schedule 14D-9 as so corrected to be filed with the SEC
and disseminated to the Company's stockholders to the extent
required by applicable Federal securities laws. Parent and
Merger Sub, and their counsel, shall be given an opportunity to
review and comment on the Schedule 14D-9 before filing with the
SEC.
(c) In connection with the Offer, the Company shall
promptly upon execution of this Agreement furnish Parent and
Merger Sub with mailing labels containing the names and addresses
of all record holders of Shares and security position listings of
Shares held in stock depositories, each as of a recent date, and
shall promptly furnish Parent and Merger Sub with such additional
information, including updated lists of stockholders, mailing
labels and security position listings, and such other information
and assistance as Parent and Merger Sub or their agents may
reasonably request for the purpose of communicating the Offer to
the record and beneficial holders of Shares.
SECTION 1.03. Directors. (a) Promptly upon the
purchase by Merger Sub of a majority of the outstanding Shares
pursuant to the Offer, and from time to time thereafter as Shares
are acquired by Merger Sub, Merger Sub shall be entitled, subject
<PAGE>
5
to compliance with Section 14(f) of the Securities Exchange Act
of 1934 (the "Exchange Act"), to designate such number of
directors, rounded to the nearest whole number (any number ending
with .5 being rounded to the next highest whole number), on the
Board of Directors of the Company as will give Merger Sub
representation on the Board of Directors equal to that number of
directors which equals the product of the total number of
directors on the Board of Directors (giving effect to the
directors appointed or elected pursuant to this sentence and
including current directors serving as officers of the Company)
multiplied by the percentage that the aggregate number of Shares
beneficially owned by Merger Sub or any affiliate of Merger Sub
(including for purposes of this Section 1.03 such Shares as are
accepted for payment pursuant to the Offer, but excluding Shares
held by the Company or any of its affiliates) bears to the number
of Shares outstanding, but in no event less than a majority of
the entire Board of Directors of the Company (regardless of
vacancies). At such times, the Company will also cause (i) each
committee of the Board of Directors, (ii) if requested by Merger
Sub, the board of directors of each of the Company's Subsidiaries
(as defined below) and (iii) if requested by Merger Sub, each
committee of such board to include persons designated by Merger
Sub constituting the same percentage of each such committee or
board as Merger Sub's designees are of the Board of Directors.
The Company shall, upon request by Merger Sub, promptly increase
the size of the Board of Directors or exercise its best efforts
to secure the resignations of such number of directors as is
necessary to enable Merger Sub designees to be elected to the
Board of Directors and shall cause Merger Sub's designees to be
so elected; provided, however, that such resignations shall not
cause the number of Disinterested Directors (as defined below) to
be less than two. Subject to applicable law, the Company shall
promptly take all action necessary pursuant to Section 14(f) of
the Exchange Act and Rule 14f-1 promulgated thereunder in order
to fulfill its obligations under this Section 1.03 and shall
include in the Schedule 14D-9 mailed to stockholders promptly
after the commencement of the Offer (or an amendment thereof or
an information statement pursuant to Rule 14f-1 if Merger Sub has
not theretofore designated directors) such information with
respect to the Company and its officers and directors as is
required under Section 14(f) and Rule 14f-1 in order to fulfill
its obligations under this Section 1.03. Parent and Merger Sub
will supply the Company and be solely responsible for any
information with respect to itself and its nominees, officers,
directors and affiliates required by Section 14(f) and Rule
14f-1.
(b) Following the election or appointment of Parent's
designees pursuant to this Section 1.03 and prior to the
Effective Time, any amendment of this Agreement or the Restated
<PAGE>
6
Articles of Incorporation or Restated Bylaws of the Company, any
termination of this Agreement by the Company, any extension by
the Company of the time for the performance of any of the
obligations or other acts of Parent or Merger Sub or waiver of
any of the Company's rights hereunder, and any other consent or
action by the Board of Directors hereunder, will require the
concurrence of a majority (which shall be at least two) of the
directors of the Company then in office who are not designees of
Parent or Merger Sub (the "Disinterested Directors").
ARTICLE II
THE MERGER
SECTION 2.01. The Merger. At the Effective Time and
subject to and upon the terms and conditions of this Agreement,
Delaware Law and Nevada Law, Merger Sub shall be merged with and
into the Company, the separate corporate existence of Merger Sub
shall cease, and the Company shall continue as the surviving
corporation. The Company as the surviving corporation after the
Merger hereinafter sometimes is referred to as the "Surviving
Corporation".
SECTION 2.02. Effective Time. As promptly as
practicable after the satisfaction or waiver of the conditions
set forth in Article VII, the parties hereto shall cause the
Merger to be consummated by filing this Agreement or a
Certificate of Merger with the Secretary of State of the State of
Delaware and the Secretary of State of the State of Nevada, in
such form as required by, and executed in accordance with the
relevant provisions of, Delaware Law and Nevada Law, respectively
(the time of such later filing being the "Effective Time").
Prior to such filings, a closing shall be held at the offices of
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd
Street, New York, New York 10022, or such other place as the
parties shall agree, for the purpose of confirming the
satisfaction or waiver of the conditions set forth in Article
VII.
SECTION 2.03. Effect of the Merger. At the Effective
Time, the effect of the Merger shall be as provided in the
applicable provisions of Delaware Law and Nevada Law. Without
limiting the generality of the foregoing, and subject thereto, at
the Effective Time all the property, rights, privileges, powers
and franchises of the Company and Merger Sub shall vest in the
Surviving Corporation, and all debts, liabilities and duties of
the Company and Merger Sub shall become the debts, liabilities
and duties of the Surviving Corporation.
<PAGE>
7
SECTION 2.04. Subsequent Actions. If, at any time
after the Effective Time, the Surviving Corporation shall
consider or be advised that any deeds, bills of sale,
assignments, assurances or any other actions or things are
necessary or desirable to vest, perfect or confirm of record or
otherwise in the Surviving Corporation its right, title or
interest in, to or under any of the rights, properties or assets
of either of the Company or Merger Sub acquired or to be acquired
by the Surviving Corporation as a result of, or in connection
with, the Merger or otherwise to carry out this Agreement, the
officers and directors of the Surviving Corporation shall be
authorized to execute and deliver, in the name and on behalf of
either the Company or Merger Sub, all such deeds, bills of sale,
assignments and assurances and to take and do, in the name and on
behalf of each of such corporations or otherwise, all such other
actions and things as may be necessary or desirable to vest,
perfect or confirm any and all right, title and interest in, to
and under such rights, properties or assets of the Surviving
Corporation or otherwise to carry out this Agreement.
SECTION 2.05. Certificate of Incorporation; By-Laws;
Directors and Officers. (a) Unless otherwise determined by
Parent before the Effective Time, at the Effective Time the
Certificate of Incorporation of Merger Sub, as in effect
immediately before the Effective Time, shall be the Articles of
Incorporation of the Surviving Corporation until thereafter
amended as permitted by law and such Articles of Incorporation;
provided, however, that Article One of the Articles of
Incorporation of the Surviving Corporation shall be amended to
read as follows: "FIRST: The name of the corporation is Magma
Power Company".
(b) The By-Laws of Merger Sub, as in effect
immediately before the Effective Time, shall be the By-Laws of
the Surviving Corporation until thereafter amended as permitted
by law, the Articles of Incorporation of the Surviving
Corporation and such By-Laws.
(c) The directors of Merger Sub immediately before the
Effective Time will be the initial directors of the Surviving
Corporation, and the officers of the Company immediately before
the Effective Time will be the initial officers of the Surviving
Corporation, in each case until their successors are elected or
appointed and qualified. If, at the Effective Time, a vacancy
shall exist on the Board of Directors or in any office of the
Surviving Corporation, such vacancy may thereafter be filled in
the manner provided by law or the By-laws of Merger Sub.
SECTION 2.06. Merger Consideration. At the Effective
Time, by virtue of the Merger and without any action on the part
<PAGE>
8
of Merger Sub, the Company or the holder of any of the following
securities:
(a) All Shares which are held by the Company or any
subsidiary of the Company, and any Shares owned by Parent, Merger
Sub or any other subsidiary of Parent, shall cease to be
outstanding, shall be canceled and retired without payment of any
consideration therefor and shall cease to exist.
(b) Subject to Section 2.09, each remaining
outstanding Share shall be converted in the Merger into the right
to receive that amount of cash and that number of shares of
common stock, par value $0.0675 per share, of Parent (the "Parent
Common Stock") equal to, at the option of Parent, (i) the All
Cash Component Amount (as defined below), net in cash, without
interest thereon, or (ii) both (A) the Mixed Cash Component
Amount (as defined below), net in cash, without interest thereon,
and (B) the number of fully paid and nonassessable shares of
Parent Common Stock equal to the quotient of (I) $39.00 less (II)
the Mixed Cash Component Amount divided by the Average Closing
Price (as defined below) (the All Cash Component Amount or
(ii)(A) and (ii)(B), collectively, as applicable, being the
"Merger Consideration"). The "Mixed Cash Component Amount" shall
mean an amount equal to the quotient of (A) (x) $28.50 multiplied
by the number of Shares outstanding at the Effective Time less
(y) $39.00 multiplied by the number of Shares owned by Parent and
any of its affiliates immediately prior to the Effective Time,
divided by (B) the number of Shares outstanding at the Effective
Time (other than Shares owned by Parent and any of its
affiliates). The "All Cash Component Amount" shall mean an
amount equal to the quotient of (A) (x) $38.75 multiplied by the
number of Shares outstanding at the Effective Time less (y)
$39.00 multiplied by the number of Shares owned by Parent and any
of its affiliates immediately prior to the Effective Time,
divided by (B) the number of Shares outstanding at the Effective
Time (other than Shares owned by Parent and any of its
affiliates). The "Average Closing Price" shall mean the average
closing price of Parent Common Stock on the New York Stock
Exchange (the "NYSE") during the 15 consecutive trading days
ending on the fifth business day prior to the Effective Time;
provided, however, that if such average closing price exceeds
$18.73, the Average Closing Price shall be $18.73, and if such
average closing price is less than $14.27, the Average Closing
Price shall be $14.27.
(c) All Shares to be converted into the right to
receive the Merger Consideration pursuant to this Section 2.06
shall cease to be outstanding, shall be canceled and retired and
shall cease to exist, and each holder of a certificate
representing any such Shares shall thereafter cease to have any
<PAGE>
9
rights with respect to such shares, except the right to receive
for each of the Shares, upon the surrender of such certificate in
accordance with Section 2.08, the Merger Consideration and cash
in lieu of fractional shares of Parent Common Stock as
contemplated by Section 2.09.
(d) Each issued and outstanding share of capital stock
of Merger Sub shall be converted into and become one fully paid
and nonassessable share of common stock, $.01 par value, of the
Surviving Corporation.
SECTION 2.07. Dissenting Company Common Stock. (a)
Notwithstanding any provision of this Agreement to the contrary,
any Shares held by a holder who has demanded and perfected his
demand for appraisal of his shares of Company Common Stock in
accordance with Nevada Law and as of the Effective Time has
neither effectively withdrawn nor lost his right to such
appraisal ("Dissenting Shares") shall not be converted into or
represent a right to receive the Merger Consideration pursuant to
Section 2.06(b), but the holder thereof shall be entitled to only
such rights as are granted by Nevada Law.
(b) Notwithstanding the provisions of subsection (a)
of this Section 2.07, if any holder of shares of Company Common
Stock who demands appraisal of his shares under Nevada Law shall
effectively withdraw or lose (through failure to perfect or
otherwise) his right to appraisal, then, as of the Effective Time
or the occurrence of such event, whichever later occurs, such
holder's shares of Company Common Stock shall automatically be
converted into and represent only the right to receive the Merger
Consideration as provided in Section 2.06(b), without interest
thereon, upon surrender of the certificate or certificates
representing such shares of Company Common Stock.
(c) The Company shall give Parent (i) prompt notice of
any written demands for appraisal or payment of the fair value of
any Company Common Stock, withdrawals of such demands, and any
other instruments served pursuant to Nevada Law received by the
Company and (ii) the opportunity to direct all negotiations and
proceedings with respect to demands for appraisal under Nevada
Law. The Company shall not voluntarily make any payment with
respect to any demands for appraisal and shall not, except with
the prior written consent of Parent, settle or offer to settle
any such demands.
SECTION 2.08. Surrender of Company Common Stock; Stock
Transfer Books. (a) Before the Effective Time, the Company and
Parent shall designate a bank or trust company to act as agent
for the holders of Company Common Stock (the "Exchange Agent") to
receive the funds and securities necessary to make the payments
<PAGE>
10
contemplated by Section 2.06. Such funds shall be invested by
the Exchange Agent as directed by the Surviving Corporation,
provided that such investments shall be in obligations of or
guaranteed by the United States of America or of any agency
thereof and backed by the full faith and credit of the United
States of America, in commercial paper obligations rated A-1 or
P-1 or better by Moody's Investors Services, Inc. or Standard &
Poor's Corporation, respectively, or in deposit accounts,
certificates of deposit or banker's acceptances of, repurchase or
reverse repurchase agreements with, or Eurodollar time deposits
purchased from, commercial banks with capital, surplus and
undivided profits aggregating in excess of $200 million (based on
the most recent financial statements of such bank which are then
publicly available at the SEC or otherwise).
(b) Each holder of a certificate or certificates
representing any outstanding shares of Company Common Stock
("Certificates") canceled upon the Merger pursuant to Section
2.06(b) may thereafter surrender such Certificate or Certificates
to the Exchange Agent, as agent for such holder, to effect the
surrender of such Certificate or Certificates on such holder's
behalf for a period ending one year after the Effective Time.
Any portion of the Merger Consideration which remains
unclaimed by the former stockholders of the Company for one year
after the Effective Time shall be delivered to Parent, upon
demand of Parent. Parent agrees that promptly after the
Effective Time it shall cause the distribution to holders of
record of Company Common Stock as of the Effective Time
appropriate materials to facilitate such surrender, including (i)
a form of letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent) and (ii) instructions for use
in effecting the surrender of the Certificates for payment
therefor. Upon surrender of Certificates for cancellation to the
Exchange Agent, together with such letter of transmittal duly
executed and any other required documents, the holder of such
Certificates shall be entitled to receive for each of the shares
of Company Common Stock represented by such Certificates the
Merger Consideration and the Certificates so surrendered shall
forthwith be canceled. Until so surrendered, Certificates shall
represent solely the right to receive the Merger Consideration
and any cash in lieu of fractional shares of Parent Common Stock
as contemplated by Section 2.09 with respect to each of the
shares contemplated thereby.
(c) If payment of the Merger Consideration in respect
of canceled Shares is to be made to a person other than the
person in whose name a surrendered Certificate or instrument is
<PAGE>
11
registered, it shall be a condition to such payment that the
Certificate or instrument so surrendered shall be properly
endorsed or shall be otherwise in proper form for transfer and
that the person requesting such payment shall have paid any
transfer and other taxes required by reason of such payment in a
name other than that of the registered holder of the Certificate
or instrument surrendered or shall have established to the
satisfaction of the Surviving Corporation that such tax either
has been paid or is not payable.
(d) At the close of business on the day of the
Effective Time, the stock transfer books of the Company shall be
closed and there shall not be any further registration of
transfers of Shares thereafter on the records of the Company.
If, after the Effective Time, Certificates are presented to the
Surviving Corporation, they shall be canceled and exchanged for
the Merger Consideration as provided in Section 2.06(b). No
interest shall accrue or be paid on any cash payable upon the
surrender of a Certificate or Certificates which immediately
before the Effective Time represented outstanding shares of
Company Common Stock.
SECTION 2.09. No Fractional Shares. No Certificates
or scrip representing less than one share of Parent Common Stock
shall be issued upon the surrender for exchange of Certificates
representing shares of Company Common Stock pursuant to Section
2.06(b). In lieu of any such fractional share, each holder of
Shares who would otherwise have been entitled to a fraction of a
share of Parent Common Stock upon surrender of Certificates for
exchange pursuant to Section 2.06(b) shall be paid upon such
surrender cash (without interest) in an amount equal to such
holder's proportionate interest in the net proceeds from the sale
or sales in the open market by the Exchange Agent, on behalf of
all such holders, of the aggregate fractional Parent Common Stock
issued pursuant to this Section 2.09. As soon as practicable
following the Effective Time the Exchange Agent shall determine
the excess of (i) the number of full shares of Parent Common
Stock delivered to the Exchange Agent by Parent over (ii) the
aggregate number of full shares of Parent Common Stock to be
distributed to holders of Company Common Stock (such excess being
herein called the "Excess Shares"), and the Exchange Agent, as
agent for the former holders of Company Common Stock, shall sell
the Excess Shares at the prevailing prices on the NYSE. The sale
of the Excess Shares by the Exchange Agent shall be executed on
the NYSE and shall be executed in round lots to the extent
practicable. The Exchange Agent shall deduct from the proceeds
of the sale of the Excess Shares all commissions, transfer taxes
and other reasonable out-of-pocket transaction costs, including
any expenses of the Exchange Agent, incurred in connection with
such sale of Excess Shares. Until the net proceeds of such sale
<PAGE>
12
have been distributed to the former stockholders of the Company,
the Exchange Agent will hold such proceeds in trust for such
former stockholders. As soon as practicable after the
determination of the amount of cash to be paid to former
stockholders of the Company in lieu of any fractional interests,
the Exchange Agent shall make available in accordance with this
Agreement such amounts to such former stockholders.
SECTION 2.10. Stock Options; Deferred Stock.
Immediately prior to the Effective Time, (a) each unexpired and
unexercised option to purchase Shares (each, a "Company Option"),
under the Company's 1987 Stock Option Plan and 1994 Equity
Participation Plan (collectively, the "Company Stock Option
Plans"), whether or not then exercisable, shall be cancelled by
the Company, and each holder of a cancelled Company Option shall
be entitled to receive at the Effective Time or as soon as
practicable thereafter from the Company in consideration for the
cancellation of such Company Option an amount in cash equal to
the product of (i) the number of Shares previously subject to
such Company Option and (ii) the excess, if any, of the Per Share
Cash Amount or, if the election contemplated by Section
2.06(b)(i) has been made by Parent, $38.75, over the exercise
price per Share previously subject to such Company Option, and
(b) each outstanding unvested share of deferred stock under the
Company's 1994 Equity Participation Plan or otherwise identified
on Schedule 4.03 (each, a "Deferred Share") shall be cancelled by
the Company, and each holder of a cancelled Deferred Share shall
be entitled to receive at the Effective Time or as soon as
practicable thereafter from the Company in consideration for the
cancellation of such Deferred Share an amount in cash equal to
the Per Share Cash Amount or, if the election contemplated by
Section 2.06(b)(i) has been made by Parent, $38.75.
SECTION 2.11. Dividends; Transfer Taxes. No dividends
or other distributions that are declared or made on Parent Common
Stock will be paid to persons entitled to receive certificates
representing Parent Common Stock pursuant to this Agreement until
such persons surrender their Certificates representing Company
Common Stock. Upon such surrender, there shall be paid to the
person in whose name the certificates representing such Parent
Common Stock shall be issued any dividends or other distributions
that shall have become payable with respect to such Parent Common
Stock in respect of a record date after the Effective Time. In
no event shall the person entitled to receive such dividends be
entitled to receive interest on such dividends. Neither the
Exchange Agent nor any party hereto shall be liable to a holder
of Shares for any shares of Parent Common Stock or dividends
thereon delivered to a public official pursuant to any applicable
escheat laws.
<PAGE>
13
SECTION 2.12. Stockholders' Meetings. (a) The
Company shall take all action necessary, in accordance with
applicable law and its Articles of Incorporation and Bylaws, to
convene a special meeting of the holders of Shares (the "Company
Meeting") as promptly as practicable after consummation of the
Offer for the purpose of considering and taking action upon this
Agreement and the Merger. The stockholder vote required for
approval of the Merger will be no greater than that set forth in
Nevada Law. The Board of Directors of the Company will recommend
that holders of Shares vote in favor of and approve the Merger.
The Company will use its best efforts to solicit from
stockholders of the Company proxies in favor of the Merger and
will take all other action necessary or, in the reasonable
opinion of Parent, advisable to secure any vote of stockholders
required by Nevada Law to effect the Merger. At the Company
Meeting, all of the Shares then owned by Parent, Merger Sub, or
any other subsidiary of Parent, or with respect to which Parent,
Merger Sub, or any other subsidiary of Parent holds the power to
direct the voting, will be voted in favor of approval of the
Merger and adoption of this Agreement.
(b) Parent shall take all action necessary, unless
Parent has elected the All Cash Component under
Section 2.06(b)(i), in accordance with applicable law and its
Certificate of Incorporation and Bylaws, to convene a special
meeting of the holders of Parent Common Stock (the "Parent
Meeting") as promptly as practicable after consummation of the
Offer for the purpose of considering and taking action to (i)
authorize the issuance of Parent Common Stock pursuant to the
Merger under the applicable guidelines of the NYSE (the "Parent
Share Proposal") and (ii) authorize the increase of the
authorized Parent Common Stock from 60,000,000 shares to no more
than 80,000,000 shares or such greater number of shares as shall
be required to issue the Parent Common Stock in the Merger. The
Board of Directors of Parent will (i) recommend that holders of
Parent Common Stock vote in favor of and approve the Parent Share
Proposal at the Parent Meeting and (ii) recommend that holders of
Parent Common Stock vote in favor of and approve an amendment to
its Certificate of Incorporation increasing the authorized Parent
Common Stock from 60,000,000 shares to no more than 80,000,000
shares or such greater number of shares as shall be required to
issue the Parent Common Stock in the Merger (the "Charter
Amendment"). Parent will use its reasonable best efforts to
solicit from stockholders of Parent proxies in favor of the
Parent Share Proposal and the Charter Amendment and will take all
other action necessary or, in the reasonable opinion of the
Company, advisable to secure any vote of stockholders required by
Delaware Law to effect the Merger.
<PAGE>
14
SECTION 2.13. Board Nominees; Assistance in
Consummation of the Merger. (a) Parent will nominate and use
its best efforts to cause up to two nominees of the Company
designated in writing to Parent prior to the closing of the
Merger to be elected or appointed as members of the Board of
Directors of Parent.
(b) Each of Parent, Merger Sub and the Company shall
provide all reasonable assistance to, and shall cooperate with,
each other to bring about the consummation of the Offer and the
Merger as soon as possible in accordance with the terms and
conditions of this Agreement. Parent shall cause Merger Sub to
perform all of its obligations in connection with this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB
Except as set forth on the Parent Disclosure Schedule
previously delivered by Parent to the Company (the "Parent
Disclosure Schedule"), Parent and Merger Sub hereby jointly and
severally represent and warrant to the Company as follows:
SECTION 3.01. Corporate Organization; Subsidiaries.
Each of Parent and the Parent Subsidiaries (as defined below) is
a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation
and has the requisite corporate power and authority and any
necessary governmental authority to own, operate or lease the
properties that it purports to own, operate or lease and to carry
on its business as it is now being conducted, and is duly
qualified as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of its
properties owned, operated or leased or the nature of its
activities makes such qualification necessary, except for such
failure which, when taken together with all other such failures,
would not have a Material Adverse Effect (as defined below) on
Parent and Merger Sub. The term "Parent Subsidiary" means any
corporation, partnership, joint venture or other legal entity of
which Parent (either alone or through or together with any other
Parent Subsidiary) owns, directly or indirectly, 50% or more of
the stock or other equity interests, or owns, directly or
indirectly, interests such that the holders are generally
entitled to vote for the election of 50% of the board of
directors or other governing body, of such corporation,
partnership, joint venture or other legal entity. When used in
connection with Parent and Merger Sub, the term "Material Adverse
Effect" means any change or effect, when taken together with all
other adverse changes and effects relating to Parent or Merger
<PAGE>
15
Sub, which are not individually or in the aggregate deemed to
have a Material Adverse Effect, that is or is reasonably likely
to be materially adverse to the business, operations, properties,
condition (financial or otherwise), assets or liabilities
(including, without limitation, contingent liabilities) of Parent
and the Parent Subsidiaries taken as a whole; provided, however,
that the occurrence of any or all of the following shall not
constitute a Material Adverse Effect: (i) any change in any law
applicable to Parent or any Parent Subsidiary or by which any
property or asset of Parent or any Parent Subsidiary is bound,
(ii) a failure to receive any contract for which Parent or any
Parent Subsidiary has submitted or will submit a competitive bid,
(iii) the loss of any contract or arrangement (whether by
revocation, lapse or invalidity) with respect to a project that
Parent or a Parent Subsidiary has under development other than
any such loss resulting from a breach by Parent of the
representations and warranties set forth in Section 3.22 or 3.23
hereof, (iv) a failure to close any public or private financing
of any project in which Parent or any Parent Subsidiary owns a
direct or indirect interest or (v) the termination of the
employment of any employee, officer, director or consultant of
Parent or any Parent Subsidiary.
SECTION 3.02. Certificate of Incorporation and
By-Laws. Parent has heretofore furnished to the Company a
complete and correct copy of Parent's and Merger Sub's
Certificates of Incorporation and By-Laws, each as amended to the
date hereof. Such Certificates of Incorporation and By-Laws are
in full force and effect. Neither Parent nor Merger Sub is in
violation of any of the provisions of its Certificate of
Incorporation or By-laws or equivalent organizational documents.
SECTION 3.03. Capitalization. As of the date hereof,
the authorized capital stock of Parent consists of 60,000,000
shares of Parent Common Stock and 1,000,000 shares of preferred
stock ("Parent Preferred Stock"). As of September 30, 1994, (i)
35,649,278 shares of Parent Common Stock were issued and
outstanding, all of which were validly issued, fully paid and
nonassessable and 3,816,686 shares of Parent Common Stock held in
treasury, (ii) 1,247 shares of Series C Redeemable Preferred
Stock of Parent were outstanding and 3,529,252 shares of Parent
Common Stock reserved for issuance upon conversion of such shares
of Series C Redeemable Preferred Stock, (iii) there were
3,541,166 shares of Parent Common Stock reserved for issuance
pursuant to options granted under Parent's 1986 Stock Option Plan
(the "Parent Stock Option Plan"), (iv) there were 6,064,154
shares of Parent Common Stock reserved for issuance under options
other than those granted under the Parent Stock Option Plan, and
(v) 4,444,444 shares of Parent Common Stock reserved for issuance
pursuant to the 5% Convertible Subordinated Debentures due July
<PAGE>
16
31, 2000 of Parent . There has been no material change in the
capitalization of Parent since September 30, 1994. All of the
outstanding shares of Parent Common Stock have been duly
authorized and validly issued and are fully paid and
nonassessable and free of preemptive rights or other similar
obligations. Except as set forth in this Section 3.03 or on
Schedule 3.03, there are not, as of the date hereof, any
outstanding or authorized subscriptions, options, warrants,
convertible securities, calls, rights, commitments to issue or
any other agreements of any character relating to the issued or
unissued capital stock or other securities of Parent to which
Parent is party or by which Parent is bound obligating Parent to
issue, deliver, or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of Parent or obligating
Parent to grant, extend or enter into any subscription, option,
warrant, call, right, commitment or other such agreement. All
the outstanding capital stock or partnership or other equity
interest of each of the Parent Subsidiaries is duly authorized,
validly issued, fully paid and nonassessable and, except as
disclosed on Schedule 3.01, is owned by Parent or a Parent
Subsidiary free and clear of any liens, security interests,
pledges, agreements, claims, charges or encumbrances of any
nature whatsoever. There are no existing options, calls or
commitments of any character relating to the issued or unissued
capital stock or other securities of any Parent Subsidiary.
Except for the Parent Subsidiaries and except as previously
disclosed in the Parent SEC Reports (as defined below), Parent
does not directly or indirectly own a 50% or greater equity
interest in any other corporation, partnership, joint venture or
other business association or entity.
SECTION 3.04. Authority Relative to this Agreement.
The execution and delivery of this Agreement by Parent and Merger
Sub and the consummation by Parent and Merger Sub of the
transactions contemplated hereby (the "Transactions") have been
duly authorized by all necessary corporate action on the part of
Parent and Merger Sub and by Parent as the sole stockholder of
Merger Sub, and no other corporate proceeding is necessary for
the execution and delivery of this Agreement by Parent or Merger
Sub, the performance by Parent or Merger Sub of their obligations
hereunder and the consummation by Parent or Merger Sub of the
transactions contemplated hereby. This Agreement has been duly
executed and delivered by Parent and Merger Sub and constitutes a
legal, valid and binding obligation of each, enforceable against
each of them in accordance with its terms.
SECTION 3.05. No Conflict; Required Filings and
Consents. (a) The execution and delivery of this Agreement by
Parent and Merger Sub do not, and the performance of this
Agreement by Parent and Merger Sub will not, (i) conflict with or
<PAGE>
17
violate any law, regulation, court order, judgment or decree
applicable to Parent or any Parent Subsidiary or by which any of
their property is bound or affected, (ii) violate or conflict
with either the Certificate of Incorporation or By-Laws of either
Parent or any Parent Subsidiary, or (iii) result in any breach of
or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to others
any rights of termination or cancellation of, or result in the
creation of a lien or encumbrance on any of the property or
assets of Parent or any Parent Subsidiary pursuant to, any
contract, instrument, permit, license or franchise to which
Parent or any Parent Subsidiary is a party or by which Parent or
any Parent Subsidiary or any of their property is bound or
affected, except in the case of (i) or (iii) for conflicts,
violations, breaches or defaults that, in the aggregate, would
not have a Material Adverse Effect.
(b) Except for applicable requirements, if any, of the
Securities Act of 1933, as amended (the "Securities Act"), the
Exchange Act, "blue sky" laws of various states, the New York
Stock Exchange, Inc. and filing and recordation of appropriate
merger documents as required by Delaware Law and Nevada Law,
neither Parent nor Merger Sub is required to submit any notice,
report or other filing with any governmental authority, domestic
or foreign, in connection with the execution, delivery or
performance of this Agreement or the consummation of the
transactions contemplated hereby. Except as aforesaid, no
waiver, consent, approval or authorization of any governmental or
regulatory authority, domestic or foreign, is required to be
obtained or made by either Parent or Merger Sub in connection
with its execution, delivery or performance of this Agreement.
SECTION 3.06. SEC Filings; Financial Statements. (a)
Parent has filed all forms, reports and documents required to be
filed with the SEC since January 1, 1992, and has heretofore
delivered (or made available) to the Company, in the form filed
with the SEC, its (i) Annual Reports on Form 10-K for the fiscal
years ended December 31, 1993 and December 31, 1992,
respectively, (ii) all proxy statements relating to the Company's
meetings of stockholders (whether annual or special) held since
January 1, 1992, and (iii) all other reports or registration
statements (including Quarterly Reports on Form 10-Q) filed by
Parent with the SEC since January 1, 1992 (collectively, the
"Parent SEC Reports"). The Parent SEC Reports (i) were prepared
in all material respects in accordance with the requirements of
the Securities Act or the Exchange Act, as the case may be, and
(ii) did not at the time they were filed contain any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under that
<PAGE>
18
they were made, not misleading. No Parent Subsidiary is required
to file any statements or reports with the SEC pursuant to
Sections 13(a) or 15(d) of the Exchange Act.
(b) The consolidated financial statements contained in
the Parent SEC Reports have been prepared in accordance with
generally accepted accounting principles applied on a consistent
basis throughout the periods involved (except as may be indicated
in the notes thereto) and fairly present the consolidated
financial position of Parent and the Parent Subsidiaries as at
the respective dates thereof and the consolidated results of
operations and changes in financial position of Parent and the
Parent Subsidiaries for the periods indicated, except that the
unaudited interim financial statements were or are subject to
normal and recurring year-end adjustments which were not or are
not expected to be material in amount.
(c) Except as reflected or reserved against in the
consolidated financial statements contained in the Parent SEC
Reports, and except as set forth on Schedule 3.06, Parent and the
Parent Subsidiaries have no liabilities of any nature (whether
accrued, absolute, contingent or otherwise) that in the aggregate
could have a Material Adverse Effect or any bonds, debentures,
notes, letters of credit or other indebtedness (including
guarantees) for any amount greater than $1,000,000. Since
September 30, 1994, neither Parent nor any of the Parent
Subsidiaries has incurred any liabilities material to Parent and
the Parent Subsidiaries taken as a whole, except (i) liabilities
incurred in the ordinary course of business and consistent with
past practice, (ii) liabilities incurred in connection with or as
a result of the Offer or the Merger or (iii) liabilities
disclosed on Schedule 3.06.
SECTION 3.07. Absence of Certain Changes or Events.
Since September 30, 1994, except as contemplated in this
Agreement or as specifically disclosed in the Parent SEC Reports
or the Tender Offer Statement on Schedule 14D-1 that was
originally filed by Parent and Merger Sub with the SEC on October
6, 1994 (as amended to the date hereof) (the "Previous 14D-1") or
as appears on Schedule 3.07, there has not been:
(a) any Material Adverse Effect;
(b) any redemption or other acquisition of Parent
Common Stock by Parent or any of the Parent Subsidiaries
(other than pursuant to a plan of repurchase under
Rule 10b-18 of the Exchange Act) or any declaration or
payment of any dividend or other distribution in cash, stock
or property with respect to Parent Common Stock;
<PAGE>
19
(c) any entry into any material commitment or
transaction (including, without limitation, any borrowing or
capital expenditure) other than in the ordinary course of
business or as contemplated by this Agreement; or
(d) any change by Parent in accounting principles or
methods except insofar as such change may have been required
by a change in generally accepted accounting principles and
disclosed in the Parent SEC Reports.
Since September 30, 1994, except as disclosed on Schedule 3.07,
the Previous 14D-1 or in the Parent SEC Reports, Parent and the
Parent Subsidiaries have conducted their business only in the
ordinary course and in a manner consistent with past practice and
have not made any material change in the conduct of the business
or operations of Parent and the Parent Subsidiaries taken as a
whole.
SECTION 3.08. Title to Property. Parent and the
Parent Subsidiaries have good and marketable title, or valid
leasehold rights in the case of leased property, to all real
property and all personal property purported to be owned or
leased by them, except where the failure to have such title or
rights would not have a Material Adverse Effect.
SECTION 3.09. Litigation. Except as disclosed in the
Parent SEC Reports, the Previous 14D-1, or as disclosed on
Schedule 3.09, there are no claims, actions, suits, proceedings
or investigations pending or, to the best knowledge of Parent,
threatened against Parent or any of the Parent Subsidiaries, or
any properties or rights of Parent or any of the Parent
Subsidiaries, before any court, administrative, governmental or
regulatory authority or body, domestic or foreign, which are
reasonably likely, in the aggregate, to have a Material Adverse
Effect or would, and are reasonably likely to, prevent or delay
the performance of this Agreement. As of the date hereof,
neither Parent nor any of the Parent Subsidiaries nor any of
their property is subject to any order, judgment, injunction or
decree having a Material Adverse Effect.
SECTION 3.10. Financing Arrangements. Parent and
Merger Sub have obtained a commitment letter from Credit Suisse
with respect to the financing for the Offer and the Merger (the
"Commitment Letter"). The Commitment Letter is in full force and
effect on the date of this Agreement, and Parent and Merger Sub
know of no reason why the financing contemplated by the
Commitment Letter will not be consummated in accordance with its
terms.
<PAGE>
20
SECTION 3.11. No Prior Activities. Except for
obligations or liabilities incurred in connection with its
incorporation or organization or the negotiation and consummation
of this Agreement and the transactions contemplated hereby
(including any financing), Merger Sub has not incurred any
obligations or liabilities, and has not engaged in any business
or activities of any type or kind whatsoever or entered into any
agreements or arrangements with any person or entity.
SECTION 3.12. Brokers. No broker, finder or
investment banker (other than Gleacher & Co. Inc. ("Gleacher")
and Lehman Brothers Inc. ("Lehman Brothers")) is entitled to any
brokerage, finder's or other fee or commission in connection with
the transactions contemplated by this Agreement based upon
arrangements made by and on behalf of Parent or Merger Sub.
SECTION 3.13. Information in Disclosure Documents;
Registration Statement; Etc. None of the information supplied by
Parent or Merger Sub for inclusion in (i) the Registration
Statement to be filed with the SEC by Parent on Form S-4 under
the Securities Act for the purpose of registering the shares of
Parent Common Stock to be issued in the Merger (the "Registration
Statement") and (ii) the joint prospectus/proxy statement of the
Company and Parent (the "Proxy Statement") required to be mailed
to the stockholders of the Company and Parent in connection with
the Merger will, in the case of the Proxy Statement or any
amendments or supplements thereto, at the time of the mailing of
the Proxy Statement and any amendments or supplements thereto,
and at the time of the Parent Meeting to be held in connection
with the Merger, or, in the case of the Registration Statement,
at the time it becomes effective and at the Effective Time,
contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The
Registration Statement will comply as to form in all material
respects with the provisions of the Securities Act, and the rules
and regulations promulgated thereunder. The Proxy Statement will
comply as to form in all material respects with the provisions of
the Exchange Act and the rules and regulations thereunder.
SECTION 3.14. Conduct of Business. Except as
disclosed in Schedule 3.14 hereto, the business of Parent and
each of the Parent Subsidiaries is not being conducted in default
or violation of any term, condition or provision of (i) its
respective Articles of Incorporation or Bylaws or similar
organizational documents, or (ii) any note, bond, mortgage,
indenture, contract, agreement, lease or other instrument or
agreement of any kind to which Parent or any of the Parent
Subsidiaries is now a party or by which Parent or any of the
<PAGE>
21
Parent Subsidiaries or any of their respective properties or
assets may be bound, or (iii) any Federal, state, local or
foreign statute, law, ordinance, rule, regulation, judgment,
decree, order, concession, grant, franchise, permit or license or
other governmental authorization or approval applicable to Parent
or any of the Parent Subsidiaries, except, with respect to the
foregoing clauses (ii) and (iii), defaults or violations that
would not, individually or in the aggregate, have a Material
Adverse Effect.
SECTION 3.15. Environment. (a) As used herein, the
term "Environmental Laws" means all Federal, state, local or
foreign laws relating to pollution or protection of human health
or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata),
including, without limitation, laws relating to emissions,
discharges, releases or threatened releases of chemicals,
pollutants, contaminants, or industrial, toxic or hazardous
substances or wastes into the environment, or otherwise relating
to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of chemicals,
pollutants, contaminants, or industrial, toxic or hazardous
substances or wastes, as well as all authorizations, codes,
decrees, demands or demand letters, injunctions, judgments,
licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.
(b) Except as disclosed on Schedule 3.15 hereto, to
the knowledge of Parent there are, with respect to Parent or any
of the Parent Subsidiaries, or any real property currently or
formerly owned, leased, or otherwise used by Parent or any of the
Parent Subsidiaries, no past or present violations of
Environmental Laws, releases of any material into the
environment, actions, activities, circumstances, conditions,
events, incidents, or contractual obligations which may give rise
to any common law or other legal liability, including, without
limitation, liability under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 ("CERCLA") or
similar state or local laws, which liabilities, either
individually or in the aggregate, would have a Material Adverse
Effect.
SECTION 3.16. Energy Regulatory Status. (a) Each of
the operational electric generation facilities ("Plants") owned
in whole or part, directly or indirectly by: (i) Parent, or (ii)
any legal entity in which Parent directly or indirectly owns more
than 50% of the voting stock or other equity interest, including
any partnership in which Parent has an interest, is a "qualifying
small power production facility" ("Small Power QF"), as such term
is defined in the Federal Power Act, as amended ("FPA"), and the
<PAGE>
22
regulations thereunder, and has continuously been in compliance
with the requirements for being a Small Power QF since it
commenced sales of electricity.
(b) The owner of each of the Plants under development
by Parent or any Parent Subsidiary and located in the United
States will, no later than the date operations commence, either
qualify as a "qualifying small power producer" or an "exempt
wholesale generator" ("EWOG"), as such terms are defined in FPA,
the regulations under the FPA, and the Public Utility Holding
Company Act of 1935, as amended ("PUHCA").
(c) The owner of each of the Plants under development
by Parent or any Parent Subsidiary and located outside the United
States will, no later than the date operations commence, either
qualify as an EWOG or a "foreign utility company", as such term
is defined under PUHCA and the regulations thereunder.
(d) Neither Parent nor any "affiliate" of Parent is a
"public utility company" or a "public utility holding company",
as such terms are defined in PUHCA and the regulations
thereunder, a "public utility" as defined in the FPA and the
regulations thereunder, or subject to regulations by any state
public utilities commission or similar state regulatory body.
(e) Each of the Plants obtained any necessary
certificates or permits from state regulatory authorities for
construction of each of the operational Plants and associated
transmission equipment owned by the owners of such Plant, and
each other entity constructing, owning or operating any of the
foregoing has obtained each required certificate or permit.
SECTION 3.17. Employee Benefit Plans; Labor Matters.
(a) With respect to each U.S. or foreign employee benefit plan,
program, arrangement and contract (including, without limitation,
any "employee benefit plan", as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA")) and any executive compensation arrangement, whether or
not funded, maintained or contributed to by Parent or any Parent
Subsidiary, or with respect to which Parent or any Parent
Subsidiary could incur liability under Section 4069, 4212(c) or
4204 of ERISA, as well as any employee benefit plan that is
subject to Section 412 of the Code or Title IV of ERISA and which
is maintained or contributed to by any other trade or business
(whether or not incorporated) which is treated as a single
employer with Parent under Section 414(b), (c), (m) or (o) of the
Code (each such trade or business being referred to herein as a
"Code Affiliate") (the "Parent Benefit Plans"), Parent has made
available to the Company a true and correct copy of (i) the most
recent annual report (Form 5500) filed with the Internal Revenue
<PAGE>
23
Service (the "IRS"), (ii) such Parent Benefit Plan, (iii) each
trust agreement relating to such Parent Benefit Plan, (iv) the
most recent summary plan description for each Parent Benefit Plan
for which a summary plan description is required, (v) the most
recent actuarial report or valuation relating to a Parent Benefit
Plan subject to Title IV of ERISA, if any, (vi) the most recent
determination letter, if any, issued by the IRS with respect to
any Parent Benefit Plan qualified under Section 401(a) of the
Code and (vii) the most recent annual and periodic accounting of
related plan assets, if any.
(b) With respect to the Parent Benefit Plans, no event
has occurred and, to the knowledge of Parent, there exists no
condition or set of circumstances, in connection with which
Parent or any Parent Subsidiary could be subject to any liability
under the terms of such Parent Benefit Plans, ERISA, the Code or
any other applicable Law which would have a Material Adverse
Effect. No claim has been asserted or, to the knowledge of
Parent, threatened, by the IRS, the Department of Labor or any
participant of a Parent Benefit Plan that Parent or any Parent
Subsidiary has, with respect to any Parent Benefit Plan, engaged
in or been a party to any "prohibited transaction," as such term
is defined in Section 4975 of the Code and Section 406 of ERISA,
which would result in the imposition of either a penalty assessed
pursuant to Section 502(i) of ERISA or a tax imposed by section
4975 of the Code, in each case applicable to Parent, any Parent
Subsidiary or any Parent Benefit Plan. Each Parent Benefit Plan
intended to qualify under Section 401(a) of the Code does so
qualify, and the trusts created thereunder are exempt from tax
under Section 501(a) of the Code, and each such Parent Benefit
Plan will be amended in the manner required by the Code by
December 31, 1994, and has been or will be submitted to the IRS
on or prior to March 31, 1995 for a determination letter
confirming that such Parent Benefit Plan meets the currently
applicable requirements for qualification and exemption from
taxation under Section 401(a) and 501(a) of the Code. No Parent
Benefit Plan has plan assets invested in any insurance company
which is or has been in insolvency proceedings within the last 3
years. No Parent Benefit Plan subject to Section 412 of the Code
has incurred any "accumulated funding deficiency" (as defined in
ERISA), whether or not waived. Neither Parent nor any of the
Parent Subsidiaries or Code Affiliates has at any time since 1987
maintained or contributed to any Parent Benefit Plan, including
without limitation any "multiemployer plan" (as defined in
Section 3(37) of ERISA), which (i) is a "defined benefit plan"
(as defined in Section 414(j) of the Code) or (ii) is subject to
Title IV of ERISA.
(c) Except as set forth in Schedule 3.17, neither
Parent nor any Parent Subsidiary is a party to any collective
<PAGE>
24
bargaining or other labor union contract applicable to persons
employed by Parent or any Parent Subsidiary, no collective
bargaining agreement is being negotiated by Parent or any Parent
Subsidiary and neither Parent nor any Parent Subsidiary knows of
any activities or proceedings of any labor union to organize any
of their respective employees. As of the date hereof, (i) Parent
and all of the Parent Subsidiaries are in compliance in all
material respects with all applicable laws relating to employment
and employment practices, wages, hours, and terms and conditions
of employment, (ii) there are no material charges with respect to
or relating to Parent or any of the Parent Subsidiaries pending
before the Equal Employment Opportunity Commission or any state,
local or foreign agency responsible for the prevention of
unlawful employment practices, and (iii) there is no labor
dispute, strike or work stoppage against Parent or any Parent
Subsidiary pending or, to Parent's knowledge, threatened which
may interfere with the respective business activities of Parent
or the Parent Subsidiaries, except where such non-compliance,
charge, dispute, strike or work stoppage would not have a
Material Adverse Effect. As of the date hereof, to the knowledge
of Parent, none of Parent or any Parent Subsidiary, or their
respective representatives or employees, has committed any unfair
labor practices in connection with the operation of the
respective businesses of Parent or the Parent Subsidiaries, and
there is no charge or complaint against Parent or the Parent
Subsidiaries by the National Labor Relations Board or any
comparable state agency pending or threatened in writing, except
where such unfair labor practice, charge or complaint would not
have a Material Adverse Effect.
SECTION 3.18. Insurance. The insurance policies in
force at the date hereof, with respect to the assets, properties
or operations of each of Parent and the Parent Subsidiaries are
set forth on Schedule 3.18 and are in full force and effect with
reputable insurers in such amounts and insure against such losses
and risks (including product liability) as are customary to
protect the properties and business of each of Parent and Parent
Subsidiaries.
SECTION 3.19. Taxes. (a) Except as set forth in
Schedule 3.19, and except as would not, either individually or in
the aggregate, have a Material Adverse Effect, (i) Parent and
each of the Parent Subsidiaries have timely filed with the
appropriate governmental authorities all Tax Returns (as defined
below) required to be filed by or with respect to the Company and
each of the Subsidiaries or their respective operations or
assets, and such Tax Returns are true, correct and complete in
all material respects and (ii) all Taxes (as defined below) shown
to be due on such Tax Returns, all Taxes required to be paid on
an estimated or installment basis, and all Taxes required to be
<PAGE>
25
withheld with respect to the Parent or any of the Parent
Subsidiaries or their respective operations or assets have been
timely paid or, if applicable, withheld and paid to the
appropriate taxing authority in the manner provided by law,
except in each case for such Taxes which are not material in the
aggregate.
(b) Neither Parent nor any of the Parent Subsidiaries
has filed a consent to the application of Section 341(f) of the
Code.
(c) No indebtedness of the Parent or any of the Parent
Subsidiaries is "corporate acquisition indebtedness" within the
meaning of Section 279(b) of the Code.
(d) For purposes of this Agreement, "Taxes" means all
taxes, charges, fees, levies or other assessments imposed by any
United States Federal, state, or local taxing authority or by any
foreign taxing authority, including, but not limited to, income,
gross receipts, excise, property, sales, use transfer, payroll,
license, ad valorem, value added, withholding, social security,
license, ad valorem, value added, withholding, social security,
national insurance (or other similar contributions or payments),
franchises, estimated, severance, stamp, and other taxes
(including any interest, fines, penalties or additions
attributable to or imposed on or with respect to any such taxes,
charges, fees, levies or other assessments).
(e) For purposes of this Agreement, "Tax Return" means
any return, report, information return or other document
(including any related or supporting information and, where
applicable, profit and loss accounts and balance sheets) with
respect to Taxes.
SECTION 3.20. Trademarks, Licenses, Patents and
Copyrights. Except as set forth on Schedule 3.20, Parent or the
Parent Subsidiaries own or possess adequate licenses or other
valid rights to use all patents, patent rights, trademarks,
trademark rights, trade names, trade name rights and proprietary
information used or held for use in connection with, and material
to, its business as currently being conducted and are unaware of
any assertions or claims challenging the validity of any of the
foregoing which are reasonably likely to have a Material Adverse
Effect; and, to the best knowledge of Parent, the conduct of
Parent's business as now conducted or proposed to be conducted
does not and will not conflict with any patents, patent rights,
licenses, trademarks, trademark rights, trade names, trade name
rights or copyrights of others known to the Parent or the Parent
Subsidiaries in any way reasonably likely to have a Material
Adverse Effect. No material infringement of any proprietary
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26
right owned by or licensed by or to Parent or any of the Parent
Subsidiaries is known to Parent or any Parent Subsidiary which is
reasonably likely to have a Material Adverse Effect.
SECTION 3.21. Related Party Transactions. Except as
is set forth in the Parent SEC Reports and the Previous 14D-1, to
the knowledge of Parent, Schedule 3.21 sets forth the material
transactions since September 1, 1994 between Parent and the
Parent Subsidiaries on the one hand, and (i) an officer or
director of Parent or any of the Parent Subsidiaries, (ii) a
record or beneficial owner of five percent (5%) or more of the
Parent Common Stock, or (iii) an affiliate of any such officer,
director or beneficial owner, on the other hand, other than
payment of compensation for services rendered to the Parent and
the Parent Subsidiaries in the ordinary course of business.
SECTION 3.22. Status of Development and Construction
Projects. To Parent's knowledge, except as specifically
disclosed on Schedule 3.22, the following statements, as
applicable, are true and correct as of the date hereof, with
respect to each of the following development and construction
projects: Upper Mahiao 120 MW and Mahanagdong 180 MW:
(i) There is no pending or threatened revocation
or loss of such project award, whether as a result of
government action or otherwise;
(ii) The executed power sales contract and
construction contract for such project is in full force
and effect and there is no oral or written threat to
its validity, whether as a result of government action
or otherwise;
(iii) For any project with an executed construction
contract, the estimated total capital cost for
construction of such project (without well-field
development expenses), including any existing or
expected change orders, is set forth on Schedule 3.22;
(iv) The joint venture or partnership or similar
agreements with local partners or contractors are in
full force and effect and the Parent's percentage
equity ownership pursuant to such contracts are as set
forth on Schedule 3.22, and there is no threat of loss
or invalidity to such contracts, whether as a result of
consummating this transaction or otherwise;
(v) The status of the financing and political
risk insurance arrangements for each such project is
set forth on Schedule 3.22; and
<PAGE>
27
(vi) Parent has not taken any actions which
violate the Foreign Corrupt Practices Act ("FCPA") and
is not aware of any actions taken by foreign Parent
Subsidiaries or local partners which if taken by a U.S.
company would constitute a violation of the FCPA.
SECTION 3.23. Status of Operating Projects. To
Parent's knowledge, as of the date hereof, with respect to each
operating project, except as set forth on Schedule 3.23:
(i) Parent is not aware of any event or
occurrence which would create a material impairment to
the operating performance or a material increase in
operating expenses or material non-compliance with
regulatory or contractual requirements;
(ii) Parent and any of the Parent Subsidiaries or
joint ventures has not changed in any material adverse
respect such project's operating, maintenance reserves
or procedures; and
(iii) Parent is not aware of any events which, with
lapse of time or otherwise could reasonably be expected
to result in a material impairment to the project's
operating performance or a material increase in
operating expenses or material non-compliance with
regulatory or contractual requirements.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the Company Disclosure Schedule
previously delivered by the Company to Parent (the "Company
Disclosure Schedule"), the Company hereby represents and warrants
to Parent and Merger Sub as follows:
SECTION 4.01. Corporate Organization; Subsidiaries.
Each of the Company and its Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has the requisite
corporate power and authority and any material necessary
governmental authority to own, operate or lease the properties
that it purports to own, operate or lease and to carry on its
business as it is now being conducted, and is duly qualified as a
foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned,
operated or leased or the nature of its activities makes such
qualification necessary, except for such failure which, when
taken together with all other such failures, would not have a
<PAGE>
28
Material Adverse Effect (as defined below) on the Company. The
term "Subsidiary" means any corporation, partnership, joint
venture or other legal entity of which the Company or, if the
context requires, the Surviving Corporation (either alone or
through or together with any other Subsidiary) owns, directly or
indirectly, 50% or more of the stock or other equity interests,
or owns, directly or indirectly, interests such that the holders
are generally entitled to vote for the election of 50% of the
board of directors or other governing body, of such corporation,
partnership, joint venture or other legal entity. When used in
connection with the Company or any of its Subsidiaries, the term
"Material Adverse Effect" means any change or effect, when taken
together with all other adverse changes and effects relating to
the Company and its Subsidiaries, that is or is reasonably likely
to be materially adverse to the business, operations, properties,
condition (financial or otherwise), assets or liabilities
(including, without limitation, contingent liabilities) of the
Company and the Subsidiaries taken as a whole; provided, however,
that the occurrence of any or all of the following shall not
constitute a Material Adverse Effect: (i) any change in any law
applicable to the Company or any Subsidiary or by which any
property or asset of the Company or any Subsidiary is bound,
(ii) a failure to receive any contract or award for which the
Company or any Subsidiary has submitted or will submit a
competitive bid, (iii) the loss of any contract or arrangement
(whether by revocation, lapse or invalidity) with respect to a
project that the Company or any Subsidiary has under development,
other than any such loss related to the Malitbog project or Fish
Lake project and other than any such loss resulting from a breach
by the Company of the representations and warranties set forth in
Sections 4.22 and 4.23 hereof, (iv) an unfavorable ruling by the
California Public Utilities Commission with respect to the
Company's California plants under the pending Biennial Resource
Plan Update, (v) a loss of, or unfavorable ruling in, the
Company's pending litigation against Southern California Edison
Company, but only insofar as such litigation seeks to increase
the energy price payable for deliveries over nameplate capacity
and not insofar as any unfavorable ruling affects the validity or
enforceability of any contract subject thereto or the
enforceability of any material term thereof, (vi) a failure to
close any public or private financing of any project in which the
Company or any Subsidiary owns a direct or indirect interest
(other than as a result of a loss with respect to the Malitbog
project or the Fish Lake project or as a result of a breach by
the Company of the representation and warranties set forth in
Section 4.22 or 4.23 hereof), or (vii) the termination of the
employment of any employee, officer, director or consultant of
the Company or any Subsidiary. A true and complete list of all
the Subsidiaries, together with the jurisdiction of incorporation
<PAGE>
29
or formation of each Subsidiary is set forth in Schedule 4.01
hereto.
SECTION 4.02. Articles of Incorporation and Bylaws.
The Company has heretofore furnished to Parent a complete and
correct copy of the Articles of Incorporation and Bylaws or
equivalent organizational documents, each as amended to the date
hereof, of the Company, and the Company has made available to
Parent such documents with respect to all Subsidiaries. Such
Articles of Incorporation, Bylaws and equivalent organizational
documents are in full force and effect. Neither the Company nor
any Subsidiary is in violation of any of the provisions of its
Articles of Incorporation or Bylaws or equivalent organizational
documents.
SECTION 4.03. Capitalization. As of the date hereof,
the authorized capital stock of the Company consists of
30,000,000 shares of Company Common Stock and 1,000,000 shares of
preferred stock ("Company Preferred Stock"). As of September 30,
1994, 24,042,915 shares of Company Common Stock were issued and
outstanding, all of which were validly issued, fully paid and
nonassessable, and no shares of Company Preferred Stock were
outstanding. As of December 1, 1994, there were 582,478 shares
of Company Common Stock reserved for issuance pursuant to options
and deferred stock awards granted under the Stock Option Plans or
otherwise identified on Schedule 4.03, and there were 996,943
shares of Company Common Stock reserved for future issuance under
the Stock Option Plans. There have been no material changes in
the capitalization of the Company since September 30, 1994.
Schedule 4.03 separately identifies as of December 1, 1994 the
option holders, the number of shares subject to each option held,
the exercise prices, vesting schedules and expiration dates of
the outstanding options granted under the Stock Option Plans.
All of the outstanding shares of Company Common Stock have been
duly authorized and validly issued and are fully paid and
nonassessable and free of preemptive rights or other similar
obligations. Except as set forth in this Section 4.03 or on
Schedule 4.03, there are not, as of the date hereof, any
outstanding or authorized subscriptions, options, warrants,
convertible securities, calls, rights, commitments to issue or
any other agreements of any character relating to the issued or
unissued capital stock or other securities of the Company to
which the Company is party or by which the Company is bound
obligating the Company to issue, deliver, or sell, or cause to be
issued, delivered or sold, additional shares of capital stock of
the Company or obligating the Company to grant, extend or enter
into any subscription, option, warrant, call, right, commitment
or other such agreement. All the outstanding capital stock or
partnership or other equity interest of each of the Subsidiaries
is duly authorized, validly issued, fully paid and nonassessable
<PAGE>
30
and, except as disclosed on Schedule 4.01, is owned by the
Company or a Subsidiary free and clear of any liens, security
interests, pledges, agreements, claims, charges or encumbrances
of any nature whatsoever. There are no existing options, calls
or commitments of any character relating to the issued or
unissued capital stock or other securities of any Subsidiary.
Except for the Subsidiaries and except as previously disclosed to
Parent on the Disclosure Schedule and in the Company SEC Reports
(as defined below), the Company does not directly or indirectly
own a 50% or greater equity interest in any other corporation,
partnership, joint venture or other business association or
entity.
SECTION 4.04. Authority Relative to this Agreement.
The Company has the necessary corporate power and authority to
enter into this Agreement and, subject to obtaining any necessary
stockholder approval of the Merger, to carry out its obligations
hereunder. The execution and delivery of this Agreement by the
Company and the consummation by the Company of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, subject to the
approval of the Merger by the Company's stockholders in
accordance with Nevada Law. This Agreement has been duly executed
and delivered by the Company and constitutes a legal, valid and
binding obligation of the Company, enforceable against it in
accordance with its terms.
SECTION 4.05. No Conflict; Required Filings and
Consents. (a) The execution and delivery of this Agreement by
the Company do not, and the performance of this Agreement by the
Company will not, (i) conflict with or violate any law,
regulation, court order, judgment or decree applicable to the
Company or any of the Subsidiaries or by which its or any of
their property is bound or affected, (ii) violate or conflict
with the Certificate of Incorporation or Bylaws or equivalent
organizational documents of the Company or any Subsidiary, or
(iii) result in any breach of or constitute a default (or an
event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination or
cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of the Company or
any of the Subsidiaries pursuant to, any contract, instrument,
permit, license or franchise to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the
Subsidiaries or its or any of their property is bound or
affected, except as set forth on Schedule 4.05 and except in the
case of (i) or (iii) for conflicts, violations, breaches or
defaults which, in the aggregate, would not have a Material
Adverse Effect.
<PAGE>
31
(b) Except for applicable requirements, if any, of the
Exchange Act and filing and recordation of appropriate merger or
other documents as required by Nevada Law, and except for any
notice, filings, authorizations, consents or approvals which are
required because of the regulatory status of the Company or any
of its Subsidiaries or facts specifically applicable to them, and
except as set forth on Schedule 4.05, the Company is not required
to submit any notice, report or other filing with any
governmental authority, domestic or foreign, in connection with
the execution, delivery or performance of this Agreement. Except
as aforesaid, no waiver, consent, approval or authorization of
any governmental or regulatory authority, domestic or foreign, is
required to be obtained or made by the Company in connection with
its execution, delivery or performance of this Agreement.
SECTION 4.06. SEC Filings; Financial Statements. (a)
The Company has filed all forms, reports and documents required
to be filed with the SEC since January 1, 1992, and has
heretofore delivered (or made available) to Parent, in the form
filed with the SEC, its (i) Annual Reports on Form 10-K for the
fiscal years ended December 31, 1993 and December 31, 1992,
respectively, (ii) all proxy statements relating to the Company's
meetings of stockholders (whether annual or special) held since
January 1, 1992, and (iii) all other reports or registration
statements (including Quarterly Reports on Form 10-Q) filed by
the Company with the SEC since January 1, 1992 (collectively, the
"Company SEC Reports"). The Company SEC Reports (i) were
prepared in all material respects in accordance with the
requirements of the Securities Act, or the Exchange Act, as the
case may be and (ii) did not at the time they were filed contain
any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading. No Subsidiary is
required to file any statements or reports with the SEC pursuant
to Sections 13(a) or 15(d) of the Exchange Act.
(b) The consolidated financial statements contained in
the Company SEC Reports have been prepared in accordance with
generally accepted accounting principles applied on a consistent
basis throughout the periods involved (except as may be indicated
in the notes thereto) and fairly present the consolidated
financial position of the Company and its Subsidiaries as at the
respective dates thereof and the consolidated results of
operations and changes in financial position of the Company and
its Subsidiaries for the periods indicated, except that the
unaudited interim financial statements were or are subject to
normal and recurring year-end adjustments which were not or are
not expected to be material in amount.
<PAGE>
32
(c) Except as reflected or reserved against in the
consolidated financial statements contained in the Company SEC
Reports, and except as set forth on Schedule 4.06, the Company
and its Subsidiaries have no liabilities of any nature (whether
accrued, absolute, contingent or otherwise) which in the
aggregate could have a Material Adverse Effect or any bonds,
debentures, notes, letters of credit or other indebtedness
(including guarantees) for any amount greater than $1,000,000.
Since September 30, 1994, neither the Company nor any of the
Subsidiaries has incurred any liabilities material to the Company
and the Subsidiaries taken as a whole, except (i) liabilities
incurred in the ordinary course of business and consistent with
past practice, (ii) liabilities incurred in connection with or as
a result of the Offer or the Merger or (iii) liabilities
disclosed on Schedule 4.06.
SECTION 4.07. Absence of Certain Changes or Events.
Since September 30, 1994, except as contemplated in this
Agreement or as specifically disclosed in the Company SEC Reports
or the Tender Offer Solicitation/Recommendation Statement on
Schedule 14D-9 that was originally filed by the Company with the
SEC on October 11, 1994 with respect to Parent's previous tender
offer (as amended to the date hereof) (the "Previous 14D-9"), or
as appears on Schedule 4.07, there has not been:
(a) any Material Adverse Effect;
(b) any redemption or other acquisition of Company
Common Stock by the Company or any of the Subsidiaries or
any declaration or payment of any dividend or other
distribution in cash, stock or property with respect to
Company Common Stock;
(c) any entry into any material commitment or
transaction (including, without limitation, any borrowing or
capital expenditure) other than in the ordinary course of
business or as contemplated by this Agreement;
(d) any transfer of, or rights granted under, any
material leases, licenses, agreements, patents, trademarks,
trade names or copyrights other than those transferred or
granted in the ordinary course of business and consistent
with past practice;
(e) any mortgage, pledge, security interest or
imposition of lien or other encumbrance on any asset of the
Company or any of the Subsidiaries that when viewed in the
aggregate with all such other encumbrances is material to
the business, financial condition or operations of the
Company and the Subsidiaries taken as a whole; or
<PAGE>
33
(f) any change by the Company in accounting principles
or methods except insofar as such change may have been
required by a change in generally accepted accounting
principles and disclosed in the Company SEC Reports.
Since September 30, 1994, except as disclosed on Schedule 4.07,
in the Company SEC Reports or the Previous 14D-9, the Company and
its Subsidiaries have conducted their business only in the
ordinary course and in a manner consistent with past practice and
have not made any material change in the conduct of the business
or operations of the Company and its Subsidiaries taken as a
whole. Without limiting the generality of the foregoing, the
Company has not, since such date, except for the contracts
referred to in the Company SEC Reports or as disclosed on
Schedule 4.07 or in the Previous 14D-9, made any changes in
executive compensation levels (other than increases in the
ordinary course of business and consistent with past practice) or
in the manner in which other employees of the Company or the
Subsidiaries are compensated, paid or agreed to pay any pension,
retirement allowance or other employee benefit not required or
permitted by the terms of any plan, agreement or arrangement
existing on such date to any director, officer or employee,
whether past or present, or committed itself to any collective
bargaining agreement (except for renewals of existing collective
bargaining agreements) or to any additional pension,
profit-sharing, bonus, incentive, deferred compensation, stock
purchase, stock option, stock appreciation right, group
insurance, severance pay, retirement or other employee benefit
plan, agreement or arrangement, or to any employment or
consulting agreement with or for the benefit of any person, or to
amend any of such plans or any of such agreements in existence on
such date.
SECTION 4.08. Title to Property. The Company and its
Subsidiaries have good and marketable title, or valid leasehold
rights in the case of leased property, to all real property and
all personal property purported to be owned or leased by them,
except where the failure to have such title or right would not
have a Material Adverse Effect. There are no material
mechanics', materialmen's, laborers', employees', suppliers' or
other liens arising by operation of law on any of the Company's
properties.
SECTION 4.09. Litigation. Except as disclosed in the
Company SEC Reports, the Previous 14D-9 or as disclosed on
Schedule 4.09, there are no claims, actions, suits, proceedings
or investigations pending or, to the best knowledge of the
Company, threatened against the Company or any of its
Subsidiaries, or any properties or rights of the Company or any
of its Subsidiaries, before any court, administrative,
<PAGE>
34
governmental or regulatory authority or body, domestic or
foreign, which are reasonably likely, in the aggregate, to have a
Material Adverse Effect or would, and are reasonably likely to,
prevent or delay the performance of this Agreement. As of the
date hereof, neither the Company nor any of its Subsidiaries nor
any of their property is subject to any order, judgment,
injunction or decree, having a Material Adverse Effect.
SECTION 4.10. Information in Disclosure Documents.
None of the information with respect to the Company or its
Subsidiaries to be included or incorporated by reference in the
Proxy Statement or the Registration Statement will, in the case
of the Proxy Statement or any amendments or supplements thereto,
at the time of the mailing of the Proxy Statement and any
amendments or supplements thereto, and at the time of the Company
Meeting to be held in connection with the Merger, or, in the case
of the Registration Statement, at the time it becomes effective
and at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made,
not misleading. The Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the
rules and regulations thereunder.
SECTION 4.11. Fairness Opinion. The Company has
received the opinion of Goldman Sachs, to the effect that the
consideration to be received by the Company's stockholders
pursuant to the Offer and the Merger is fair to the stockholders
of the Company (other than Parent and its affiliates).
SECTION 4.12. Brokers. No broker, finder or
investment banker (other than Goldman Sachs) is entitled to any
brokerage, finder's or other fee or commission in connection with
the transactions contemplated by this Agreement based upon
arrangements made by and on behalf of the Company. The Company
has heretofore furnished to Parent true and complete information
concerning the financial arrangements between the Company and
Goldman Sachs, pursuant to which such firm would be entitled to
any payment as a result of the transactions contemplated
hereunder.
SECTION 4.13. Takeover Provisions Inapplicable; Rights
Agreement Amendment. (a) As of the date hereof and at all times
on or prior to the Effective Time, Sections 78.378 through
78.3793, inclusive, and Sections 78.411 through 78.444,
inclusive, of Nevada Law are, and shall be, inapplicable to the
Offer, the Merger and the transactions contemplated by this
Agreement including, without limitation, the pledge of the shares
of Company Common Stock acquired in the Offer to the lending
<PAGE>
35
institutions providing the financing for the Offer, and the
transfer of such shares upon the exercise of remedies under the
applicable agreements. The Company has heretofore delivered to
Parent a complete and correct copy of the resolutions of the
Board of Directors of the Company to the effect that such
sections of Nevada Law are, and shall be, inapplicable to the
Offer, the Merger and the transactions contemplated by this
Agreement.
(b) The Board of Directors of the Company has taken
all necessary action with respect to the Rights Agreement, such
that none of the execution or delivery of this Agreement, the
purchase of Shares pursuant to the Offer, the exchange of the
Shares for the shares of Parent Common Stock and cash in
accordance with this Agreement or any transaction contemplated by
this agreement will cause (A) the rights (the "Rights") issued
pursuant to the Rights Agreement to become exercisable under the
Rights Agreement, (B) Parent, Merger Sub and any of their
associates or affiliates (as such terms are defined in the Rights
Agreement) to be deemed an "Acquiring Person" (as defined in the
Rights Agreement), or (C) the "Stock Acquisition Date" or
"Distribution Date" (as such terms are defined in the Rights
Agreement) to occur upon any such event.
SECTION 4.14. Conduct of Business. Except as
disclosed in Schedule 4.14 hereto, the business of the Company
and each of the Subsidiaries is not being conducted in default or
violation of any term, condition or provision of (i) its
respective Articles of Incorporation or Bylaws or similar
organizational documents, or (ii) any note, bond, mortgage,
indenture, contract, agreement, lease or other instrument or
agreement of any kind to which the Company or any of the
Subsidiaries is now a party or by which the Company or any of the
Subsidiaries or any of their respective properties or assets may
be bound, or (iii) any Federal, state, local or foreign statute,
law, ordinance, rule, regulation, judgment, decree, order,
concession, grant, franchise, permit or license or other
governmental authorization or approval applicable to the Company
or any of the Subsidiaries, except, with respect to the foregoing
clauses (ii) and (iii), defaults or violations that would not,
individually or in the aggregate, have a Material Adverse Effect.
SECTION 4.15. Environment. Except as disclosed on
Schedule 4.15 hereto, to the knowledge of the Company, there are,
with respect to the Company or any of its Subsidiaries, or any
real property currently or formerly owned, leased, or otherwise
used by the Company or any of its Subsidiaries, no past or
present violations of Environmental Laws, releases of any
material into the environment, actions, activities,
circumstances, conditions, events, incidents, or contractual
<PAGE>
36
obligations which may give rise to any common law or other legal
liability, including, without limitation, liability under CERCLA
or similar state or local laws, which liabilities, either
individually or in the aggregate, would have a Material Adverse
Effect.
SECTION 4.16. Energy Regulatory Status. (a) Each of
the Plants owned in whole or part, directly or indirectly by: (i)
the Company or (ii) any legal entity in which the Company
directly or indirectly owns 50% or greater of the voting stock or
other equity interest, including any partnership in which the
Company has an interest, is a Small Power QF, as such term is
defined in the FPA, and the regulations thereunder, and has
continuously been in compliance with the requirements for being a
Small Power QF since it commenced sales of electricity.
(b) The owner of each of the Plants under development
by the Company or any Subsidiary and located in the United States
will, no later than the date operations commence, either qualify
as a "qualifying small power producer" or an EWOG, as such terms
are defined in the FPA, the regulations under the FPA, and the
PUHCA.
(c) The owner of each of the Plants under development
by the Company or any Subsidiary and located outside the United
States will, no later than the date operations commence, either
qualify as an EWOG or a "foreign utility company", as such term
is defined under PUHCA and the regulations thereunder.
(d) Neither the Company nor any "affiliate" of the
Company is a "public utility company" or a "public utility
holding company", as such terms are defined in PUHCA and the
regulations thereunder, a "public utility" as defined in the FPA
and the regulations thereunder, or subject to regulations by any
state public utilities commission or similar state regulatory
body.
(e) Each of the Plants obtained any necessary
certificates or permits from state regulatory authorities for
construction of each of the operational Plants and associated
transmission equipment owned by the owners of the Plant, and each
other entity constructing, owning or operating any of the
foregoing has obtained each required certificate or permit.
SECTION 4.17. Employee Benefit Plans; Labor Matters.
(a) With respect to each U.S. or foreign employee benefit plan,
program, arrangement and contract (including, without limitation,
any "employee benefit plan", as defined in Section 3(3) of ERISA)
and any executive compensation arrangement, whether or not
funded, maintained or contributed to by the Company or any of its
<PAGE>
37
Subsidiaries, or with respect to which the Company or any of its
Subsidiaries could incur liability under Section 4069, 4212(c) or
4204 of ERISA, as well as any employee benefit plan that is
subject to Section 412 of the Code or Title IV of ERISA and which
is maintained or contributed to by any other trade or business
(whether or not incorporated) which is treated as a single
employer with the Company under Section 414(b), (c), (m) or (o)
of the Code (each such trade or business being referred to herein
as a "Code Affiliate") (the "Company Benefit Plans"), the Company
has made available to Parent a true and correct copy of (i) the
most recent annual report (Form 5500) filed with the IRS,
(ii) such Company Benefit Plan, (iii) each trust agreement
relating to such Company Benefit Plan, (iv) the most recent
summary plan description for each Company Benefit Plan for which
a summary plan description is required, (v) the most recent
actuarial report or valuation relating to a Company Benefit Plan
subject to Title IV of ERISA, if any, (vi) the most recent
determination letter, if any, issued by the IRS with respect to
any Company Benefit Plan qualified under Section 401(a) of the
Code and (vii) the most recent annual and periodic accounting of
related plan assets, if any.
(b) With respect to the Company Benefit Plans, no
event has occurred and, to the knowledge of the Company, there
exists no condition or set of circumstances in connection with
which the Company or any of its Subsidiaries could be subject to
any liability under the terms of such Company Benefit Plans,
ERISA, the Code or any other applicable Law which would have a
Material Adverse Effect. No claim has been asserted, or, to the
knowledge of the Company, threatened by the IRS, the Department
of Labor or any participant of a Company Benefit Plan that the
Company or any of the Subsidiaries has, with respect to any
Company Benefit Plan, engaged in or been a party to any
"prohibited transaction", as such term is defined in Section 4975
of the Code and Section 406 of ERISA, which could result in the
imposition of either a penalty assessed pursuant to Section 502
of ERISA or a tax imposed by Section 4975 of the Code, in each
case applicable to the Company, any Subsidiary or any Company
Benefit Plan. Each Company Benefit Plan intended to qualify
under Section 401(a) of the Code does so qualify, and the trusts
created thereunder are exempt from tax under Section 501(a) of
the Code, and each such Company Benefit Plan will be amended in
the manner required by the Code by December 31, 1994, and has
been or will be submitted to the IRS on or prior to March 31,
1995 for a determination letter confirming that such Company
Benefit Plan meets the currently applicable requirements for
qualification and exemption from taxation under Sections 401(a)
and 501(a) of the Code. No Company Benefit Plan has plan assets
invested in any insurance company which is or has been in
insolvency proceedings within the last 3 years. No Company
<PAGE>
38
Benefit Plan subject to Section 412 of the Code has incurred any
"accumulated funding deficiency" (as defined in ERISA), whether
or not waived. Neither the Company nor any of its Subsidiaries
or Code Affiliates has at any time since 1987 maintained or
contributed to any Company Benefit Plan, including without
limitation any "multiemployer plan" (as defined in Section 3(37)
of ERISA), which (i) is a "defined benefit plan", (as defined in
Section 414(j) of the Code) or (ii) is subject to Title IV of
ERISA.
(c) Except as set forth in Schedule 4.17, (i) neither
the Company nor any of its Subsidiaries is a party to any
collective bargaining or other labor union contract applicable to
persons employed by the Company or its Subsidiaries, (ii) no
collective bargaining agreement is being negotiated by the
Company or any of its Subsidiaries and (iii) neither the Company
nor any of its Subsidiaries knows of any activities or
proceedings of any labor union to organize any of their
respective employees. As of the date hereof, the Company and all
of its Subsidiaries are in compliance in all material respects
with all applicable laws relating to employment and employment
practices, wages, hours, and terms and conditions of employment,
there are no material charges with respect to or relating to the
Company or any of its Subsidiaries pending before the Equal
Employment Opportunity Commission or any state, local or foreign
agency responsible for the prevention of unlawful employment
practices, and there is no labor dispute, strike or work stoppage
against the Company or any of its Subsidiaries pending or, to the
Company's knowledge, threatened which may interfere with the
respective business activities of the Company or its
Subsidiaries, except where such noncompliance, charge, dispute,
strike or work stoppage would not have a Material Adverse Effect.
As of the date hereof, to the knowledge of the Company, none of
the Company or any of its Subsidiaries, or their respective
representatives or employees, has committed any unfair labor
practices in connection with the operation of the respective
businesses of the Company or its Subsidiaries, and there is no
charge or complaint against the Company or its Subsidiaries by
the National Labor Relations Board or any comparable state agency
pending or threatened in writing, except where such unfair labor
practice, charge or complaint would not have a Material Adverse
Effect.
(d) The Company has made available to Parent
(i) copies of all employment agreements with officers of the
Company and its Subsidiaries; (ii) copies of all severance
agreements, programs and policies of the Company with or relating
to its employees; and (iii) copies of all plans, programs,
agreements and other arrangements of the Company with or relating
to its employees which contain change in control provisions
<PAGE>
39
(which plans, programs, agreements and arrangements are set forth
in Schedule 4.17 or have been disclosed in the Company SEC
Reports or the Previous 14D-9).
(e) Except as provided in Schedule 4.17 or as
otherwise required by Law, no Company Benefit Plan provides
retiree medical or retiree life insurance benefits to any person.
SECTION 4.18. Insurance. The insurance policies in
force at the date hereof, with respect to the assets, properties
or operations of each of the Company and the Subsidiaries are set
forth on Schedule 4.18 and are in full force and effect with
reputable insurers in such amounts and insure against such losses
and risks (including product liability) as are customary to
protect the properties and businesses of each of the Company and
the Subsidiaries.
SECTION 4.19. Taxes. (a) Except as set forth in
Schedule 4.19, and except as would not, either individually or in
the aggregate, have a Material Adverse Effect, (i) the Company
and each of the Subsidiaries have timely filed with the
appropriate governmental authorities all Tax Returns (as defined
below) required to be filed by or with respect to the Company and
each of the Subsidiaries or their respective operations or
assets, and such Tax Returns are true, correct and complete in
all material respects and (ii) all Taxes shown to be due on such
Tax Returns and all Taxes required to be withheld with respect to
the Company or any of the Subsidiaries or their respective
operations or assets have been timely paid or, if applicable,
withheld and paid to the appropriate taxing authority in the
manner provided by law, except in each case for such Taxes which
are not material in the aggregate.
(b) Neither the Company nor any of the Subsidiaries
has filed a consent to the application of Section 341(f) of the
Code.
(c) Except as set forth on Schedule 4.19, no property
of either of the Company or any of the Subsidiaries is "tax
exempt use property" within the meaning of Section 168(h) of the
Code or property that either of the Company or any of the
Subsidiaries will be required to treat as being owned by another
person pursuant to Section 168(f)(8) of the Internal Revenue Code
of 1954, as amended, in effect immediately before the enactment
of the Tax Reform Act of 1986.
SECTION 4.20. Trademarks, Licenses, Patents and
Copyrights. Except as set forth on Schedule 4.20, the Company or
the Subsidiaries own or possess adequate licenses or other valid
rights to use all patents, patent rights, trademarks, trademark
<PAGE>
40
rights, trade names, trade name rights and proprietary
information used or held for use in connection with, and material
to, its business as currently being conducted and are unaware of
any assertions or claims challenging the validity of any of the
foregoing which are reasonably likely to have a Material Adverse
Effect; and, to the best knowledge of the Company, the conduct of
the Company's business as now conducted or proposed to be
conducted does not and will not conflict with any patents, patent
rights, licenses, trademarks, trademark rights, trade names,
trade name rights or copyrights of others known to the Company or
the Subsidiaries in any way reasonably likely to have a Material
Adverse Effect. No material infringement of any proprietary
right owned by or licensed by or to the Company or any of the
Subsidiaries is known to the Company or any Subsidiary which is
reasonably likely to have a Material Adverse Effect.
SECTION 4.21. Related Party Transactions. Except as
is set forth in the Company SEC Reports or in the Previous 14D-9,
to the Company's knowledge, Schedule 4.21 sets forth the material
transaction since September 1, 1994 between the Company and its
Subsidiaries, on the one hand, and (i) an officer or director of
the Company or any of its Subsidiaries, (ii) a record or
beneficial owner of five percent (5%) or more of Company Common
Stock, or (iii) an affiliate of any such officer, director or
beneficial owner, on the other hand, other than payment of
compensation for services rendered to the Company and its
Subsidiaries in the ordinary course of business.
SECTION 4.22. Status of Development and Construction
Projects. To the Company's knowledge, except as specifically
disclosed on Schedule 4.22, the following statements, as
applicable, are true and correct as of the date hereof with
respect to each of the following development and construction
projects: (Malitbog 231 MW, Alto Peak 70 MW, Fish Lake 16 MW and
20MW Salton Sea Unit 1 expansion):
(i) There is no pending or threatened revocation
or loss of such project award, whether as a result of
government action or otherwise;
(ii) The executed power sales contract and
construction contract for such project is in full force
and effect and there is no oral or written threat to
its validity, whether as a result of government action
or otherwise;
(iii) For any project with an executed construction
contract, the estimated total capital cost for
construction of such project (without well-field
<PAGE>
41
development expenses), including any existing or
expected change orders is set forth on Schedule 4.22;
(iv) The joint venture or partnership or similar
agreements with local partners or contractors are in
full force and effect, and the Company's percentage
equity ownership pursuant to such contracts is as set
forth on Schedule 4.22, and there is no threat of loss
or invalidity to such contracts, whether as a result of
consummating this transaction or otherwise;
(v) The status of the financing and political
risk insurance arrangements for each such project is
set forth on Schedule 4.22; and
(vi) The Company has not taken any actions which
violate the FCPA and is not aware of any actions taken
by foreign Subsidiaries or local partners which if
taken by a U.S. company would constitute a violation of
the FCPA.
SECTION 4.23. Status of Operating Projects. With
respect to each operating project, except as set forth on
Schedule 4.23:
(i) The Company is not aware of any event or
occurrence which would create a material impairment to
the operating performance or a material increase in
operating expenses or material non-compliance with
regulatory or contractual requirements;
(ii) The Company and any of its Subsidiaries or
joint ventures have not changed in any material adverse
respect such project's operating, maintenance reserves
or procedures; and
(iii) The Company is not aware of any events which,
with lapse of time or otherwise, could reasonably be
expected to result in a material impairment to the
project's operating performance or a material increase
in operating expenses or material non-compliance with
regulatory or contractual requirements.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 5.01. Acquisition Proposals. The Company will
notify Parent immediately if any inquiries or proposals are
received by, any information is requested from, or any
negotiations or discussions are sought to be initiated or
<PAGE>
42
continued with the Company, in each case in connection with any
acquisition, business combination or purchase of all or any
significant portion of the assets of, or any equity interest in,
the Company or any Subsidiary. The Company shall provide a copy
of any such written inquiries or proposals to Parent immediately
after receipt thereof and thereafter keep Parent and Merger Sub
promptly advised of any development with respect thereto.
SECTION 5.02. Conduct of Business by the Parties
Pending the Merger. (I) The Company covenants and agrees that,
between the date of this Agreement and the Effective Time, unless
Parent shall otherwise consent in writing and except as is
otherwise permitted hereby, the businesses of the Company and its
Subsidiaries shall be conducted only in, and the Company and its
Subsidiaries shall not take any action except in, the ordinary
course of business and in a manner consistent with past practice;
and the Company will use its best efforts to preserve
substantially intact its business organization, to keep available
the services of its present officers, employees and consultants
and to preserve its present relationships with customers,
suppliers and other persons with which it or any of its
subsidiaries has significant business relations. By way of
amplification and not limitation, except as contemplated by this
Agreement, neither the Company nor any of its Subsidiaries shall,
between the date of this Agreement and the Effective Time,
directly or indirectly, do any of the following without the prior
written consent of Parent:
(a) (i) issue, sell, pledge, dispose of, encumber,
authorize, or propose the issuance, sale, pledge,
disposition, encumbrance or authorization of any shares of
its or its subsidiaries' capital stock of any class, or any
options, warrants, convertible securities or other rights of
any kind to acquire any shares of its or its subsidiaries'
capital stock, or any other ownership interest (except with
respect to Company Common Stock previously reserved for
issuance as disclosed in Section 4.03 hereof); (ii) amend or
propose to amend its articles of incorporation or bylaws or
equivalent organizational documents; (iii) split, combine or
reclassify any of its outstanding common stock, or declare,
set aside or pay any dividend or distribution payable in
cash, stock, property or otherwise with respect to the
common stock; (iv) redeem, purchase or otherwise acquire or
offer to redeem, purchase or otherwise acquire any shares of
its capital stock, except in the performance of its
obligations under existing employee plans; or (v) authorize
or propose or enter into any contract, agreement, commitment
or arrangement with respect to any of the matters set forth
in this Section 5.02(I)(a);
<PAGE>
43
(b) (i) acquire (by merger, consolidation, or
acquisition of stock, partnership interests or assets) any
corporation, partnership or other business organization or
division thereof or any other interests in operating
properties; (ii) except in the ordinary course of business
and in a manner consistent with past practices, and except
as set forth on Schedule 5.02(I)(b), sell, pledge, lease,
transfer, dispose of, or encumber or authorize or propose
the sale, pledge, lease, transfer disposition or encumbrance
of any of its or its Subsidiaries- assets (including
intangible assets); (iii) create, incur, assume or guarantee
any indebtedness or other similar obligation, or enter into
any contract or agreement, except in the ordinary course of
business and consistent with past practice, and except as
set forth on Schedule 5.02(I)(b); (iv) enter into any new
line of business or make any bid or enter into any
commitment in respect of any new or proposed projects; (v)
prepay or refinance any part of the principal or interest of
any existing indebtedness before the due date thereof; (vi)
assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise)
for the obligations of any other person or entity, except
for endorsements in the ordinary course of business in
connection with the deposit of items for collection; (vii)
make any loans, advances or capital contributions to or
investments in any person or entity; (viii) waive, release,
grant or transfer any rights of value or modify or change in
any material respect any existing license, material lease or
commitment; (ix) make or commit to or guarantee any single
capital expenditure or obligations which are not consistent
with past practice and currently budgeted; or (x) enter into
or amend any contract, agreement, commitment or arrangement
with respect to any of the matters set forth in this Section
5.02(I)(b);
(c) take any action other than in the ordinary course
of business and in a manner consistent with past practice
(none of which actions shall be unreasonable or unusual)
with respect to the grant of any severance or termination
pay (otherwise than pursuant to policies of the Company or
any of its Subsidiaries in effect on November 30, 1994) or
with respect to any increase of benefits payable under its
severance or termination pay policies in effect on November
30, 1994;
(d) make any payments (except in the ordinary course
of business and in amounts and in a manner consistent with
past practice) under any of its employee plans to any of its
or its subsidiaries' employees, independent contractors or
consultants, enter into any new employee plan, any new
<PAGE>
44
employment or consulting agreement, grant or establish any
new awards under such plan or agreement, or adopt or
otherwise amend any of the foregoing;
(e) take any action except in the ordinary course of
business and in a manner consistent with past practice (none
of which actions shall be unreasonable or unusual) with
respect to accounting policies or procedures (including
without limitation its procedures with respect to the
payment of accounts payable);
(f) before the purchase of Company Common Stock
pursuant to the Offer and other than pursuant to this
Agreement, take any action to cause the shares of its common
stock to cease to be listed on the Nasdaq National Market;
(g) cause or permit any of their current insurance (or
reinsurance) policies to be cancelled or terminated or any
of the coverage thereunder to lapse, unless forthwith upon
notice of such termination, cancellation or lapse, the
Company or such Subsidiary used its best efforts to obtain
commercially reasonable replacement policies from the same
or comparable insurers providing coverage which is the same
as or comparable to that provided under the cancelled,
terminated or lapsed policies;
(h) enter into any agreement or transaction with any
affiliate of the Company upon terms and conditions less
favorable to the Company or such affiliate than could be
obtained on an arm's length basis, except for agreements or
transactions in the ordinary course of business and
consistent with past practice;
(i) settle any material pending litigation; or
(j) enter into any oral or written agreement,
contract, commitment, arrangement or understanding with
respect to any of the foregoing.
Notwithstanding any other term or provision of this Section
5.02(I):
(i) the Company may close the financing of its
Maltibog project without the prior consent of Parent
provided that Parent has been given the opportunity to
review the relevant financing documents and Company has
given Parent at least two days' prior notice of the
anticipated closing date;
<PAGE>
45
(ii) the Company may make and commit to ordinary
course budgeted operational capital and other
expenditures relating to projects in operation or
construction without the consent of Parent;
(iii) the Company may make planned capital and
operational expenditures with respect to its Maltibog
project, without the consent of Parent;
(iv) the Company will not make any capital or
other expenditures in excess of $500,000 in the
aggregate with respect to its Nevada Power Pumped
Storage contract, its Alto Peak contract and any other
contract related to a development project without prior
consultation with Parent and Parent's consent;
(v) the Company may honor all existing
contractual obligations relating to projects in
operation or construction without the consent of
Parent; and
(vi) the Company will not incur any additional
indebtedness (secured or unsecured) or make new project
or capital commitments in excess of $1,000,000 without
prior consultation with Parent and Parent's consent.
(II) Parent covenants and agrees that, between the
date of this Agreement and the Effective Time (unless the
election contemplated by Section 2.06(b)(i) has been made),
unless the Company shall otherwise consent in writing and except
as is otherwise permitted hereby, neither Parent nor any of the
Parent Subsidiaries shall, directly or indirectly, do any of the
following:
(a) (i) issue or sell, or propose the issuance or
sale of, any shares of its or its subsidiaries' capital
stock of any class, or any options, warrants, convertible
securities or other rights of any kind to acquire any shares
of its or its subsidiaries' capital stock, or any other
ownership interest (except with respect to Parent Common
Stock previously reserved for issuance as disclosed in
Section 3.03 hereof) if (A) the proceeds of any such
issuance or sale ("Proceeds") exceed $50,000,000, and (B)
such Proceeds are not applied, if necessary, so as to allow
Parent to exercise the election contemplated by Section
2.06(b)(i); (ii) split, combine or reclassify any of its
outstanding common stock, or declare, set aside or pay any
dividend or distribution payable in cash, stock, property or
otherwise with respect to the common stock; (iii) redeem,
purchase or otherwise acquire or offer to redeem, purchase
<PAGE>
46
or otherwise acquire any shares of its capital stock, except
in the performance of its obligations under existing
employee plans or pursuant to a repurchase program under
Rule 10b-18 promulgated under the Exchange Act; or (iv)
authorize or propose or enter into any contract, agreement,
commitment or arrangement with respect to any of the matters
set forth in this Section 5.02(II)(a);
(b) in the case of Parent, merge or consolidate with
or into another person or engage in a recapitalization or
other similar extraordinary business transaction;
(c) make any material change in accounting policies,
other than as required by generally accepted accounting
principles; or
(d) enter into any oral or written agreement,
contract, commitment, arrangement or understanding with
respect to any of the foregoing.
SECTION 5.03. No Shopping. The Company and its
Subsidiaries will not, directly or indirectly, through any
officer, director, agent, financial adviser or otherwise,
solicit, initiate or encourage submission of proposals or offers
from any person relating to any Competing Transaction (as defined
below), or participate in any negotiations regarding, or furnish
to any other person any information (except for information which
has been previously publicly disseminated by the Company in the
ordinary course of business) with respect to, or otherwise
cooperate in any way with, or assist or participate in,
facilitate or encourage, any effort or attempt by any other
person to do or seek any of the foregoing. Notwithstanding the
foregoing, the parties hereby agree that the Board of Directors
of the Company may (i) review and act upon (which actions may
include, without limitation, providing confidential information,
negotiating a transaction and entering into an agreement for a
transaction) an unsolicited proposal by any other person relating
to any of the transactions referred to in the preceding sentence,
if the Board of Directors determines in good faith, after
consultation with and based upon the advice of its financial and
legal advisors, that failing to review and act upon such proposal
would constitute a breach of fiduciary duty and (ii) comply with
Rule 14e-2 promulgated under the Exchange Act with regard to a
tender or exchange offer, and such review, conduct or compliance
will not violate this Section 5.03. For purposes of this
Agreement, "Competing Transaction" shall mean any of the
following involving the Company or any Subsidiary: (i) any
merger, consolidation, share exchange, business combination, or
other similar transaction; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 50% or more of
<PAGE>
47
the assets of the Company and the Subsidiaries, taken as a whole,
in a single transaction or series of transactions; (iii) any
tender offer or exchange offer for 50% or more of the Shares or
the filing of a registration statement under the Securities Act
in connection therewith; (iv) any person having acquired
beneficial ownership or the right to acquire beneficial ownership
of, or any "group" (as such term is defined under Section 13(d)
of the Exchange Act and the rules and regulations promulgated
thereunder) having been formed which beneficially owns or has the
right to acquire beneficial ownership of, 50% or more of the
Shares; or (v) any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage
in any of the foregoing.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. Registration Statement/Proxy Statement.
(a) As promptly as practicable after the consummation of the
Offer, the Company and Parent shall prepare and file with the SEC
preliminary proxy materials which shall constitute the
preliminary Proxy Statement and a preliminary prospectus with
respect to the Parent Common Stock to be issued in connection
with the Merger. As promptly as practicable after comments are
received from the SEC with respect to such preliminary materials
and after the furnishing by the Company and Parent of all
information required to be contained therein, the Company shall
file with the SEC the definitive Proxy Statement and Parent shall
file with the SEC the Registration Statement (which shall include
the definitive Proxy Statement), and Parent and the Company shall
use their best efforts to cause the Registration Statement to
become effective and to mail the definitive Proxy Statement to
their respective stockholders as soon thereafter as practicable.
(b) Parent and the Company shall make all necessary
filings with respect to the Merger and the Parent Share Proposal
under the Securities Act and the Exchange Act and the rules and
regulations thereunder, under applicable blue sky or similar
securities laws and the New York Stock Exchange, Inc. and shall
use all reasonable efforts to obtain required approvals and
clearances with respect thereto.
SECTION 6.02. Stock Exchange Listing. Parent shall
use its best efforts to list on the NYSE, upon official notice of
issuance, the Parent Common Stock to be issued pursuant to the
Merger.
SECTION 6.03. Additional Agreements. The Company,
Parent and Merger Sub will each comply in all material respects
<PAGE>
48
with all applicable laws and with all applicable rules and
regulations of any governmental authority in connection with its
respective execution, delivery and performance of this Agreement
and the transactions contemplated hereby. Each of the parties
hereto agrees to use all reasonable efforts to obtain in a timely
manner all necessary waivers, consents and approvals and to
effect all necessary registrations and filings, and to use all
reasonable efforts to take, or cause to be taken, all other
actions and to do, or cause to be done, all other things
necessary, proper or advisable to consummate and make effective
as promptly as practicable the transactions contemplated by this
Agreement.
SECTION 6.04. Notification of Certain Matters. The
Company shall give prompt notice to Parent, and Parent shall give
prompt notice to the Company, of (i) the occurrence or
non-occurrence of any event whose occurrence or non-occurrence
would be likely to cause any representation or warranty contained
in this Agreement to be untrue or inaccurate in any material
respect at any time from the date hereof to the Effective Time
and (ii) any material failure of the Company, Parent or Merger
Sub, as the case may be, or any officer, director, employee or
agent thereof, to comply with or satisfy any covenant, condition
or agreement to be complied with or satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to
this Section 6.04 shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
SECTION 6.05. Access to Information. (a) From the
date hereof to the Effective Time, each of Parent and the Company
shall, and shall cause their respective subsidiaries, officers,
directors, employees, auditors, attorneys and agents to, afford
the officers, employees, auditors, attorneys and agents of the
other party (the "Respective Representatives") complete access at
all reasonable times and on reasonable notice to its officers,
employees, agents, accountants, properties, offices and other
facilities and to all books and records, and shall furnish such
Respective Representatives with all financial, operating and
other data and information and all information relating to the
regulatory status of its Plants (whether held by it, a
subsidiary, or agents thereof) as the other party, through its
officers, employees, agents or accountants, may reasonably
request.
(b) All information obtained by Parent or the Company
pursuant to this Section 6.05 shall be kept confidential in
accordance with the confidentiality agreements dated December 4,
1994 between Parent and the Company.
<PAGE>
49
(c) In the event of the termination of this Agreement,
each of Parent and the Company shall, and shall cause its
affiliates to, return promptly every document furnished to them
by the other party or its Respective Representatives in
connection with the transactions contemplated hereby and any
copies thereof which may have been made, and shall cause its
Respective Representatives to whom such documents were furnished
promptly to return such documents and any copies thereof any of
them may have made, other than documents filed with the
Commission or otherwise publicly available.
SECTION 6.06. Public Announcements. Parent and the
Company shall consult with each other before issuing any press
release or otherwise making any public statements with respect to
the Merger and shall not issue any such press release or make any
such public statement before such consultation, except as may be
required by law.
SECTION 6.07. Best Efforts; Cooperation. Upon the
terms and subject to the conditions hereof, each of the parties
hereto agrees to use its best efforts to take or cause to be
taken all actions and to do or cause to be done all things
necessary, proper or advisable to consummate the transactions
contemplated by this Agreement and shall use its best efforts to
obtain all necessary waivers, consents and approvals, and to
effect all necessary filings under the Exchange Act. The parties
shall cooperate in responding to inquiries from, and making
presentations to, regulatory authorities.
SECTION 6.08. Agreement to Defend and Indemnify. (a)
If any action, suit, proceeding or investigation relating hereto
or to the transactions contemplated hereby is commenced, whether
before or after the Effective Time, the parties hereto agree to
cooperate and use their best efforts to defend against and
respond thereto. It is understood and agreed that, subject to
the limitations, if any, on indemnification contained in
applicable law, the Company shall, to the fullest extent
permitted under applicable law and regardless of whether the
Merger becomes effective, indemnify and hold harmless, and after
the Effective Time, the Surviving Corporation and Parent shall,
to the fullest extent permitted under applicable law, indemnify
and hold harmless, each director, officer, employee, fiduciary
and agent of the Company or any Subsidiary and their respective
subsidiaries and controlled affiliates, including, without
limitation, officers and directors serving as such on the date
hereof (collectively, the "Indemnified Parties"), from and
against any costs or expenses (including attorneys' fees),
judgments, fines, losses, claims, damages, liabilities and
amounts paid in settlement in connection with any claim, action,
suit, proceeding or investigation arising out of or pertaining to
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50
any of the transactions contemplated hereby, including without
limitation liabilities arising under the Securities Act or the
Exchange Act in connection with the Merger. Parent shall cause
the Surviving Corporation to continue in effect the
indemnification provisions currently provided (or provisions that
are no less favorable to the Indemnified Parties than those
currently provided) by the Articles of Incorporation, Bylaws or
any written indemnification agreement of the Company for a period
of not less than six years following the Effective Time. This
Section shall survive the consummation of the Merger. This
covenant shall survive any termination of this Agreement pursuant
to Section 8.01 hereof. Notwithstanding Section 9.07 hereof,
this Section is intended to be for the benefit of and to grant
third party rights to Indemnified Parties whether or not parties
to this Agreement, and each of the Indemnified Parties shall be
entitled to enforce the covenants contained herein.
(b) Parent shall cause to be maintained in effect for
not less than three years after the Effective Time the current
policies of directors' and officers' liability insurance
maintained by the Company and its Subsidiaries with respect to
matters occurring prior to the Effective Time; provided, however,
that Parent may substitute therefor its current policies or other
policies of at least the same coverage containing terms and
conditions which are no less advantageous to the Indemnified
Parties; provided, however, that in no event shall Parent be
required to expend pursuant to this Section 6.08(b) more than an
amount equal to 125% of current annual premiums paid by the
Company for such insurance.
(c) If Parent, the Surviving Corporation or any of
either of their successors or assigns (i) consolidates with or
merges into any other person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger
or (ii) transfers all or substantially all of its properties and
assets to any person, then and in each such case, proper
provision shall be made so that the successors and assigns of
Parent or Surviving Corporation assume the obligations set forth
in this Section 6.08.
SECTION 6.09. Disposition of Litigation. (a) The
parties agree to file jointly a stipulation of dismissal without
prejudice, or take other reasonable steps necessary to terminate
without prejudice, the action entitled Magma Power Company, et
al. v. California Energy Company, Inc., et al., Case No. CV-N-94-
00719-DWH pending in the United States District Court for the
District of Nevada, including any and all claims and
counterclaims asserted against the Company, its directors, its
officers, Parent and Merger Sub, with each party bearing its own
costs and attorneys' fees. The Company agrees that it will not
<PAGE>
51
settle any litigation currently pending, or commenced after the
date hereof, against the Company or any of its directors by any
stockholder of the Company relating to the Offer or this
Agreement, without the prior written consent of Parent.
(b) The Company will not voluntarily cooperate with
any third party that has sought or may hereafter seek to restrain
or prohibit or otherwise oppose the Offer or the Merger and will
cooperate with Parent and Merger Sub to resist any such effort to
restrain or prohibit or otherwise oppose the Offer or the Merger,
unless failing to so cooperate with such third party or
cooperating with Parent or Merger Sub, as the case may be, would
constitute a breach of fiduciary duty of the Board of Directors
of the Company or otherwise violate any applicable law or rules.
SECTION 6.10. Employee Benefits. (a) Parent shall
cause the Surviving Corporation and its Subsidiaries to (x) honor
all employment, change in control, deferred compensation,
pension, retirement and severance agreements in effect on the
date hereof between the Company or one of its Subsidiaries and
any employee of the Company or one of its Subsidiaries, or
maintained for the benefit of any employee of the Company or one
of its Subsidiaries, all of which have been made available to
Parent, and (y) honor all bonus determinations for the fiscal
year ending December 31, 1994 made by the Company or any of its
Subsidiaries prior to the date hereof with respect to the bonus
plans and arrangements of the Company and its Subsidiaries.
(b) For a period of one year commencing on the
Effective Time, Parent shall cause the Surviving Corporation to
provide active employees of the Company and its Subsidiaries with
benefits (including, without limitation, welfare benefits) that
are no less favorable, taken as a whole, than the benefits
provided under the Company Benefit Plans (other than equity-based
plans and bonus plans) as in effect immediately prior to the
Effective Time. To the extent that service is relevant for
eligibility, vesting or benefit calculations or allowances
(including, without limitation, entitlements to vacation and sick
days) under any plan or arrangement maintained in order to
provide the benefits described in the preceding sentence, such
plan or arrangement shall credit employees for service on or
prior to the Effective Time with the Company or any of its
Subsidiaries.
(c) Parent shall as promptly as practicable after the
Effective Time cause the Surviving Corporation to (or the Company
may prior to the Effective Time) amend each demand note made in
favor of the Company by an employee of the Company or one of its
Subsidiaries (each of which has been made available to Parent) to
provide that (x) such demand note will not be repayable on demand
<PAGE>
52
from the Company and (y) upon the involuntary termination without
cause of the employment of such employee, all sums owed under
such demand note shall be payable in equal quarterly installments
over a period of not less than 36 months.
(d) With respect to each employee of the Company
(other than employees of the Company which are parties to a
"change in control" or "severance" agreements referred to in the
Previous 14D-9) who is, within the one year period following the
closing of the Offering, either (i) terminated without cause or
(ii) terminated as a result of a reduction in force, Parent shall
cause the Surviving Corporation to make the following payments:
(1) if, upon the effective date of such
employee's termination, such employee has less than one
year's service with the Company, a payment equal to
three months base salary plus an amount equal to one-
fourth of the prior years targeted bonus for such
employee, payable in twelve equal installments over the
twelve months following such termination; or
(2) if, upon the effective date of such
employee's termination, such employee has one year or
more of service with the company, a payment equal to
six months base salary plus an amount equal to one-
fourth of the prior years targeted bonus for each such
employee, payable in twelve equal installments over the
twelve months following such termination.
For the purposes of subclauses (1) and (2), if an
employee was not eligible for a bonus in the referenced prior
year, then the targeted bonus for the current year shall be used.
An employee shall not be eligible for the payments specified in
subclauses (1) or (2) if such employee's termination relates to a
reduction in force referred to subclause (ii) above and such
employee has been offered a comparable position (in terms of
compensation) by Parent at any location; provided however, that
no such amounts referenced in (1) and (2) will be payable if, in
the good faith determination of the Company, the employee's job
performance did not merit continued employment or offer of
relocation to a comparable position. An employee may not receive
the severance payments contemplated by this Section 6.10(d) and
also receive any severance payments under the Company's severance
policy covered by Sections 6.10(a) and (b) and identified on a
schedule hereto.
SECTION 6.11. Certain Action of Parent and Merger Sub.
Promptly following the execution of this Agreement, Parent and
Merger Sub shall suspend their solicitation of requests for the
call of a special meeting of the Company's stockholders and their
<PAGE>
53
solicitation of proxies to elect nominees to the Company's Board
of Directors.
ARTICLE VII
CONDITIONS OF MERGER
SECTION 7.01. Conditions to Obligation of Each Party
to Effect the Merger. The respective obligations of each party to
effect the Merger shall be subject to the following conditions:
(a) Offer. Parent shall have made, or caused to be
made, the Offer and shall have purchased, or caused to be
purchased, Shares pursuant to the Offer;
(b) Company Stockholder Approval. This Agreement and
the transactions contemplated hereby shall have been approved and
adopted by the requisite vote of the holders of the Company
Common Stock.
(c) Parent Stockholder Approval. The Parent Share
Proposal shall have been approved by the requisite vote of the
holders of Parent Common Stock.
(d) Stock Exchange Listing. The Parent Common Stock
issuable in the Merger shall have been authorized for listing on
the NYSE upon official notice of issuance.
(e) Effectiveness of Registration Statement. The
Registration Statement shall have become effective in accordance
with the provisions of the Securities Act. No stop order
suspending the effectiveness of the Registration Statement shall
have been issued by the Commission and remain in effect.
(f) No Prohibition. There shall not be in effect (i)
any judgment decree or order issued by any Federal, state or
local court of competent jurisdiction, or (ii) any statute, rule
or regulation enacted or promulgated by any Federal, state, local
or legislative, administrative or regulatory body of competent
jurisdiction, that in either of cases (i) or (ii) prohibits the
consummation of the Merger or makes such consummation illegal.
<PAGE>
54
SECTION 7.02. Additional Conditions to Obligations of
the Company. The obligation of the Company to effect the Merger
is also subject to the fulfillment of the following conditions:
(a) Representations and Warranties. The
representations and warranties of Parent and Merger Sub
contained in this Agreement shall be true and correct in all
material respects on the date hereof and shall also be true
and correct in all material respects on and as of the
Effective Time, except for changes contemplated by this
Agreement, with the same force and effect as if made on and
as of the Effective Time, except to the extent that the
failure of such representations and warranties to be so true
and correct, individually and in the aggregate, does not
have a Material Adverse Effect; provided, however, that any
inaccuracy of a representation or warranty, on the date
hereof or at the Effective Time, shall not result in the
non-satisfaction of this Section 7.02(a) unless any such
inaccuracy or inaccuracies, either (i) individually or in
the aggregate, constitute facts or circumstances having a
Material Adverse Effect (it being understood that such facts
or circumstances shall be deemed to be so constituted if the
particular representation or warranty which is inaccurate
contains a Material Adverse Effect standard) or (ii) are
clearly intentional misrepresentations; and
(b) Agreements, Conditions and Covenants. Parent and
Merger Sub shall have performed or complied in all material
respects with all agreements, conditions and covenants
required by this Agreement to be performed or complied with
by them on or before the Effective Time.
SECTION 7.03. Additional Conditions to Obligations of
Parent and Merger Sub. The obligations of Parent and Merger Sub
to effect the Merger are also subject to the following
conditions:
(a) Representations and Warranties. The
representations and warranties of the Company contained in
this Agreement shall be true and correct in all material
respects on the date hereof and shall also be true and
correct in all material respects on and as of the Effective
Time, except for changes contemplated by this Agreement,
with the same force and effect as if made on and as of the
Effective Time, except to the extent that the failure of
such representations and warranties to be so true and
correct, individually and in the aggregate, does to have a
Material Adverse Effect; provided, however that any
inaccuracy of a representation or warranty, on the date
hereof or at the Effective Time, shall not result in the
<PAGE>
55
non-satisfaction of this Section 7.03(a) unless any such
inaccuracy or inaccuracies, either (i) individually or in
the aggregate, constitute facts or circumstances having a
Material Adverse Effect (it being understood that such facts
or circumstances shall be deemed to be so constituted if the
particular representation or warranty which is inaccurate
contains a Material Adverse Effect standard) or (ii) are
clearly intentional misrepresentations; and
(b) Agreements; Conditions and Covenants. The Company
shall have performed or complied in all material respects
with all agreements, conditions and covenants required by
this Agreement to be performed or complied with by it on or
before the Effective Time.
(c) Funding. Parent and/or Merger Sub shall have
received the proceeds of the financing contemplated by
Section 3.10 hereof.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. Termination. This Agreement may be
terminated at any time before the Effective Time:
(a) By mutual consent of the Boards of Directors of
Parent and the Company; or
(b) By the Company or Parent if the Offer shall not
have been consummated by February 28, 1995; or
(c) By the Company or Parent if the Effective Time
shall not have occurred on or prior to September 30, 1995; or
(d) By either Parent or the Company if a court of
competent jurisdiction or governmental, regulatory or
administrative agency or commission shall have issued an order,
decree or ruling or taken any other action (which order, decree
or ruling the parties hereto shall use their best efforts to
lift), in each case permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this
Agreement and such order, decree, ruling or other action shall
have become final and nonappealable; or
(e) By Parent if (i) the Board of Directors of the
Company withdraws, modifies or changes its recommendation of this
Agreement or any of the transactions contemplated by this
Agreement or shall have resolved to do any of the foregoing, or
(ii) the Board of Directors of the Company recommends to the
<PAGE>
56
holders of Shares any proposal with respect to a merger,
consolidation, share exchange or similar transaction involving
the Company or any of its Subsidiaries, other than the
transactions contemplated by this Agreement; or
(f) By Parent if, without the Company's consent, any
person has acquired beneficial ownership or the right to acquire
beneficial ownership of or any "group" (as defined under Section
13(d) of the Exchange Act and the rules and regulations
promulgated thereunder) has been formed which beneficially owns,
or has the right to acquire "beneficial ownership" (as defined in
the Rights Agreement) of, more than 10% of the Shares; or
(g) By the Company or Parent if (i) a corporation,
partnership, person or other entity or group shall have made a
bona fide offer that the Board of Directors of the Company
determines in its good faith judgment and in the exercise of its
fiduciary duties, after consultation with and based upon the
advice of its financial and legal advisors, is more favorable to
the Company's stockholders than the Offer and the Merger or (ii)
any person (including, without limitation, the Company or any
affiliate thereof), other than Parent or any affiliate of Parent,
shall have become the beneficial owner of more than 50% of the
then outstanding Shares; or
(h) By either Parent or the Company if the other party
shall have breached this Agreement hereunder in any material
respect and such breach continues for a period of ten days after
the receipt of notice of the breach from the nonbreaching party.
SECTION 8.02. Effect of Termination. In the event of
termination of this Agreement as provided in Section 8.01 hereof,
this Agreement shall forthwith become void and there shall be no
liability on the part of Parent, Merger Sub or the Company,
except (i) as set forth in Sections 8.03, 8.04 and 9.01 hereof,
and (ii) nothing herein shall relieve any party from liability
for any willful breach hereof.
SECTION 8.03. Agreement Termination Fee. (a) If this
Agreement is terminated pursuant to Section 8.01(e) or (g) or
terminated by Parent pursuant to Section 8.01(h), the Company
shall pay Parent a fee of $8,000,000 plus Parent's actual
documented out-of-pocket expenses incurred since September 13,
1994 in connection with this Agreement and the transactions
contemplated hereby (including the previous offer referred to in
the Previous 14D-9), including, without limitation legal and
professional fees and expenses.
(b) Any payment required to be made pursuant to
Section 8.03(a) shall be made not later than one business day
<PAGE>
57
after termination of this Agreement and shall be made by wire
transfer of immediately available funds to an account designated
by Parent.
SECTION 8.04. Offer Fee. (a) If, by December 19,
1994, Parent has not delivered to the Company either a revised
Commitment Letter or definitive loan documentation reflecting the
financing contemplated by such Commitment Letter which, in each
case (i) do not contain any due diligence conditions regarding
Parent and the Company and its Subsidiaries and (ii) have a
definition of "material adverse effect" and/or "material adverse
change" that substantially conforms in all material respects with
the definition of Material Adverse Effect (other than as provided
in subclause (i) thereof) contained herein with respect to Parent
and the Company, then Parent shall owe the Company a fee of
$8,000,000 payable in accordance with and to the extent provided
in subsection (b) below.
(b) The $8,000,000 fee referred to in Section 8.04(a)
shall be paid by Parent to the Company only upon (i) termination
or expiration of the Offer without Merger Sub having accepted for
payment the shares tendered pursuant thereto or (ii) termination
of this Agreement pursuant to Section 8.01(b) (collectively, the
"Offer Termination Events") unless failure to close the Offer
results from one or more of the following:
(i) A Material Adverse Effect with
respect to the Company shall exist or shall have
occurred and be continuing on or prior to the
relevant Offer Termination Event;
(ii) The Company shall have materially
breached this Agreement and Parent shall have
terminated this Agreement under Section 8.01(h),
in each case on or prior to the relevant Offer
Termination Event; or
(iii) Generally accepted accounting principles
would require a restatement of the Company's audited
financial statements contained in the Company SEC
Reports.
(c) Any payment required to be made pursuant to
Section 8.04 shall be made not later than one business day after
the occurrence of an Offer Termination Event and shall be made by
wire transfer of immediately available funds to an account
designated by the Company.
<PAGE>
58
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01. Non-Survival of Representations,
Warranties and Agreements. The representations, warranties and
agreements in this Agreement shall
terminate at the Effective Time or the termination of this
Agreement pursuant to Section
8.01, as the case may be, except that the agreements set forth in
Article I and Section 6.08
shall survive the Effective Time indefinitely and those set forth
in Sections 6.05(b), 6.05(c), 6.10 and 9.03 shall survive
termination indefinitely.
SECTION 9.02. Notices. All notices and other
communications given or made pursuant hereto shall be in writing
and shall be deemed to have been duly given or made as of the
date delivered or mailed if delivered personally or mailed by
registered or certified mail (postage prepaid, return receipt
requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice,
except that notices of changes of address shall be effective upon
receipt):
(a) if to Parent or Merger Sub
California Energy Company, Inc.
10831 Old Mill Road
Omaha, Nebraska 68154
Attention: Steven A. McArthur, Esq.
with a copy to:
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: Peter J. Hanlon, Esq.
(b) if to the Company:
Magma Power Company
4365 Executive Drive, Suite 900
San Diego, California 92121
Attention: Jon R. Peele, Esq.
with a copy to:
Shearman & Sterling
555 California Street
<PAGE>
59
San Francisco, California 94104
Attention: Michael J. Kennedy, Esq.
SECTION 9.03. Expenses. Except as is provided in
Section 8.03 hereof, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such costs and
expenses.
SECTION 9.04. Certain Definitions. For purposes of
this Agreement, the term: (a) "affiliate" of a person means a
person that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common
control with, the first mentioned person;
(b) "control" (including the terms "controlled by" and
"under common control with") means the possession, direct or
indirect, of the power to direct or cause the direction of the
management and policies of a person, whether through the
ownership of stock, as trustee or executor, by contract or credit
arrangement or otherwise; and
(c) "person" means an individual, corporation,
partnership, association, trust or any unincorporated
organization.
SECTION 9.05. Headings. The headings contained in
this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this
Agreement.
SECTION 9.06. Severability. If any term or other
provision of this Agreement is invalid, illegal or incapable of
being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected
in any manner adverse to any party. Upon such determination that
any term or other provision is invalid, illegal or incapable of
being enforced, the parties hereto shall negotiate in good faith
to modify this Agreement so as to effect the original intent of
the parties as closely as possible in an acceptable manner to the
end that transactions contemplated hereby are fulfilled to the
maximum extent possible.
SECTION 9.07. Entire Agreement; No Third-Party
Beneficiaries. This Agreement constitutes the entire agreement
and supersedes any and all other prior agreements and
undertakings, both written and oral, among the parties, or any of
them, with respect to the subject matter hereof and, except as
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60
otherwise expressly provided herein and for the provisions of
Sections 2.10, 6.05 and 6.10 hereof, is not intended to confer
upon any other person any rights or remedies hereunder.
SECTION 9.08. Waiver. At any time before the
Effective Time, any party hereto may (a) extend the time for the
performance of any of the obligations or other acts of the other
parties hereto, (b) waive any inaccuracies in the representations
and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be
valid only as against such party and only if set forth in an
instrument in writing signed by such party.
SECTION 9.09. Amendment. This Agreement may be
amended by the parties hereto by action taken by Parent and
Merger Sub, and by action taken by or on behalf of the Company's
Board of Directors at any time before the Effective Time,
provided, however, that, after approval of the Merger by the
stockholders of the Company, no amendment may be made which would
materially adversely impact the interests of the Company's
stockholders or reduce the amount or change the type of
consideration into which each Share will be converted upon
consummation of the Merger. This Agreement may not be amended
except by an instrument in writing signed by the parties hereto.
SECTION 9.10. Assignment. This Agreement shall not be
assigned by operation of law or otherwise, except that Parent and
Merger Sub may assign all or any of their rights hereunder to any
affiliate of Parent provided that no such assignment shall
relieve the assigning party of its obligations hereunder.
SECTION 9.11. Governing Law. This Agreement shall be
governed by, and construed in accordance with, the internal laws
of the State of Delaware.
SECTION 9.12. Counterparts. This Agreement may be
executed in one or more counterparts and by facsimile, and by the
different parties hereto in separate counterparts, each of which
when executed shall be deemed to be an original but all of which
shall constitute one and the same agreement.
<PAGE>
61
IN WITNESS WHEREOF, Parent, Merger Sub and the Company
have caused this Agreement to be executed as of the date first
written above by their respective officers thereunto duly
authorized.
CALIFORNIA ENERGY COMPANY, INC.
By: /s/ David L. Sokol
Name: David L. Sokol
Title: Chairman, President
and Chief Executive
Officer
CE ACQUISITION COMPANY, INC.
By: /s/ David L. Sokol
Name: David L. Sokol
Title: Chairman, President
and Chief Executive
Officer
MAGMA POWER COMPANY
By: /s/ Ralph W. Boeker
Name: Ralph W. Boeker
Title: President and Chief
Executive Officer
<PAGE>
ANNEX I
Conditions to the Offer
Notwithstanding any other provision of the Offer, Merger Sub
shall not be required to accept for payment or pay for, or may
delay the acceptance for payment of or payment for, tendered
Shares, or may, in the sole discretion of Merger Sub, terminate
or amend the Offer as to any Shares not then paid for if (i) at
the Expiration Date the Minimum Tender Condition or the Financing
Condition shall not have been satisfied or waived, or (ii) on or
after December 9, 1994, and at or before the acceptance for
payment for any of such Shares, any of the following events shall
occur:
(a) there shall be instituted or pending any action or
proceeding by any government or governmental authority or agency,
domestic or foreign, or by any other person, domestic or foreign,
before any court or governmental authority or agency, domestic or
foreign, (i) challenging or seeking to make illegal, to delay or
otherwise directly or indirectly to restrain or prohibit the
making of the Offer, the acceptance for payment of or payment for
some of or all the Shares by Merger Sub or any other affiliate of
Parent, the consummation by Merger Sub of the Merger or seeking
to obtain material damages, (ii) seeking to prohibit the
ownership or operation by Merger Sub of all or any material
portion of the business or assets of the Company and its
subsidiaries or of Merger Sub, or to compel Merger Sub to dispose
of or hold separately all or any material portion of the business
or assets of Merger Sub or the Company or any of its subsidiaries
or seeking to impose any material limitation on the ability of
Merger Sub or any other affiliates of Parent to conduct their
business or own such assets, (iii) seeking to impose or confirm
limitations on the ability of Merger Sub or any other affiliates
of Parent effectively to exercise full rights of ownership of the
Shares, including, without limitation, the right to vote any
Shares acquired by any such person on all matters properly
presented to the Company's stockholders, (iv) seeking to require
divestiture by Merger Sub or any other affiliates of Parent of
any Shares, or (v) seeking any material diminution in the
benefits expected to be derived by Merger Sub or any other
affiliates of Parent as a result of the transactions contemplated
by the Offer or the Merger;
(b) there shall be any action taken, or any statute,
rule, regulation, interpretation, judgment, order or injunction
enacted, enforced, promulgated, amended, issued or deemed
applicable (i) to Merger Sub or (ii) to the Offer or the Merger
by any court, government or governmental, administrative or
regulatory authority or agency, domestic or foreign, other than
the routine application of the waiting period provisions of the
HSR Act to the Offer or to the Merger, which might, directly or
I-1
<PAGE>
indirectly, result in any of the consequences referred to in
clauses (i) through (v) of paragraph (a) above;
(c) it shall have been publicly disclosed or
Merger Sub shall have otherwise learned that (i) any person,
entity (including the Company or any of its subsidiaries) or
"group" (within the meaning of Section 13(d)(3) of the Exchange
Act) shall have acquired beneficial ownership of more than 20% of
any class or series of capital stock of the Company (including
the Shares), through the acquisition of stock, the formation of a
group or otherwise, or shall have been granted any right, option
or warrant, conditional or otherwise, to acquire beneficial
ownership of more than 20% or any class or series of capital
stock of the Company (including the Shares) other than
acquisitions for bona fide arbitrage purposes only and except as
disclosed in a Schedule 13D or 13G on file with the SEC on
December 5, 1994 or (ii) any such person, entity or group which
before December 5, 1994, had filed such a Schedule with the SEC
has acquired or proposes to acquire, through the acquisition of
stock, the formation of a group or otherwise, beneficial
ownership of an additional 5% or more of any class or series of
capital stock of the Company (including the Shares), or shall
have been granted any right, option or warrant, conditional or
otherwise, to acquire beneficial ownership of an additional 5% or
more of any class or series of capital stock of the Company
(including the Shares); provided, however, that if such person or
group acquired the shares without the Company's consent and the
Company has not taken any action under its Rights Plan to exempt
such acquisition from the terms thereof, then the foregoing
condition shall be inapplicable;
(d) the Company shall have failed to comply with in
any material respect any of its obligations under the Agreement
or any representation or warranty of the Company in such
Agreement shall not be true and correct in any material respect
and such failure to comply or be true and correct shall have a
Material Adverse Effect;
(e) a Material Adverse Effect with respect to the
Company shall have occurred;
(f) this Agreement shall have been terminated in
accordance with its terms; or
(g) the Company's Board of Directors shall have
withdrawn, modified or amended in any unfavorable respect its
recommendation of the Offer or shall have resolved to do so or
shall have entered into an agreement with a third party with
respect to a Competing Transaction;
which, in the good faith judgment of Parent and Merger Sub with
respect to each and every matter referred to above and regardless
I-2
<PAGE>
of the circumstances (including any action or inaction by Parent
or Merger Sub) giving rise to any such condition, makes it
inadvisable to proceed with the Offer or with such acceptance for
payment or payment.
The foregoing conditions are for the sole benefit of
Parent and Merger Sub and may be asserted by Parent or Merger Sub
or may be waived by Parent or Merger Sub in whole or in part at
any time and from time to time in its sole discretion.
I-3
<PAGE>
ANNEX B
[GOLDMAN, SACHS & CO. LETTERHEAD]
December 9, 1994
The Board of Directors
Magma Power Company
4365 Executive Drive
Suite 900
San Diego, CA 92121
Gentlemen:
You have requested that we confirm our oral opinion as to the
fairness to the holders (other than California Energy Company,
Inc. ("California Energy") and its affiliates) of the outstanding
shares of Common Stock, par value $0.10 per share (the "Shares"),
of Magma Power Company (the "Company") of the Cash Consideration
and the Merger Consideration (as defined below) proposed to be
paid by CE Acquisition Company, Inc. ("Purchasor"), a wholly
owned subsidiary of California Energy, and California Energy in
the Offer and the Merger (as defined below) pursuant to the
Agreement and Plan of Merger dated as of December 5, 1994 among
California Energy, Purchaser and the Company (the "Merger
Agreement").
The Merger Agreement provides for a tender offer for 12,400,000
Shares (the "Offer") pursuant to which Purchaser will pay $39.00
per Share in cash for each Share accepted (the "Cash
Consideration"). The Merger Agreement further provides that
following completion of the Offer, Purchaser will be merged with
and into the Company (the "Merger") and each outstanding Share
(other than Shares already owned by California Energy or
Purchaser) will be converted into the right to receive, at the
option of California Energy:
(I) an amount in cash equal to the quotient of (A) $38.75
multiplied by the number of Shares outstanding at the
effective time of the Merger (the "Effective Time"), less
$39.00 multiplied by the number of Shares owned by
California Energy and its affiliates immediately prior to
the Effective Time, divided by (B) the number of Shares
outstanding at the Effective Time (other than Shares owned
by California Energy and its affiliates) (the "All Cash
Component Amount"); or
<PAGE>
Magma Power Company
December 9, 1994
Page 2
(II) both (A) an amount in cash equal to the quotient of
$28.50 multiplied by the number of Shares outstanding at the
Effective Time, less $39.00 multiplied by the number of
Shares owned by California Energy and its affiliates
immediately prior to the Effective Time, divided by the
number of Shares outstanding at the Effective Time (other
than Shares owned by California Energy and its affiliates)
(such amount, the "Mixed Cash Component Amount"), and (B)
the number of shares of Common Stock, par value $0.0675 per
share (the "California Energy Common Stock") of California
Energy equal to the quotient of (I) $39.00 less (II) the
Mixed Cash Component Amount, divided by the average closing
price (the "Average Closing Price") of California Energy
Common Stock on the New York Stock Exchange during the 15
consecutive trading days ending the fifth business day prior
to the Effective Time, provided, however, that if such
average closing price exceeds $18.73, the Average Closing
Price will be $18.73, and if such average closing price is
less than $14.27, the Average Closing Price will be $14.27.
The consideration to be received by the holders of Shares in the
Merger, under either the All Cash Component Amount or (II)(A) and
(II(B), collectively, as applicable, is referred to herein as the
"Merger Consideration". The Cash Consideration and the Merger
Consideration are collectively referred to herein as the
"Consideration".
Goldman, Sachs & Co., as part of its investment banking business,
is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other
purposes. We are familiar with the Company having acted as its
financial advisor in connection with, and having participated in
certain of the negotiations leading to the Merger Agreement. In
the course of the trading activities of Goldman, Sachs & Co.
prior to our retention in connection with the matter, the Firm
accumulated a long position of 60,100 Shares.
In connection with this opinion, we have reviewed, among other
things, the Merger Agreement; Annual Reports to Stockholders and
Annual Reports on Form 10-K of the Company and California Energy
for the five years ended December 31, 1993; certain interim
2
<PAGE>
Magma Power Company
December 9, 1994
Page 3
reports to stockholders and Quarterly Reports on Form 10-Q of the
Company and California Energy; certain other communications from
the Company and California Energy to their respective
stockholders; certain internal financial analyses and forecasts
for the Company prepared by the management of the Company; and
certain internal financial analyses and forecasts for the Company
and California Energy prepared by the management of California
Energy. We also have held discussions with members of the senior
managements of each of the Company and California Energy
regarding the past and current business operations, financial
condition and future condition and future prospects of their
respective companies and as combined in the contemplated Merger.
We have reviewed the reported price and trading activity for both
the Shares and the California Energy Common Stock, compared
certain financial and stock market information for the Company
and California Energy, respectively, with similar information for
certain other companies the securities of which are publicly
traded, reviewed the financial terms of certain recent business
combinations in the independent power production industry
specifically and in other industries generally and considered
such other information, held such other discussions and performed
such other studies and analyses as we considered appropriate.
We have relied without independent verification upon the accuracy
and completeness of all of the financial information and other
information reviewed by us for purposes of this opinion. In
addition, we have not made an independent evaluation or appraisal
of the assets and liabilities of either the Company or California
Energy or any of their subsidiaries and we have not been
furnished with any such evaluation or appraisal.
Based upon and subject to the foregoing and such other matters as
we considered relevant, we confirm our oral opinion that, as of
December 5, 1994, the Cash Consideration and the Merger
Consideration to be received by the holders of Shares in the
Offer and the Merger, taken as a unitary transaction, are fair to
the holders of Shares receiving such Consideration (other than
California Energy and its affiliates).
Very truly yours,
/s/ Goldman Sachs & Co.
GOLDMAN, SACHS & CO.
3
<PAGE>
ANNEX C
[GLEACHER & CO. INC. LETTERHEAD]
December 6, 1994
Board of Directors
California Energy Company, Inc.
10831 Old Mill Road
Omaha, NE 68154
Dear Ladies and Gentlemen:
California Energy Company, Inc., a Delaware corporation (the
"Company" or "CECI"), CE Acquisition Company, Inc., a Delaware
corporation and a wholly owned subsidiary of CECI ("Merger Sub"),
and Magma Power Company, a Nevada corporation ("Magma"), propose
to enter into an agreement (the "Agreement") pursuant to which
Merger Sub will make a tender offer (the "Offer") for at least a
majority of Magma's outstanding common stock, $0.10 par value per
share (the "Shares"), for $39.00 per share, net to the seller in
cash (the "Offer Consideration"). The Agreement also provides
that, following consummation of the Offer, Merger Sub will be
merged with and into Magma in a transaction (the "Merger") in
which each remaining Share will be converted into the right to
receive, at the Company's option, either (i) $39.00 per share in
a combination of cash and a number of shares of CECI's common
stock to be determined in accordance with the Agreement, or (ii)
$38.50 per Share in cash (the "Merger Consideration" and together
with the Offer Consideration, the "Consideration").
You have asked for our opinion as to whether the Consideration to
be paid by the Company pursuant to the Offer and the Merger is
fair to the Company from a financial point of view.
In arriving at the opinion set forth below, we have, among other
things:
(i) reviewed the audited and unaudited financial statements
and public Securities Exchange Commission filings for
the three most recent fiscal years and interim periods
to date of Magma and the Company ("SEC Reports");
(ii) on an operating and trading basis, compared financial
information relating to Magma's businesses with
published financial information concerning certain
companies whose businesses we deemed to be reasonably
similiar, in whole or in part, to those of Magma;
<PAGE>
California Energy Company, Inc.
December 6, 1994
Page 2
(iii) analyzed the market prices and trading characteristics
of the Shares and the Company's common stock for recent
periods to date;
(iv) conducted discussions with members of senior management
of the Company concerning its businesses and prospects;
(v) reviewed certain financial forecasts for Magma and the
Company, and projections of expected cost savings in a
business combination (together, the "Projections"), in
each case as prepared by the Company;
(vi) based on the Projections, performed a discounted cash
flow analysis of Magma including the expected cost
savings arising from a business combination;
(vii) based on the Projections, analyzed the pro forma
financial effects to the Company of the proposed
business combination;
(viii) assumed without independent investigation that no
material contingent liability exists with respect to
Magma or the Company which is not disclosed in the SEC
Reports;
(ix) reviewed the definitive merger agreement and related
transaction documentation; and
(x) reviewed such other financial studies and performed
such other analyses and took into account such other
matters as we deemed appropriate.
It should be noted that our opinion necessarily is based upon
prevailing market conditions and other circumstances and
conditions existing at the present time. In preparing our
opinion, we have relied upon the accuracy and completeness of all
information supplied or otherwise made available to us by the
Company, and we have not independently verified such information
or made or obtained an independent evaluation or appraisal of the
assets of the Company or Magma. With respect to the Projections,
we have assumed without independent investigation that the
Projections have been reasonably prepared by the Company, and
have been generated on bases reflecting the best currently
available estimates and judgment of the Company's management as
<PAGE>
California Energy Company, Inc.
December 6, 1994
Page 3
to the expected future financial performance of the Company or
Magma, as the case may be.
We are acting as financial advisor to the Company in connection
with the Offer and the Merger and will receive a fee for our
services.
Based on our analysis of the foregoing, and on our assessment of
the general economic environment, and assuming no material change
therein, we are of the opinion that the Consideration to be paid
by the Company pursuant to the Offer and the Merger is fair to
the Company from a financial point of view.
Very truly yours,
GLEACHER & CO. INC.
By: /s/ James Goodwin
James Goodwin
Managing Director
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL") grants each corporation organized thereunder, such as CECI, the power
to indemnify its directors and officers against liabilities for certain of
their acts. Article EIGHTH of CECI's Restated Certificate of Incorporation and
Article V of CECI's By-Laws provide for indemnification of directors and
officers of CECI to the fullest extent permitted by the DGCL. Article V of
CECI's By-Laws further provides that CECI may enter into contracts providing
indemnification to the full extent authorized or permitted by the DGCL and that
CECI may create a trust fund, grant a security interest and/or use other means
to ensure the payment of such amounts as may become necessary to effect
indemnification pursuant to such contracts or otherwise.
Section 102(b)(7) of the DGCL permits a provision in the certificate of
incorporation of each corporation organized thereunder, such as CECI,
eliminating or limiting, with certain exceptions, the personal liability of a
director to the corporation or its stockholders for monetary damages for
certain breaches of fiduciary duty as a director. Article EIGHTH of CECI's
Restated Certificate of Incorporation eliminates the personal liability of
directors to the full extent permitted by the DGCL.
The foregoing statements are subject to the detailed provisions of Sections
145 and 102(b)(7) of the DGCL, Article EIGHTH of CECI's Restated Certificate of
Incorporation and Article V of CECI's By-Laws.
Item 21. Exhibits and Financial Statement Schedules.
A. Exhibits.
Exhibit
No. Description
2.1 Agreement and Plan of Merger, dated as of December 5, 1994, among
California Energy Company, Inc., CE Acquisition Company, Inc., and Magma Power
Company (included as Annex A to the Information Statement/Prospectus).
3.1 CECI's Restated Certificate of Incorporation (incorporated by reference
to Exhibit 3.1 to the CECI's Form 10-K for the year ended December 31, 1992,
File No. 1-9874 (the "1992 Form 10-K")).
3.2 Certificate of Amendment of the CECI's Restated Certificate of
Incorporation, dated June 23, 1993 (incorporated by reference to the CECI's
Form 8-A, dated July 28, 1993, File No. 1-9874 (the "Form 8-A")).
3.3 CECI's Certificate of Designation with respect to CECI's Series C
Redeemable Convertible Exchangeable Preferred Stock, dated November 20, 1991
(incorporated by reference to Exhibit 3.1 of CECI's 1992 Form 10-K).
3.4 CECI's By-Laws as amended through September 24, 1993 (incorporated by
reference to Exhibit 3.4 to CECI's Form 10-K for the year ended December 31,
1993, File No. 1-9874 (the "1993 Form 10-K")).
4.1 Specimen copy of form of Common Stock Certificate (incorporated by
reference to Exhibit 4.1 of CECI's 1993 Form 10-K).
4.2 Stockholders Rights Agreement between the Registrant and Manufacturers
Hanover Trust Company of California dated December 1, 1988 (incorporated by
reference to Exhibit 1 to CECI's Form 8-K dated December 5, 1988, File No. 1-
9874).
4.3 Amendment Number 1 to Stockholder Rights Agreement, dated February 15,
1991 (incorporated by reference to Exhibit 4.2 to CECI's 1992 Form 10-K).
5.0 Opinion of Willkie Farr & Gallagher.*
10.1 Joint Venture Agreement for China Lake Joint Venture between CECI and
Caithness Geothermal 1980 Ltd., restated as of January 1, 1984 (incorporated by
reference to Exhibit 10.1 to CECI's Registration Statement on Form S-1, 33-
7770).
10.2 Amended Joint Venture Agreement for Coso Land Company between CECI and
Caithness Geothermal 1980 Ltd., dated as of June 1, 1983 (incorporated by
reference to Exhibit 10.3 to CECI's Registration Statement on Form S-1, 33-
7770).
10.3 Amended General Partnership Agreement for Coso Finance Partners between
China Lake Operating Company and ESCA I L.P. dated July 13, 1988 (incorporated
by reference to Exhibit 10.3 to CECI's 1992 Form 10-K).
10.4 First Supplemental Amendment to the Amended and Restated General
Partnership Agreement for Coso Finance Partners between China Lake Operating
Company and ESCA L.P. (Undated) (incorporated by reference to Exhibit 10.4 to
CECI's 1992 Form 10-K).
10.5 Second Supplemental Amendment to the Amended and Restated General
Partnership Agreement for Coso Finance Partners between China Lake Operating
Company and ESCA L.P. dated as of July 13, 1988 (incorporated by reference to
<PAGE>
Exhibit 10.5 to CECI's 1992 Form 10-K).
10.6 Third Supplemental Amendment to the Amended and Restated General
Partnership Agreement for Coso Finance Partners between China Lake Operating
Company and ESCA L.P. dated as of December 16, 1992 (incorporated by reference
to Exhibit 10.6 to CECI's 1992 Form 10-K).
10.7 General Partnership Agreement for Coso Finance Partners II between
China Lake Geothermal Management Company and ESCA II L.P. dated July 7, 1987
(incorporated by reference to Exhibit 10.7 to CECI's 1992 Form 10-K).
10.8 Restated General Partnership Agreement for Coso Energy Developers
between Coso Hotsprings Intermountain Power Inc. and Caithness Coso Holdings
L.P. dated as of March 31, 1988 (incorporated by reference to Exhibit 10.8 to
CECI's 1992 Form 10-K).
10.9 First Amendment to the Restated General Partnership Agreement for Coso
Energy Developers between Coso Hotsprings Intermountain Power, Inc. and
Caithness Coso Holdings L.P. dated as of March 31, 1988 (incorporated by
reference to Exhibit 10.9 to CECI's 1992 Form 10-K).
10.10 Second Amendment to the Restated General Partnership Agreement for Coso
Energy Developers between Coso Hotsprings Intermountain Power, Inc. and
Caithness Coso Holdings L.P. dated as of December 16, 1992 (incorporated by
reference to Exhibit 10.10 to CECI's 1992 Form 10-K).
10.11 Amended and Restated General Partnership Agreement for Coso Power
Developers between Coso Technology Corporation and Caithness Navy II Group L.P.
dated July 31, 1989 (incorporated by reference to Exhibit 10.11 to CECI's 1992
Form 10-K).
10.12 First Amendment to the Amended and Restated General Partnership for
Coso Power Developers between Coso Technology Corporation and Caithness Navy II
Group L.P. dated as of March 19, 1991 (incorporated by reference to Exhibit
10.12 to CECI's 1992 Form 10-K).
10.13 Second Amendment to the Amended and Restated General Partnership
Agreement for Coso Power Developers between Coso Technology Corporation and
Caithness Navy II Group L.P. dated as of December 16, 1992 (incorporated by
reference to Exhibit 10.13 to CECI's 1992 Form 10-K).
10.14 Form of Amended and Restated Field Operation and Maintenance Agreement
between Coso Joint Ventures and the Registrant dated as of December 16, 1992
(incorporated by reference to Exhibit 10.14 to CECI's 1992 Form 10-K).
10.15 Form of Amended and Restated Project Operation and Maintenance
Agreement between Coso Joint Venture and the Registrant dated as of December
16, 1992 (incorporated by reference to Exhibit 10.15 to CECI's 1992 Form 10-K).
10.16 Trust Indenture between Coso Funding Corp. and Bank of America National
Trust and Savings Association dated as of December 16, 1992 (incorporated by
reference to Exhibit 10.16 to CECI's 1992 Form 10-K).
10.17 Form of Amended and Restated Credit Agreement between Coso Funding
Corp. and Coso Joint Ventures dated as of December 16, 1992 (incorporated by
reference to Exhibit 10.17 to CECI's 1992 Form 10-K).
10.18 Form of Support Loan Agreement among Coso Joint Ventures dated December
16, 1992 (incorporated by reference to Exhibit 10.18 to CECI's 1992 Form 10-K).
10.19 Form of Project Loan Pledge Agreement between Coso Joint Ventures and
Bank of America National Trust and Savings dated as of December 16, 1992
(incorporated by reference to Exhibit 10.19 to CECI's 1992 Form 10-K).
10.20 Power Purchase Contracts between Southern California Edison Company
and:
(a) China Lake Joint Venture, executed June 4, 1984 with a term of 24
years;
(b) China Lake Joint Venture, executed February 1, 1985 with a term of 23
years; and
(c) Coso Geothermal Company, executed February 1, 1985 with a term of 30
years
(incorporated by reference to Exhibit 10.7 to CECI's Registration Statement on
Form S-1, 33-7770).
10.21 Contract No. N62474-79-C-5382 between the United States of America and
China Lake Joint Venture, restated October 19, 1983 as "Modification P00004,"
including modifications through "Modification P00026," dated December 16, 1992
(incorporated by reference to Exhibit 10.21 to CECI's 1992 Form 10-K).
10.22 Lease between the BLM and Coso Land Company, effective November 1, 1985
(with Designation of Geothermal Operator) (incorporated by reference to Exhibit
10.8 to CECI's Registration Statement on Form S-1, 33-7770).
10.23 Stock Purchase Agreement between CECI and Kiewit Energy Company dated
as of February 18, 1991, as amended as of June 19, 1991 (incorporated by
reference to Exhibit 1 to CECI's Form 8-K dated February 26, 1991).
10.24 Amendment No. 2 to Stock Purchase Agreement between Kiewit Energy
Company and CECI dated as of January 8, 1992 (incorporated by reference to
Exhibit 10.24 to CECI's 1992 Form 10-K).
10.25 Amendment No. 3 to Stock Purchase Agreement between Kiewit Energy
Company and CECI dated as of April 2, 1993 (incorporated by reference to
<PAGE>
Exhibit 10.25 to CECI 1993 Form 10-K).
10.26 Stockholder's Agreement between CECI and Kiewit Energy Company dated as
of February 18, 1991, as amended as of June 19, 1991 and as of November 20,
1991 (incorporated by reference to Exhibit 1 to CECI's Form 8-K dated February
26, 1991, Exhibit 1 to CECI's Form 8-K dated July 18, 1992, and Exhibit 3 to
CECI's Form 8-K dated November 21, 1991).
10.27 Amendment No. 3 to Stockholder's Agreement between CECI and Kiewit
Energy Company dated as of April 2, 1993 (incorporated by reference to Exhibit
14 to CECI's Form 8-A).
10.28 Amendment No. 4 to Stockholder's Agreement between CECI and Kiewit
Energy Company dated as of July 20, 1993 (incorporated by reference to Exhibit
10.28 to CECI's 1993 Form 10-K).
10.29 Registration Rights Agreement between CECI and Kiewit Energy Company
dated as of February 18, 1991, as amended as of June 19, 1991 (incorporated by
reference to Exhibit 1 to CECI's Form 8-K dated July 18, 1992).
10.30 Registration Rights Agreement between CECI and Kiewit Energy Company
dated June 19, 1991, as amended November 20, 1991 (incorporated by reference to
Exhibit 1 to CECI's Form 8-K dated July 19, 1991 and Exhibit 4 to CECI's Form
8-K dated November 21, 1991).
10.31 Stock Option Agreement between CECI and Kiewit Energy Company dated as
of February 18, 1991, as amended as of June 19, 1991 (incorporated by reference
to Exhibit 1 to CECI's Form 8-K dated February 26, 1991, and Exhibit 1 to
CECI's Form 8-K dated July 18, 1992).
10.32 Stock Option Agreement between CECI and Kiewit Energy Company dated as
of June 19, 1991 (incorporated by reference to Exhibit 1 to CECI's Form 8-K
dated July 18, 1991).
10.33 Securities Purchase Agreement between CECI and Kiewit Energy Company
dated November 20, 1991 (incorporated by reference to Exhibit 2 to CECI's Form
8-K dated November 21, 1991).
10.34 Sublease between CECI and Kiewit Energy Company dated March 15, 1991
(incorporated by reference to Exhibit 10.32 to CECI's 1992 Form 10-K).
10.35 Amended and Restated 1986 Stock Option Plan, as amended (incorporated
by reference to Exhibit 10.33 to CECI's 1992 Form 10-K).
10.36 Form of severance letter between CECI and certain executive officer of
CECI (incorporated by reference to Exhibit 10.35 to CECI's 1992 Form 10-K).
10.37 Indenture between CECI and The Chemical Trust Company of California
dated as of June 24, 1993 (incorporated by reference to CECI's Form 8-K dated
June 24, 1993, File No. 1-9874).
10.38 Registration Rights Agreement among CECI, Lehman Brothers, Inc. and
Alex Brown & Sons Incorporated dated June 24, 1993 (incorporated by reference
to CECI's Form 8-K dated June 24, 1993, File No. 1-9874).
10.39 Indenture dated March 24, 1994 between CECI and IBJ Schroder Bank and
Trust Company (incorporated by reference to Exhibit 3 to CECI's Form 8-K dated
March 28, 1994).
10.40 Employment Agreement between CECI and David L. Sokol dated as of April
2, 1993 (incorporated by reference to Exhibit 10.40 to CECI's 1993 Form 10-K).
10.41 Termination Agreement between CECI and Richard R. Jaros dated as of
December 9, 1993 (incorporated by reference to Exhibit 10.41 to CECI's 1993
Form 10-K).
10.42 Standard Offer Number 2, Standard Offer for Power Purchase with a Firm
Capacity Qualifying Facility effective June 15, 1990 ("SO2") between San Diego
Gas & Electric Company and Bonneville Pacific Corporation (incorporated by
reference to Exhibit 10.42 to CECI's 1993 Form 10-K).
10.43 Amendment Number One to the SO2 dated September 25, 1990 (incorporated
by reference to Exhibit 10.43 to CECI's 1993 Form 10-K).
10.44 Joint Venture Agreement among the Registrant, Kiewit Diversified Group
Inc. and Kiewit Construction Group Inc. dated December 14, 1993 (incorporated
by reference to Exhibit 10.44 to CECI's 1993 Form 10-K).
10.45 Joint Venture Agreement between CECI and Distral dated December 14,
1993 (incorporated by reference to Exhibit 10.45 to CECI's 1993 Form 10-K).
10.47 Note Purchase Agreement between CECI and Principal Mutual Life
Insurance Company, dated March 15, 1988 (incorporated by reference to Exhibit 1
to CECI's Form 8-K dated April 11, 1988).
10.48 Defeasance Agreement between Principal Mutual Life Insurance Company
and CECI, dated March 3, 1994 (incorporated by reference to Exhibit 4.5 of
CECI's 1993 Form 10-K).
10.49 Consent and Agreement between Principal Mutual Life Insurance Company
and CECI, dated March 24, 1994 (incorporated by reference to Exhibit 4.6 of
CECI's 1993 Form 10-K).
10.50 Escrow Deposit Agreement between Bank of America National Trust and
Savings Association and CECI, dated March 3, 1994 (incorporated by reference to
Exhibit 4.7 of CECI's 1993 Form 10-K).
<PAGE>
11.1 Statement re computation of per share earnings CECI Three Years
Ended December 31, 1993.
11.2 Statement re computation of per share earnings CECI Three and Nine
Months Ended September 30, 1994 and 1993.
11.3 Statement re computation of per share earnings Magma Three Years
Ended December 31, 1993.
11.4 Statement re computation of per share earnings Magma Three and Nine
Months Ended September 30, 1994 and 1993.
13.0 CECI's 1993 Annual Report (incorporated by reference to CECI's 1993
Form 10-K).
15.1 Awareness Letter for Review Reports of Deloitte & Touche LLP.
21.1 Subsidiaries of CECI.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Willkie Farr & Gallagher (set forth in their opinion filed
as Exhibit 5.0 to this Registration Statement).*
24.1 Power of Attorney (included on the signature page hereto).
B. Financial Statement Schedules.
Financial statement schedules are not submitted because either they are not
applicable, not required or because the information required is contained in
the financial statements of this registration statement, including the notes
thereto.
______________________
* To be filed by amendment.
<PAGE>
Item 22. Undertakings.
(1) The undersigned registrant hereby undertakes to file during any period in
which offers or sales are being made a post-effective amendment to this
registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(b) To reflect in the Information Statement/Prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) The undersigned registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration statement relating
to the securities offered therein, and in the offering of such securities at
that time shall be deemed to be the initial bona fide offer thereof.
(3) The undersigned registrant hereby undertakes to remove from registration
by means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(5) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(6) The undersigned registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415 of the Securities
Act, will be filed as part of an amendment to the registration statement and
will not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(7) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this registration statement, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained
in documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
(8) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired therein, that was not the subject of and included in the
registration statement when it became effective.
(9) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Omaha State of Nebraska,
on January 6, 1995.
CALIFORNIA ENERGY COMPANY, INC.
By: /s/ David L. Sokol
David L. Sokol
President and
Chief Executive Officer
The undersigned officers and directors of California Energy Company, Inc.,
hereby severally constitute and appoint David L. Sokol, Steven A. McArthur, and
John G. Sylvia, and each of them singly, as attorneys-in-fact for the
undersigned, in any and all capacities, each with the power of substitution, to
sign any amendments to this registration statement, and to file the same with
exhibits thereto and other documents in connection therewith, with the
Commission, hereby ratifying and confirming all that each of said attorneys-in-
fact, or his substitute or substitutes, may do or cause to be done by virtue
hereof.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ David L. Sokol Chairman of the Board of January 6, 1995
David L. Sokol Directors, President,
Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ John G. Sylvia Senior Vice President, January 6, 1995
John G. Sylvia Chief Financial Officer
and Treasurer (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ Edgar D. Aronson Director January 6, 1995
Edgar D. Aronson
/s/ Judith E. Ayers Director January 6, 1995
Judith E. Ayres
/s/ James Q. Crowe Director January 6, 1995
James Q. Crowe
/s/ Richard K. Davidson Director January 6, 1995
Richard K. Davidson
/s/ Ben M. Holt Director January 6, 1995
Ben M. Holt
/s/ Richard R. Jaros Director January 6, 1995
Richard R. Jaros
/s/ Everett B. Laybourne Director January 6, 1995
Everett B. Laybourne
/s/ Herbert L. Oakes, Jr. Director January 6, 1995
Herbert L. Oakes, Jr.
/s/ Walter Scott, Jr. Director January 6, 1995
Walter Scott, Jr.
/s/ Barton W. Shackelford Director January 6, 1995
Barton W. Shackelford
<PAGE>
/s/ David E. Wit Director January 6, 1995
David E. Wit
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Exhibit Page
11.1 Statement re computation of per share earnings CECI
Three Years Ended December 31, 1993.
11.2 Statement re computation of per share earnings CECI Three
and Nine Months Ended September 30, 1994 and 1993.
15.1 Awareness Letter for Review Reports of Deloitte & Touche LLP.
21.1 Subsidiaries of CECI.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
<PAGE>
<PAGE>
</TABLE>
EXHIBIT 11.1
California Energy Company, Inc.
Calculation of Earnings per share in Accordance
with Interpretive Release No. 34-9083
for the three years ended December 31, 1993
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Actual weighted average shares outstanding for the
period 35,454,539 33,414,139 29,847,156
Dilutive stock options and warrants using average
market prices 3,030,431 3,330,618 4,844,869
Preferred Stock - 786,712 779,405
--------- --------- ----------
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 38,484,970 37,531,469 35,471,430
Additional dilutive stock options and warrants using
ending market price - 1,282,223 992,399
--------- --------- ----------
Total shares based on shares outstanding and the
assumption that dilutive stock options and warrants
will be exercised at ending market price 38,484,970 38,813,692 36,463,829
=========== ========== ===========
Income before change in accounting principle and
extraordinary item $ 43,074 $ 38,810 $ 26,582
Cumulative effect of change in accounting principle 4,100 - -
Extraordinary item - (4,991) -
---------- ---------- ----------
Net income 47,174 33,819 26,582
Less: Series C Preferred stock dividends (4,630) (4,275) -
---------- ---------- ----------
Net income available for common shares $ 42,544 $ 29,544 $ 26,582
=========== ========== ===========
Primary earnings per share before change in
accounting principle and extraordinary item $ 1.00 $ 0.92 $ 0.75
=========== ========== ===========
Primary earnings per share $ 1.11 $ 0.79 $ 0.75
=========== ========== ===========
Fully diluted earnings per share before change in
accounting principle and extraordinary item based
on SEC Interpretive Release No. 34-9083 $ 1.00 $ 0.89 $ 0.73
=========== ========== ===========
Fully diluted earnings per share based on SEC
interpretive release No. 34-9083 $ 1.11 $ 0.76 $ 0.73
=========== ========== ============
</TABLE>
EXHIBIT 11.2
CALIFORNIA ENERGY COMPANY, INC.
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 38,831,251 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 outstanding 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 - - (2,027) -
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 $ 0.38 $ 0.41 $ 0.77 $ 0.81
Extraordinary item per share - - (0.06) -
Cumulative effect of change in accounting
principle per share - - - 0.11
Primary earnings per share $ 0.38 $ 0.41 $ 0.71 $ 0.92
Fully diluted earnings per share based on SEC
interpretive release No. 34-9083** $ 0.36 $ 0.41 $ 0.70 $ 0.92
</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 Option 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 15.1
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 and 1993, 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 is being included in the
Information Statement/Prospectus which is a part of this Registration Statement
on Form S-4.
We also are aware that the aforementioned report, pursuant to Rule 436(C) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
January 3, 1995
EXHIBIT 21.1
CECI SUBSIDIARIES
Coso Hotsprings Intermountain Power, Inc. (CHIP)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
Coso Energy Developers (CED)
Formed in California
General Partnership: 48% CHIP; 52% Caithness Coso
Holdings, L.P.
China Lake Operating Co. (CLOC)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
Coso Finance Partners (CFP)
Formed in California
General Partnership: 46.3% owned by CLOC; 53.7% owned by ESCA I, L.P.
Coso Technology Corporation (CTC)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
Coso Power Developers (CPD)
Formed in California
General Partnership: 50% owned by CTC; 50% by Caithness Navy II Group, L.P.
Coso Funding Corp. (CFC)
Incorporated in Delaware
General Partnership: Owned 33% by CFP; 35% by CPD; 32% by CED
Coso Transmission Line Partners (CTLP)
Formed in California
General Partnership: Owned 50% by CED; 50% by CPD
China Lake Geothermal Management Company (CLGMC)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
Coso Finance Partners II (CFP II)
Formed in California
General Partnership: Owned 50% by CLGMC, 50% by ESCA II, L.P.
China Lake Plant Services, Inc. (CLPSI)
Incorporated in California
Capital Stock: Owned 100% by CECI
Coso Land Company (CLC)
Formed in California
General Partnership: Owned 50% by CECI; 50% by Caithness Geothermal 1980,
Ltd.
China Lake Joint Venture (CLJV)
Formed in California
General Partnership: Owned 50% by CECI; 50% by Caithness Geothermal 1980,
Ltd.
Coso Geothermal Company (CGC)
Formed in California
General Partnership: Owned 50% by CLC; 16% by CECI
Coso Hotsprings Overland Power, Inc. (CHOP)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
CE Geothermal, Inc. (CEG)
Incorporated in Delaware
Capital Stock: Owned by 100% by CECI
Western States Geothermal Company (WSG)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
Intermountain Geothermal Company (IGC)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
CE CIS-FSU, Inc. (CCF)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
California Energy Development Corporation (CEDC)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
California Energy Yuma Corporation (CEYC)
Incorporated in Utah
Capital Stock: Owned 100% by CEDC
<PAGE>
Yuma Cogeneration Associates (YCA)
Formed in Utah
General Partnership: Owned 50% by CEDC; 50% By CEYC
Rose Valley Properties, Inc. (RVP)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
The Ben Holt Co. (BHC)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
CBE Engineering Co. (CBC)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
Kennebec Construction, Co. (KCC)
Incorporated in California
Capital Stock: Owned 100% by BHC
The Ben Holt International Co., Inc. (BHIC)
Incorporated in Delaware
Capital Stock: Owned 100% by BHC
CE Exploration Company (CEX)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
CE Newberry, Inc. (CEN)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
CE Humboldt, Inc. (CEH)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
California Energy International Services, Inc. (CEISI)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
American Pacific Finance Company (APFC)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
California Energy General Corporation (CEGC)
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
CE Acquisition Company, Inc.
Incorporated in Delaware
Capital Stock: Owned 100% by CECI
CE International Investments Ltd. (CEII)
Incorporated in Bermuda
Capital Stock: Owned 100% by CECI
CE Mahanagdong Ltd.
Incorporated in Bermuda
Capital Stock: Owned 100% by CEII
CE Luzon Geothermal Power Company, Inc.
Incorporated in the Philippines
Capital Stock: Owned 50% by CE Mahanagdong Ltd.;
50% by Kiewit Energy International (Bermuda) Ltd; an
industrial company has the right to acquire 10% of the
equity - 5% from CE Mahanagdong Ltd. and 5% from Kiewit
Energy International (Bermuda) Ltd.
CE Philippines Ltd.
Incorporated in Bermuda
Capital Stock: Owned 100% by CEII
Ormat Cebu Ltd.
Incorporated in Bermuda
Capital Stock: Owned 48% by CEII; 52% by CE Philippines Ltd.
CE Cebu Geothermal Power Company, Inc.
Incorporated in the Philippines
Capital Stock: Owned 52% by Ormat Cebu Ltd.; 48% by CE
Philippines Ltd.
CE Indonesia Ltd.
Incorporated in Bermuda
Capital Stock: Owned 100% by CEII
Himpurna California Energy Ltd.
Incorporated in Bermuda
Capital Stock: Owned 90% by CE Indonesia Ltd., 10% by
P.T. Himpurna Enersindo Abadi; California Energy International Ltd. has an
option to acquire an interest in P.T. Himpurna or its project company shares
equal to up to 4% of the project company; under the Joint Operating Contract,
Pertamina has certain rights to acquire up to 25% interest in the Joint
Operating Contract, but not under the Energy Sales Contract.
<PAGE>
CE Colombia Ltd.
Incorporated in Bermuda
Capital Stock: Owned 100% by CEII
Bali Energy Ltd.
Incorporated in Bermuda
Capital Stock: Owned 100% by CE Bali Ltd. (P.T.
Pandanwangi Sekartaji has the right to purchase
up to 40% of the equity for this project)
CE Casecnan Ltd.
Incorporated in Bermuda
Capital Stock: Owned 100% by CEII
CE Latin America Ltd.
Incorporated in Bermuda
Capital Stock: Owned 100% by CEII
Patuha Power, Ltd.
Incorporated in Bermuda
Capital Stock: Owned 90% by CE Singapore Ltd.; 10% by
P.T. Enersindo Supra Abadi, P.T. Enersindo Supra Abadi has the right to
acquire an additional 20% of the project equity in certain circumstances and
for a limited time; under the Joint Operating Contract, Pertamina has certain
rights to acquire up to a 25% interest in the Joint Operating Contract, but not
under the Energy Sales Agreement.
CE Singapore Ltd.
Incorporated in Bermuda
Capital Stock: Owned 100% by CEII
California Energy International Ltd.
Incorporated in Bermuda
Capital Stock: Owned 100% by CEII
CE Casecnan Water and Energy Company, Inc.
Incorporated in the Philippines
Capital Stock: Owned 100% by CE Casecnan Ltd.; La
Prairie Group Contractors (International) Ltd. and San Lorenzo Ruiz Builders
& Developers Group, Inc. each are entitled to a 15% equity interest
CE Bali Ltd.
Incorporated in Bermuda
Capital Stock: Owned 100% by CEII
CE Ijen Ltd.
Incorporated in Bermuda
Capital Stock: Owned 100% by CEII
Kiewit Joint Venture Agreement
Nebraska Contractual Joint Venture
Parent has a right to 50% of covered international projects; Kiewit
Diversified Group, Inc. and Kiewit Construction Group, Inc. have a right to a
50% participation in covered projects
Certain of CECI's subsidiaries recently formed in Bermuda as offshore holding
companies have not yet been fully capitalized, the capitalization of which
taken together would not have a material adverse effect on CECI's results of
operations.
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of California Energy
Company, Inc. on Form S-4 of the report of Deloitte & Touche LLP dated February
24, 1994 (which report expresses an unqualified opinion and includes an
explanatory paragraph referring to California Energy Company, Inc.'s adoption
effective January 1, 1993, of Statement of Financial Accounting Standards
No.109, Accounting for Income Taxes), appearing in this Information
Statement/Prospectus and to the reference to Deloitte & Touche LLP under the
heading "Experts" in this Information Statement/Prospectus, which is part of
this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
January 3, 1995
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of California Energy
Company, Inc. on Form S-4 of our report dated March 18, 1994, on our audits of
the consolidated financial statements and consolidated financial statement
schedules of Magma Power Company and subsidiaries as of December 31, 1993 and
1992 and for each of the three years in the period ended December 31, 1993, and
to the inclusion of our report dated May 6, 1993 on our audits of the Statement
of Net Assets Acquired as of March 31, 1993 and Historical Summaries of Gross
Revenues and Direct Operating Expenses for each of the three years in the
period ended December 31, 1992 of the Imperial Valley Geothermal Interests
(acquired by Magma Power Company from Union Oil Company of California). We
also consent to the reference to our Firm under the captions "Experts" and
"Selected Historical Consolidated Financial and Operating Data of Magma".
/s/ COOPER & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
San Diego, California
January 5, 1995
