CALIFORNIA ENERGY CO INC, DEFR14A, 1995-01-23

CALIFORNIA ENERGY CO INC
DEFR14A, 1995-01-23
STEAM & AIR-CONDITIONING SUPPLY

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As filed with the Securities and Exchange Commission on January 23, 1995

DEFINITIVE PROXY MATERIALS

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934

Filed by the registrant [X]

Filed by a party other than the registrant [ ]

Check the appropriate box:

[ ] Preliminary proxy statement

[X] Definitive proxy statement

[ ] Definitive additional materials

[ ] Soliciting material pursuant to Section 240.14a-11(c) or
Section 240.14a-12

CALIFORNIA ENERGY COMPANY, INC.
- -------------------------------------------------------------------------------
(Name of Registrant as specified in its Charter)

CALIFORNIA ENERGY COMPANY, INC.
- -------------------------------------------------------------------------------
(Name of person(s) filing proxy statement)

Payment of filing fee (Check the appropriate box):

[X] $125 per Exchange Act Rule 0-11(c)(l)(ii), 14a-6(i)(l), or 14a-6(i)(2).

[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transactions applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:

(4) Proposed maximum aggregate value of transaction:

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[X] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount previously paid:
$125

(2) Form, Schedule or Registration Statement No.:
Schedule 14A

(3) Filing Party:
California Energy Company, Inc.

(4) Date Filed:
December 21, 1994

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[CALIFORNIA ENERGY LOGO]

CALIFORNIA ENERGY COMPANY, INC.

10831 OLD MILL ROAD
OMAHA, NE 68154

January 23, 1995

Dear Fellow Stockholder:

You are cordially invited to attend the Special Meeting of Stockholders of
California Energy Company, Inc. (the "Company") to be held at the Marriott
Hotel, 10220 Regency Circle, in Omaha, Nebraska on February 10, 1995 at 10:00
A.M., local time.

The following matters will be considered and acted upon at the Special
Meeting: (i) amendment of the Company's Restated Certificate of Incorporation
to increase by 20,000,000 the number of shares of common stock of the Company
authorized to be issued from 60,000,000 to 80,000,000; (ii) approval of the
issuance of up to 17,700,000 shares of common stock of the Company to holders
of common stock of Magma Power Company ("Magma"), in connection with the
pending acquisition of Magma by the Company; and (iii) transaction of such
other matters as may be incidental to the conduct of the Special Meeting. A
vote for these proposals is, in effect, a vote for completion of the
Company's acquisition of Magma by way of the merger described in the attached
Proxy Statement. As a result of the acquisition of Magma, shares of Company
common stock will be issued either to the former Magma stockholders or to the
public such that the newly issued shares will represent approximately 25.2%
to 33.1% of the aggregate Company common stock issued, common stock
equivalents and shares reserved for issuance pursuant to stock option plans
and an employee stock purchase plan.

Information concerning the matters to be considered and voted upon at the
Special Meeting is set forth in the attached Notice of Special Meeting and
Proxy Statement. We encourage you to review the attached material carefully
and to sign, date and return the enclosed proxy card in the enclosed postage
paid envelope. Each proxy is revocable and will not affect your right to vote
in person if you attend the meeting.

Sincerely,

/s/ David L. Sokol
David L. Sokol
Chairman of the Board, President and Chief
Executive Officer

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[CALIFORNIA ENERGY LOGO]

CALIFORNIA ENERGY COMPANY, INC.

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON FEBRUARY 10, 1995

To the Stockholders of California Energy Company, Inc.:

Notice is hereby given that a Special Meeting of Stockholders of
California Energy Company, Inc. (the "Company") will be held at the Marriott
Hotel, 10220 Regency Circle, in Omaha, Nebraska on February 10, 1995 at 10:00
A.M. local time for the following purposes:

1. To amend the Company's Amended and Restated Certificate of
Incorporation to increase the number of shares of common stock of the
Company (the "Common Stock") authorized to be issued by the Company from
60,000,000 to 80,000,000;

2. To approve the issuance of up to 17,700,000 shares of Common Stock
as part of the Merger Consideration in the pending acquisition of Magma
Power Company ("Magma"), by the Company; and

3. To transact such other matters as may be incidental to the conduct
of the Special Meeting.

A vote for these proposals is, in effect, a vote for completion of the
Company's acquisition of Magma by way of the merger described in the attached
Proxy Statement. As a result of the acquisition of Magma, shares of Company
common stock will be issued either to the former Magma stockholders or to the
public such that the newly issued shares will represent approximately 25.2%
to 33.1% of the aggregate Company common stock issued, common stock
equivalents and shares reserved for issuance pursuant to stock option plans
and an employee stock purchase plan.

All Stockholders of record at the close of business on January 17, 1995
are entitled to vote at the Special Meeting.

To ensure that your shares are represented, you are urged to please fill
in, sign, date and return the enclosed proxy card promptly in the enclosed
postage paid envelope. You may revoke your proxy at any time before it is
voted at the Special Meeting. If you attend the meeting, you may vote your
shares in person.

Please date your proxy card and sign it exactly as your name appears on
the proxy card.

By Order of the Board of Directors

/s/ David L. Sokol
David L. Sokol
Chairman of the Board, President and Chief
Executive Officer

January 23, 1995

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
INTRODUCTION .................................................................... 1
SUMMARY ......................................................................... 2
Time, Place and Date of the Special Meeting; Record Date ....................... 2
The Proposals .................................................................. 2
Voting and Vote Required ....................................................... 3
The Pending Acquisition ........................................................ 3
Reasons for the Pending Acquisition ............................................ 3
Recommendation of the Company's Board .......................................... 3
Opinions of Financial Advisors ................................................. 4
Description of the Merger Agreement ............................................ 4
Conflicts of Interest of Members of the Magma Board ............................ 5
Regulatory Approvals ........................................................... 5
Accounting Treatment ........................................................... 5
Stock Exchange Listing ......................................................... 5
Dissenters' Rights ............................................................. 6
Market Prices and Dividends .................................................... 6
VOTING AND VOTE REQUIRED ........................................................ 7
PROPOSAL 1 ...................................................................... 8
PROPOSAL 2 ...................................................................... 9
THE PENDING ACQUISITION AND THE MERGER AGREEMENT ................................ 10
The Pending Acquisition ........................................................ 10
Background of the Merger ....................................................... 10
Reasons for the Pending Acquisition ............................................ 14
Recommendation of the Company's Board .......................................... 14
Opinion of the Company's Financial Advisor ..................................... 16
Opinion of Magma's Financial Advisor ........................................... 19
Description of the Merger Agreement ............................................ 22
Conflicts of Interest of Members of the Magma Board ............................ 29
Antitrust ...................................................................... 31
Regulatory Approvals ........................................................... 31
Accounting Treatment ........................................................... 31
Federal Income Tax Consequences ................................................ 31
Stock Exchange Listing ......................................................... 31
Effects of the Pending Acquisition ............................................. 31
Source and Amount of Funds ..................................................... 32
CAPITALIZATION OF THE COMPANY ................................................... 34
Merger Consideration Consisting of a Combination of Cash and Common Stock ..... 34
Merger Consideration Consisting of All Cash .................................... 35
COMPARISON OF CERTAIN UNAUDITED DATA ............................................ 36
Merger Consideration Consisting of a Combination of Cash and Common Stock ..... 36
Merger Consideration Consisting of All Cash .................................... 37
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND
OPERATING DATA OF THE COMPANY .................................................. 38
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
AND OPERATING DATA OF MAGMA .................................................... 40
BUSINESS OF THE COMPANY AND MAGMA
AND RELATED INFORMATION ........................................................ 41
General ....................................................................... 41
International Projects ........................................................ 47

</TABLE>

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Domestic Projects ............................................................. 48
International Projects--Discussion ........................................... 49
Domestic Projects--Discussion ................................................ 57
Regulatory and Environmental Matters .......................................... 63
Employees ..................................................................... 64
Properties .................................................................... 65
Legal Proceedings ............................................................. 65
THE COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ....................................................... 66
General ....................................................................... 66
Results of Operations Through September 30, 1994 .............................. 66
Results of Operations for Three Years Ended December 31, 1993, 1992, and 1991 . 68
Liquidity and Capital Resources Through September 30, 1994 .................... 71
Liquidity and Capital Resources Through December 31, 1993 ..................... 74
Adoption of Financial Accounting Standard No. 109 ............................. 76
MAGMA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .................................................................. 77
Results of Operations: Third Quarter 1994 Compared to Third Quarter 1993 ...... 77
Nine Months Ended September 30, 1994 Compared to Nine Months Ended September
30, 1993 .................................................................... 78
Results of Operations: 1993 Compared to 1992 .................................. 79
Results of Operations: 1992 Compared to 1991 .................................. 81
Liquidity and Capital Resources ............................................... 83
Seasonality ................................................................... 85
Inflation ..................................................................... 85
Future Rates .................................................................. 85
PRO FORMA UNAUDITED CONDENSED COMBINED FINANCIAL DATA ......................... 86
Pro Forma Unaudited Condensed Combined Balance Sheet (Merger Consideration
Consisting of a Combination of Cash and Common Stock) ....................... 87
Pro Forma Unaudited Condensed Combined Statements of Earnings (Merger
Consideration Consisting of a Combination of Cash and Common Stock) ......... 88
Notes To Pro Forma Unaudited Condensed Combined Financial Data (Merger
Consideration Consisting of a Combination of Cash and Common Stock) ......... 89
Pro Forma Unaudited Condensed Combined Balance Sheet (Merger Consideration
Consisting of All Cash) ..................................................... 91
Pro Forma Unaudited Condensed Combined Statements of Earnings (Merger
Consideration Consisting of All Cash) ....................................... 92
Notes To Pro Forma Unaudited Condensed Combined Financial Data (Merger
Consideration Consisting of All Cash) ....................................... 93
MARKET PRICES AND DIVIDENDS ..................................................... 95
SECURITY OWNERSHIP OF SIGNIFICANT STOCKHOLDERS AND MANAGEMENT ................... 97
OTHER MATTERS ................................................................... 98
STOCKHOLDER PROPOSALS ........................................................... 98
ACCOUNTANT'S REPRESENTATIVES .................................................... 98
AVAILABLE INFORMATION ........................................................... 98
INDEX TO FINANCIAL STATEMENTS ................................................... F-1
Annex A Opinion of Gleacher & Co. Inc. .......................................... A-1
Annex B Opinion of Goldman, Sachs & Co. ......................................... B-1

</TABLE>

<PAGE>

CALIFORNIA ENERGY COMPANY, INC.

10831 OLD MILL ROAD
OMAHA, NE 68154

PROXY STATEMENT

SPECIAL MEETING OF STOCKHOLDERS
February 10, 1995

INTRODUCTION

This Proxy Statement ("Proxy Statement") is furnished in connection with
the solicitation of proxies on behalf of the Board of Directors (the
"Company's Board") of California Energy Company, Inc. (the "Company") to be
voted at the Special Meeting of Stockholders to be held on February 10, 1995,
or any adjournment or postponement thereof (the "Special Meeting"). The
purpose of the Special Meeting of Stockholders is:

1. To amend the Company's Amended and Restated Certificate of
Incorporation to increase the number of shares of common stock, $0.0675 par
value, of the Company ("Common Stock") authorized to be issued by the Company
from 60,000,000 to 80,000,000;

2. To approve the issuance of up to 17,700,000 shares of Common Stock
in connection with the acquisition (the "Pending Acquisition") by the Company
of Magma Power Company, a Nevada corporation ("Magma"), pursuant to an
Agreement and Plan of Merger, dated as of December 5, 1994 (the "Merger
Agreement"), among the Company, CE Acquisition Company, Inc., a wholly owned
subsidiary of the Company (the "Purchaser"), and Magma; and

3. To transact such other matters as may be incidental to the conduct
of the Special Meeting.

A vote for these proposals is, in effect, a vote for completion of the
Company's acquisition of Magma by way of the Merger (as defined below).
Pursuant to the Merger Agreement, the Company may elect to pay the
consideration to be paid in the Merger to the holders of shares of the common
stock, par value $0.10 per share, of Magma ("Magma Shares") either with a
combination of cash and Common Stock or solely in cash. As a result of the
acquisition of Magma, shares of Company common stock will be issued either to
the former Magma stockholders or to the public such that the newly issued
shares will represent approximately 25.2% to 33.1% of the aggregate Company
common stock issued, common stock equivalents and shares reserved for
issuance pursuant to stock option plans and an employee stock purchase plan.

This Proxy Statement, the attached Notice of Special Meeting and the
accompanying Proxy are being mailed to stockholders of the Company on or
about January 23, 1995.

<PAGE>

SUMMARY

The following is a brief summary of the more detailed information
contained in this Proxy Statement with respect to the proposals to be
considered at the Special Meeting and with respect to the Pending
Acquisition. This Summary is not intended to be complete and is qualified in
its entirety by the more detailed information contained elsewhere in this
Proxy Statement. Terms used but not defined in this Summary have the meanings
ascribed to them elsewhere in this Proxy Statement. Cross references in this
Summary are to the captions of sections of this Proxy Statement.

Stockholders of the Company should read carefully this Proxy Statement in
its entirety.

TIME, PLACE AND DATE OF THE SPECIAL MEETING; RECORD DATE

The Special Meeting will be held at 10:00 a.m., Nebraska time, on February
10, 1995 at the Marriott Hotel, 10220 Regency Circle, in Omaha, Nebraska.
Only holders of Common Stock of record at the close of business on January
17, 1995, the Record Date, are entitled to vote at the Special Meeting or any
adjournment or postponement thereof.

THE PROPOSALS

The Special Meeting is being held for the purpose of voting on the
following proposals:

Proposal 1. To amend the Company's Amended and Restated Certificate
of Incorporation to increase the number of shares of Common Stock
authorized to be issued by the Company from 60,000,000 to 80,000,000; and

Proposal 2. To approve the issuance of up to 17,700,000 shares of
Common Stock in connection with the Pending Acquisition by the Company of
Magma, pursuant the Merger Agreement.

Proposal 1. The Company's Board has unanimously approved and recommended
to the Company's stockholders an amendment to the Amended and Restated
Certificate of Incorporation to increase by 20,000,000 shares the number of
shares of Common Stock the Company is authorized to issue.

If Proposal 1 is not approved by the Company's stockholders, the Company
will be unable to consummate the Merger; therefore, a vote FOR Proposal 1 is,
in effect, a vote for the Merger. The Company will own 51% of the outstanding
Magma Shares and such Magma Shares will remain pledged to Credit Suisse
pursuant to the terms of the Tender Facility. See "Source and Amount of
Funds." The anticipated benefits of the Merger would not be realized by the
Company, which, as a majority stockholder of Magma, would be subject to
fiduciary duties vis-a-vis Magma's other stockholders that would preclude
operation of the two companies as a single business unit.

Proposal 2. Pursuant to the policy of the New York Stock Exchange, Inc.
(the "NYSE"), the Company's stockholders are being asked to approve the
issuance and reservation for issuance by the Company of the Common Stock to
be issued as part of the Merger Consideration (as defined below) to be paid
in the Merger in the event the Company elects to pay the Merger Consideration
with a combination of cash and Common Stock. If the Company elects to pay the
Merger Consideration solely in cash, no approval pursuant to Proposal 2 will
be required. Approval by a majority of the votes cast on this proposal will
be required provided that the total vote cast represents at least a majority
of the Voting Stock (as defined below) entitled to vote on this proposal.

If Proposal 1 is approved by the Company's stockholders and the Company
elects to pay the Merger Consideration with a combination of cash and Common
Stock, but the required affirmative vote by the stockholders is not obtained
and the NYSE were to commence delisting proceedings or refuses to list the
Common Stock of the Company, the Company intends promptly to apply to list
the Common Stock on the Nasdaq National Market ("NNM") and, upon such
listing, to consummate the Merger. Although there can be no assurance that
the NNM would approve the Common Stock for listing thereon, the Company is
unaware of any reason why the Common Stock would not be eligible for listing
thereon.

<PAGE>

VOTING AND VOTE REQUIRED

The Voting Stock consists of the Common Stock and the Series C Redeemable
Preferred Stock (as defined below) of the Company. Holders of the Common
Stock and holders of the Series C Preferred Stock will vote together as a
single class at the Special Meeting. Each share of Common Stock will be
entitled to one vote on all matters presented at the Special Meeting. Each
share of Series C Preferred Stock will be entitled to vote on an "as
converted" basis on all matters presented at the Special Meeting.

The approval of sixty-six and two-thirds percent (66 2/3 %) of the Voting
Stock (whether or not present at the Special Meeting) is required to approve
Proposal 1. A quorum equal to sixty-six and two-thirds percent (66 2/3 %) of
the Voting Stock must be present in person or by proxy at the Special Meeting
in order to consider Proposal 1. The approval by a majority of the Voting
Stock cast is required to approve Proposal 2, provided that the total Voting
Stock cast on Proposal 2 represents over 50% in interest of all the Voting
Stock. Peter Kiewit Sons', Inc. ("PKS"), the beneficial owner of
approximately 39.1% of the voting power of the outstanding Voting Stock, has
agreed to vote in favor of Proposal 1 and Proposal 2.

THE PENDING ACQUISITION

Pursuant to the Merger Agreement, on January 10, 1995, CE Acquisition
Company, Inc. (the "Purchaser") purchased 12,400,000 Magma Shares at $39.00
per Magma Share, net to the seller in cash, without interest thereon,
pursuant to a tender offer commenced on December 9, 1994 (the "Offer"). As a
result of the consummation of the Offer, the Purchaser acquired majority
control of Magma as the first step in the acquisition of the entire equity
interest in Magma. Pursuant to the Merger Agreement, the Purchaser will, as
soon as practicable, consummate the Merger with Magma. The purpose of the
Merger is to acquire all Magma Shares not beneficially owned by the
Purchaser. As a result of the Merger, Magma will continue as the surviving
corporation and will become a wholly owned subsidiary of the Company.

REASONS FOR THE PENDING ACQUISITION

The Company believes that combining the businesses of the Company and
Magma will provide an excellent strategic fit due to the synergies and other
benefits which will result from combining the operations of Magma and the
Company pursuant to the Merger Agreement and which will strengthen the
combined companies' competitive position in the increasingly challenging
business environment and global markets in which they presently operate.

Each of Magma and the Company have separately indicated their respective
beliefs that, in the next several years, the greatest opportunities for
financially attractive development projects will be found in the
international markets and each company is engaged in, or otherwise pursuing,
geothermal power and other power development projects in the Philippines and
Indonesia, and elsewhere overseas where competition is strong and involves
much larger entities than either company.

The Company believes that the combined companies' international growth
prospects will be substantially enhanced by the expanded development,
financial, construction and operational resources and capabilities resulting
from the Merger and that certain domestic and international synergies will
also result from such a transaction.

RECOMMENDATION OF THE COMPANY'S BOARD

On September 19, 1994, the Company's Board approved a proposal to acquire
the outstanding Magma Shares for $35.00 per Magma Share for consideration
consisting of cash and Common Stock, and authorized certain officers of the
Company to negotiate modifications to the foregoing proposal (including the
final price and form of the consideration) in consultation with members of
the Executive Committee of the Company. On December 6, 1994, the Company's
Board unanimously ratified the signing of the Merger Agreement and the
transactions contemplated thereby. Therefore, the Company's Board recommends
that the Company's stockholders vote FOR both Proposal 1 and Proposal 2.

The Company's Board concluded that the Merger will further the Company's
objectives in part because of its belief that Magma is an excellent strategic
fit and that the acquisition will create significant

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benefits, including: (i) expansion and enhancement of development efforts,
(ii) benefits of increased size, (iii) opportunities for operational and
administrative cost savings, and (iv) diversification in sources of revenue
and operations. See "Recommendation of the Company's Board."

OPINIONS OF FINANCIAL ADVISORS

On December 6, 1994, Gleacher delivered its written opinion to the
Company's Board 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. 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 Proxy Statement as Annex A. See
"Opinion of the Company's Financial Adviser."

On December 5, 1994, Goldman Sachs delivered its oral opinion (which was
subsequently confirmed in writing) to the Magma Board of Directors (the
"Magma Board") that, as of December 5, 1994, the consideration to be received
by the holders of the Magma Shares in the Offer and the Merger, taken as a
unitary transaction, was fair to the holders of Magma Shares receiving such
Consideration (other than the Company 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 Proxy Statement as Annex B. See "Opinion of
Magma's Financial Adviser."

DESCRIPTION OF THE MERGER AGREEMENT

General. The Company, the Purchaser 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, the Purchaser purchased
12,400,000 Magma Shares at a price of $39 per Magma Share in cash. Pursuant
to the Merger Agreement, the Purchaser and Magma will, as soon as practicable
following consummation of the Offer, consummate the Merger.

Merger Consideration. Upon the effectiveness of the Merger, each
outstanding Magma Share (other than Magma Shares held by the Company, the
Purchaser or any other direct or indirect subsidiary of the Company and Magma
Shares held in the treasury of Magma) will be converted into the right to
receive, at the Company's election, either cash or a combination of cash and
Common Stock of the Company. If the Company elects to pay the Merger
Consideration with a combination of cash and Common Stock, the consideration
paid by the Company in the Offer and the Merger will consist, on a blended
basis, of $28.50 per Magma Share in cash and $10.50 per Magma Share in market
value of Common Stock, based on the Average Closing Price and subject to the
Collar Provision (as such terms are defined below). If the Company elects to
pay the Merger Consideration solely in cash, the blended consideration paid
by the Company in the Offer and the Merger would be $38.75 per Magma Share.

Financing of the Merger. If the Company elects to pay the Merger
Consideration with a combination of cash and Common Stock, the Company
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 the Company 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 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 the Company from the Company's
general corporate funds and, if the Company elects to pay the Merger
Consideration solely in cash, the net proceeds of a public offering of 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 Company's Board and the Magma Board; or (b) by Magma or the
Company if the Effective Time shall not have occurred on or prior to
September 30, 1995; or (c) by either the Company 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

CAPITAL PRINTING SYSTEMS]
<PAGE>

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 the Company 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 Magma
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 the Company
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 Magma Shares; or (f) by
Magma or the Company 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 the Company or any affiliate of the Company,
shall have become the beneficial owner of more than 50% of the then
outstanding Magma Shares; or (g) by either the Company 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 the Company. The Merger Agreement provides that if it
is terminated pursuant to clauses (d) or (f) or terminated by the Company
pursuant to clause (g) of the preceding paragraph, Magma will be required to
pay the Company a termination fee of $8,000,000 plus the Company'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.

CONFLICTS OF INTEREST OF MEMBERS OF THE MAGMA BOARD

The Merger Agreement, including the consideration to be paid in the
Merger, was negotiated by the Company and Magma at arms' length. The Company
does not believe that any party to the negotiation of the Merger Agreement
had a material conflict of interest in respect thereof. However, stockholders
of the Company 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 and that these same members of
Magma's management and the Magma Board participated in the negotiation of the
terms of the Merger Agreement on behalf of Magma's stockholders. See
"Conflicts of Interest of Members of the Magma Board."

REGULATORY APPROVALS

The Company, the Purchaser 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.

STOCK EXCHANGE LISTING

It is a condition to the Merger that the shares of Common Stock to be
issued pursuant to the Merger, if any, be authorized for listing on the NYSE.
Application will be made to list the Common Stock to be issued pursuant to
the Merger on such exchange.

<PAGE>

DISSENTERS' RIGHTS

Neither the holders of the Common Stock nor the holders of the Magma
Shares have the right to dissent from the Merger or from the authorization or
issuance of Common Stock in connection therewith.

MARKET PRICES AND DIVIDENDS

The Company. The Common Stock is listed on the NYSE under the symbol "CE".
The Common Stock is also listed on the Pacific Stock Exchange (the "PSE") and
the London Stock Exchange (the "LSE"). The following table sets forth the
quarterly high and low last reported sales price per share for the Common
Stock, as reported on the NYSE Composite Tape, based on published financial
sources, for the fiscal quarters indicated.

<TABLE>
<CAPTION>
QUARTER HIGH LOW
- ------- -------- --------
<S> <C> <C>
1995:
First (through January 20) $17.88 $15.75
1994:
Fourth .................... 17.13 15.25
Third ..................... 17.75 16.00
Second .................... 18.13 16.00
First ..................... 19.25 17.13
1993:
Fourth .................... 20.13 18.13
Third ..................... 18.38 16.00
Second .................... 20.13 17.25
First ..................... 21.50 16.50
</TABLE>

On January 20, 1995, the last full trading day for which quotations were
available at the time of printing of this Proxy Statement, the last reported
sale price per share of Common Stock on the NYSE was $17.88. 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 per share of Common
Stock on the NYSE was $16.50. On September 19, 1994, the day of the Company'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 Common Stock having a combined
cash and market value of $35 per Magma Share, the last reported sale price
per share of Common Stock on the NYSE was $16.875.

As of March 21, 1994, there were approximately 1,408 holders of record of
Common Stock. The Company's present policy is to retain earnings to provide
sufficient funds for the operation and expansion of its business.
Accordingly, the Company has not paid, and does not have any present plan to
pay, cash dividends on the Common Stock.

Magma. The Magma 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 the Magma Shares, as reported by the NNM, based on published
financial sources, for the fiscal quarters indicated.

<TABLE>
<CAPTION>
QUARTER HIGH LOW
- ------- -------- --------
<S> <C> <C>
1995:
First (through January 20) $38.25 $37.50
1994:
Fourth .................... 37.69 34.25
Third ..................... 34.88 26.50
Second .................... 32.75 28.00
First ..................... 35.00 30.75
1993:
Fourth .................... 39.50 30.25
Third ..................... 39.00 29.75
Second .................... 40.00 30.75
First ..................... 39.50 31.00
</TABLE>

<PAGE>

On January 20, 1995, the last full trading day for which quotations were
available at the time of printing of this Proxy Statement, the last reported
sale price per Magma Share on the NNM was $38.13. 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 per Magma Share on the NNM was
$35.50. On September 19, 1994, the day of the Company'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 of Magma
would receive cash and shares of Common Stock having a combined cash and
market value of $35.00 per Magma Share, the reported closing sale price per
Magma Share on the NNM was $27.50.

VOTING AND VOTE REQUIRED

The voting stock of the Company (the "Voting Stock") consists of the
Common Stock and the Series C Redeemable Convertible Exchangeable Preferred
Stock of the Company (the "Series C Preferred Stock"). Holders of the Common
Stock and holders of the Series C Preferred Stock will vote together as a
single class at the Special Meeting. Each share of Common Stock will be
entitled to one vote on all matters presented at the Special Meeting. Each
share of Series C Preferred Stock will be entitled to vote on an "as
converted" basis on all matters presented at the Special Meeting.

The close of business on January 17, 1995 is the record date (the "Record
Date") for determining holders of the outstanding Voting Stock (the
"Stockholders") entitled to vote at the Special Meeting. On the Record Date,
31,866,621 shares of Common Stock and 1,272 shares of Series C Preferred
Stock, entitled to 3,461,224 votes, were outstanding.

The approval of sixty-six and two-thirds percent (66 2/3 %) of the Voting
Stock (whether or not present at the Special Meeting) is required to approve
the amendment of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") to increase the amount of
authorized Common Stock ("Proposal 1"). A quorum equal to sixty-six and
two-thirds percent (66 2/3 %) of the Voting Stock must be present in person
or by proxy at the Special Meeting in order to consider Proposal 1. The
approval by a majority of the Voting Stock cast is required to approve the
issuance of Common Stock for purposes of the Pending Acquisition ("Proposal
2"), provided that the total Voting Stock cast on Proposal 2 represents over
50% in interest of all the Voting Stock. Peter Kiewit Sons', Inc. ("PKS"),
the beneficial owner of approximately 39.1% of the voting power of the
outstanding Voting Stock, has agreed to vote in favor of Proposal 1 and
Proposal 2.

All shares of Voting Stock represented by properly executed proxies, which
are returned and not revoked will be voted in accordance with the
instructions, if any, given therein. If no instructions are provided in a
proxy, it will be voted FOR the approval of Proposals 1 and 2, and in
accordance with the proxy-holders' best judgment as to any other matters
raised at the Special Meeting. For purposes of determining whether a proposal
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. In instances where nominee recordholders, such as
brokers, are prohibited from exercising discretionary authority for
beneficial owners who have not returned a proxy ("broker non-votes"), those
shares will not be included in the vote totals and, therefore, will have no
effect on the vote. The proxy is revocable and any Stockholder who executes a
proxy may revoke it at any time before it is voted by delivering to the
Secretary of the Company a written statement revoking the proxy, by executing
and delivering to the Secretary of the Company a later dated proxy or by
voting in person at the Special Meeting.

Expenses in connection with this solicitation of proxies will be paid by
the Company. Upon request, the Company will reimburse brokers, dealers, banks
or similar entities acting as nominees for reasonable expenses incurred in
forwarding copies of these proxy materials to the beneficial owners of shares
which such persons hold of record. The Company has engaged MacKenzie
Partners, Inc. ("MacKenzie") to solicit proxies for the Special Meeting for a
fee of $20,000 plus reimbursement of reasonable expenses. In addition,
solicitation of proxies may be made through the mail, in person and by
facsimile and telephone by certain directors, officers and regular employees
of the Company.

PAGE>
PROPOSAL 1

AMENDMENT OF CERTIFICATE OF INCORPORATION--INCREASE
IN AUTHORIZED COMMON STOCK IN CONNECTION WITH
THE PENDING ACQUISITION

The Company's Board has unanimously approved and recommended to the
Stockholders an amendment to the Certificate of Incorporation to increase by
20,000,000 shares the number of shares of Common Stock the Company is
authorized to issue.

The Certificate of Incorporation currently authorizes the Company to issue
60,000,000 shares of Common Stock. If Proposal 1 is approved, the Certificate
of Incorporation would be amended to authorize the Company to issue
80,000,000 shares of Common Stock. As of the Record Date, (i) 31,866,621
shares of Common Stock were outstanding, (ii) 1,272 shares of Series C
Preferred Stock were outstanding and 3,529,252 shares of Common Stock have
been reserved for issuance upon conversion of such shares of Series C
Preferred Stock, (iii) 3,541,166 shares of Common Stock have been reserved
for issuance pursuant to options granted under the Company's Amended and
Restated 1986 Stock Option Plan (the "Stock Option Plan"), (iv) 6,064,154
shares of Common Stock have been reserved for issuance under options other
than those granted under the Stock Option Plan, (v) 4,444,444 shares of
Common Stock have been reserved for issuance pursuant to the 5% Convertible
Subordinated Debentures due July 31, 2000 of the Company and (vi) 738,064
shares of Common Stock have been reserved for issuance pursuant to the
Company's Employee Stock Purchase Plan. As a result, as of the Record Date an
insufficient number of authorized but unissued shares of Common Stock remain
available to permit payment of the Merger Consideration (as defined below).

As of the date of this Proxy Statement, only approximately 9,900,000
shares of Common Stock are available for issuance in connection with the
Merger. If the Company chooses to consummate the Merger by electing to pay
the Merger Consideration solely in cash, the Company estimates that
approximately an additional 9,300,000 shares of Common Stock would have to be
made available for issuance, or if the Company chooses to consummate the
Merger by electing to pay the Merger Consideration with a combination of cash
and Common Stock, the Company estimates that approximately an additional
17,700,000 shares of Common Stock would have to be made available for
issuance. Although the Company is seeking approval for the authorization of
an additional 20,000,000 shares of Common Stock, the Company has no current
plans relating to the shares (up to approximately 800,000 shares) sought to
be authorized that are not required to be issued in connection with the
Merger. If Proposal 1 is approved by the Company's stockholders but the
Merger is not consummated, the additional 20,000,000 shares will remain
authorized, although the Company has no current plans relating to such shares
if the Merger were not to occur.

If Proposal 1 is adopted, the Certificate of Incorporation will be amended
accordingly.

If Proposal 1 is not approved by the stockholders of the Company, the
Company will be unable to proceed with the Merger pursuant to the Merger
Agreement. The Company will own 51% of the outstanding Magma Shares and such
Magma Shares will remain pledged to Credit Suisse pursuant to the terms of
the Tender Facility. See "Source and Amount of Funds." The anticipated
benefits of the Merger would not be realized by the Company, which, as a
majority stockholder of Magma, would be subject to fiduciary duties vis-a-vis
Magma's other stockholders that would preclude operation of the two companies
as a single business unit. See "Reasons for the Pending Acquisition." If
Proposal 1 is not approved by the stockholders of the Company, the Company
would not, however, be in breach of the Merger Agreement because its
obligations thereunder are conditioned upon the approval of Proposal 1.

The approval of sixty-six and two-thirds percent (66 2/3 %) of the Voting
Stock (whether or not present at the Special Meeting) is required for
approval of Proposal 1. A quorum equal to sixty-six and two-thirds percent
(66 2/3 %) of the Voting Stock must be present in person or by proxy at the
Special Meeting in order to consider Proposal 1. If no instructions are
provided in a proxy, such proxy will be voted FOR the approval of Proposal 1.

<PAGE>

PKS, the beneficial owner of approximately 39.1% of the voting power of
the outstanding Voting Stock, has agreed to vote in favor of Proposal 1.

THE COMPANY'S BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.

PROPOSAL 2

APPROVAL OF THE ISSUANCE OF COMMON STOCK TO HOLDERS OF MAGMA
SHARES AS PART OF THE MERGER CONSIDERATION
IN THE PENDING ACQUISITION

Proposal 2 is to authorize the issuance by the Company of up to 17,700,000
shares of Common Stock in connection with the Pending Acquisition. Under the
Merger Agreement, the Company has the option of paying the Merger
Consideration (as defined below) in a mixture of cash and Common Stock or all
in cash. It is the Company's current intention to pay the Merger
Consideration solely in cash, although such intention is subject to change
based on market conditions and other factors. If the Company opts to pay the
Merger Consideration all in cash, the Company intends to issue Common Stock
in a private placement or public offering and to use the cash proceeds of
such sales to fund a portion of the Merger Consideration. Such sales will be
based on market conditions at the time. If the Company determines to issue
Common Stock in the Merger pursuant to the Merger Agreement, the precise
number of shares to be issued will depend on market conditions, but in no
event will the Merger Consideration consist of more than 17,700,000 shares of
Common Stock or less than 13,477,000 shares of Common Stock. On January 6,
1995, the Company filed with the Securities and Exchange Commission (the
"Commission") a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), for the purpose of registering shares of
Common Stock that may be issued in an underwritten public offering (the
"Public Offering") in order to enable the Company to pay the Merger
Consideration solely in cash. See "Description of Merger Agreement."

It is the policy of the New York Stock Exchange (the "NYSE"), which lists
the Company's outstanding Common Stock, to require stockholder approval of an
issuance of common stock or securities convertible into common stock, other
than in a public offering for cash, if such issuance could result in an
increase of 20% or more in the outstanding common stock of a company. If all
of the Common Stock issuable pursuant to the Pending Acquisition were
outstanding, such newly issued shares will represent approximately 25.2% to
33.1% of the aggregate Common Stock issued, Common Stock equivalents and
Common Stock reserved for issuance pursuant to stock options plans and an
employee stock purchase plan.

Stockholders are being asked to approve the issuance and reservation for
issuance by the Company of the Common Stock to be issued as part of the
Merger Consideration in the Pending Acquisition in response to the policy of
the NYSE. If the Company elects to pay the Merger Consideration solely in
cash, no approval pursuant to Proposal 2 will be required. The issuance of
the Common Stock in connection with the Pending Acquisition would not affect
the rights of the existing stockholders of the Company with respect to Common
Stock or Series C Preferred Stock which they hold. Approval by a majority of
the votes cast on this proposal will be required provided that the total vote
cast represents at least a majority of the Voting Stock entitled to vote on
this proposal. If the required affirmative vote of the stockholders is
obtained, no further authorization for the issuance of the Common Stock as
part of the Merger Consideration in the Pending Acquisition will be solicited
prior to the issuance. Although the Company intends to pay the Merger
Consideration solely in cash, if the Company elects to pay the Merger
Consideration in a combination of cash and Common Stock and the required
affirmative vote by the stockholders with respect to Proposal 2 is not
obtained and the NYSE were to commence delisting proceedings or refuses to
list the Common Stock of the Company, the Company intends promptly to apply
to list the Common Stock on the NNM and, upon such listing, to consummate the
Merger. Although there can be no assurance that the NNM would approve the
Common Stock for listing thereon, the Company is unaware of any reason why
the Common Stock would not be eligible for listing thereon.

PKS, the beneficial owner of approximately 39.1% of the voting power of
the outstanding Voting Stock, has agreed to vote in favor of Proposal 2.

THE COMPANY'S BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.

<PAGE>

THE PENDING ACQUISITION AND THE MERGER AGREEMENT

THE PENDING ACQUISITION

Pursuant to the Merger Agreement, on January 10, 1995, the Purchaser
purchased 12,400,000 shares of common stock, par value $0.10 per share
("Magma Shares"), of Magma at $39.00 per Magma Share, net to the seller in
cash, without interest thereon, pursuant to a tender offer commenced on
December 9, 1994 (the "Offer"). As a result of consummation of the Offer, the
Purchaser acquired majority control of Magma as the first step in the
acquisition of the entire equity interest in Magma. Pursuant to the Merger
Agreement, the Purchaser will, as soon as practicable, consummate a merger
(the "Merger") with Magma by filing the Merger 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 (the time of such later filing being the
"Effective Time") . The purpose of the Merger is to acquire all Magma Shares
not beneficially owned by the Purchaser.

As a result of the Merger, Magma will continue as the surviving
corporation (the "Surviving Corporation") and will become a wholly owned
subsidiary of the Company. In addition, the directors of the Purchaser
immediately prior to the Merger will become the initial directors of the
Surviving Corporation, and the officers of Magma immediately before the
Merger will become the initial officers of the Surviving Corporation, in each
case until their successors are duly elected or appointed and qualified.

BACKGROUND OF THE MERGER

In May 1991, representatives of the Company 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 the Company's
representatives and persons believed by the Company to be Magma's
representatives were held regarding a possible merger of Magma with and into
the Company. Based upon those conversations, on September 26, 1991, after
receiving the approval of the Company's Executive Committee, the Company
transmitted a proposed letter of intent to Magma. The proposed letter of
intent contemplated a consensual merger of Magma with and into the Company.
Pursuant to the proposed merger, each outstanding Magma Share would have been
exchanged for approximately two shares of the Common Stock in a transaction
accounted for on a pooling of interests basis. Such a transaction would have
represented a value of $30.25 for each Magma 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 the Company 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 the Company, 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 the Company, 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
the Company and Magma as a result of these discussions. In addition, at that
meeting the Company 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

<PAGE>

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 the Company and Magma. Such contact was made as a
result of Mr. Sokol's continuing belief that a combination of the two
companies would provide substantial operational benefits such as those more
fully discussed under the heading "BUSINESS OF THE COMPANY AND MAGMA AND
RELATED INFORMATION--General--Rationale for the Merger." Mr. Boeker
responded favorably to Mr. Sokol's proposal to meet by agreeing to a meeting
on August 11, 1994.

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
the desire of Magma's management to dedicate its full attention to the
pending financing of Magma's Malitbog project in the Philippines.

In response to Magma's cancellation of the scheduled August 11 meeting, 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 the Company'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 the Company was considering a number of strategic alternatives,
including a possible combination with Magma, and that the Company'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 the Company 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, in light
of their belief that their attention was more appropriately devoted to
completion of Magma's Malitbog project, they would agree to meet only after
the Malitbog closing. Mr. Sokol concluded the call by reiterating the
Company's need to act upon certain of its strategic alternatives on a prompt
basis.

On September 18, 1994, the Company retained Gleacher to serve as financial
advisor to the Company in connection with the possible acquisition of Magma
by the Company.

On September 19, 1994, Mr. Sokol wrote to Messrs. Pankratz and Boeker
proposing to acquire all outstanding Magma Shares for $35 per Magma Share
comprised of $25.00 in cash and $10.00 in market value of the Common Stock
(the "Initial Proposal"). The form and amount of consideration offered to
Magma pursuant to the Initial Proposal was determined in consultation with
Gleacher and was based on the Company's internal review of publicly available
information of and relating to Magma. 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 the Company
contacted management of The Dow Chemical Company ("Dow"), the beneficial
owner of approximately 21% of the Magma Shares, to determine Dow's reaction
to the Company's proposal of September 19, 1994. The Company representatives
were told Dow was evaluating such proposal. During the week of September 26,
1994, the

<PAGE>

Company's financial representatives contacted management of Dow to inquire as
to the circumstances surrounding a recent sale by Dow of 857,143 Magma Shares
for $28.25 per Magma Share and an associated option agreement to acquire such
Magma 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 Magma Shares and whether any structural
changes to the Company's merger proposal would be helpful in this regard. Dow
reported that it was considering such issues in the context of the Company's
proposal.

On September 22, 1994, Magma announced its retention of Goldman as its
financial advisor in connection with the Initial Proposal.

On September 28, 1994, after telephone discussions between the Company's
financial advisors and Magma's financial advisors regarding the Company's
request to arrange a meeting between the parties, Messrs. Sokol and McArthur,
together with representatives from the Company's financial advisors, met with
representatives from Magma's financial advisor in order to introduce the
Company and to further elaborate and answer questions with respect to the
details of the Company's proposal. The Company provided the representatives
from Magma's financial advisors with a letter to Messrs. Pankratz and Boeker
and copies of a draft merger agreement.

At a meeting held on October 2 and 3, 1994, the Magma Board considered
Magma's business, financial condition and prospects, the terms and conditions
of the Initial Proposal, and the Company's business, financial condition and
prospects. Magma's management made detailed presentations regarding Magma's
business plan and the various strategic initiatives which Magma had
undertaken both in the United States and overseas. On October 3, 1994,
Magma's financial advisors informed the Company'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 the Company's financial advisors as soon as possible and,
accordingly, a meeting was scheduled for the morning of October 4, 1994. The
Company 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 the Company 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 the Company's financial
advisors and Magma's financial advisors, Magma's financial advisors informed
the Company's financial advisors that Magma was not for sale and that the
value placed on Magma by the Initial Proposal did not reflect the intrinsic
value of Magma.

Following the defensive actions taken by Magma, on October 6, 1994 the
Purchaser commenced a cash tender offer for 12,400,000 Magma Shares at $35
per Magma 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, the Company 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 the Company's proposals which, if
approved, would help facilitate consummation of the Previous Offer.

On October 21, 1994, the Purchaser increased the price per Magma Share to
be paid in the Previous Offer to $38.50 per Magma Share (the "Revised
Previous Offer"). The form and amount of consideration

<PAGE>

offered to Magma pursuant to the Revised Previous Offer was determined in
consultation with Gleacher and was based on the Company's internal review of
publicly available information of and relating to Magma and based on the
Company's belief that the increased consideration was both prudent and would
allow a transaction to occur. On October 31, 1994, the Company learned that
the Magma Board had resolved at its meeting of that date to recommend that
its stockholders reject the Revised Previous Offer. In making this
recommendation, the Magma Board took into account inquiries received from
various third parties expressing interest in pursuing a possible business
combination with Magma, the terms of the Revised Previous Offer, which the
Magma Board viewed as conditional and coercive, and the opinion of Goldman
that the consideration provided for in the Revised Previous Offer was
inadequate.

On November 1, 1994, the Company 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, the Company 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, the Company had neither
entered into a merger agreement with Magma nor received sufficient written
requests to call the Requested Special Meeting. Consequently, the Company
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 the
Company 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, the Company and
Magma arranged to meet the following day in New York to explore the
possibility of a negotiated acquisition of Magma by the Company. The meeting
was arranged between the Company and Magma because their respective financial
advisors advised that it would be in the parties' respective best interests
to discuss the possibility of a negotiated transaction at a higher
consideration and because Dow indicated it would consider supporting a
negotiated transaction at a higher consideration.

From December 3, 1994 through the morning of December 5, 1994,
representatives of the Company and Magma, together with their legal and
financial advisors, met to negotiate the terms of a proposed acquisition of
Magma by the Company. The Magma 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.

The principal participants in the meetings held on December 3 through the
morning of December 5, 1994, were: Messrs. Sokol and McArthur and John G.
Sylvia, Senior Vice President, Chief Financial Officer and Treasurer, from
the Company; Messrs. Boeker, Pankratz and Peele from Magma; representatives
of Gleacher and Willkie Farr & Gallagher on behalf of the Company; and
representatives of Goldman and Shearman & Sterling on behalf of Magma. The
material issues discussed by the parties were the form and amount of the
consideration to be paid in a transaction, the structure of a transaction,
covenants relating to conduct of the respective businesses pending completion
of a transaction, reciprocal termination fees, a "no shop" provision, a
"standstill" provision in case the transaction failed to close as a result of
the Company's fault, and the ability of the Company to secure the financing
necessary to complete a transaction. Representatives of Credit Suisse and its
counsel assisted in the discussions relating to the ability of the Company to
finance a transaction.

Representatives of the Company and Magma each sought to structure the
transaction in two steps, the first as a tender offer to obtain control of
Magma and the second as a merger to permit the acquisition of the entire
remaining equity interest in Magma. The Company sought this transaction
structure in order to obtain operating control of Magma at the earliest
possible time, and Magma sought this structure in order to enable Magma
stockholders to receive a portion of the transaction consideration at the
earliest possible time. The form and amount of the consideration was
determined by the parties in consultation with their respective financial
advisors and was based on the form of the consideration that had been offered
by the Company pursuant to the Revised Previous Proposal. Representatives of
the Company proposed that the transaction consideration be a combination of
cash and Common Stock and that any

<PAGE>

increase in such consideration be paid in additional shares of Common Stock.
Representatives of Magma proposed that the transaction consideration be paid
entirely in cash. The parties then discussed an increase in the consideration
from a blended amount of $28.50 in cash and $10.00 in market value of Common
Stock, as contemplated by the Revised Previous Proposal, to a blended amount
of $28.50 in cash and $10.50 in market value of Common Stock. In light of
Magma's desire to have the consideration paid entirely in cash, the Company
proposed that, at its option, the Company could pay the consideration all in
cash (rather than in cash and Common Stock) such that the blended all cash
consideration paid in the Offer and the Merger would be $38.75 per Magma
Share.

On January 10, 1995, the Company consummated the Offer and purchased
12,400,000 Magma Shares pursuant thereto. Pursuant to the Merger Agreement,
nine members of the 11 member Magma Board resigned and six nominees of the
Company and the Purchaser were elected to fill such vacancies. At such time,
the size of the Magma Board was reduced to eight directors. Accordingly, as
of the date hereof, the Company and the Purchaser have designated a majority
of the Magma Board.

REASONS FOR THE PENDING ACQUISITION

The Company believes that combining the businesses of the Company and
Magma will provide an excellent strategic fit due to the synergies and other
benefits which will result from combining the operations of Magma and the
Company 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 presently operate.

In considering the Merger Agreement, the Company's Board identified no
significant disadvantages to the combining of the businesses of the Company
and Magma. The Company's Board considered the synergies expected to result
from such a combination and determined that the economic value of such
synergies was not a material determinant in establishing the Company's
Board's belief that the Merger Consideration represents a fair value for the
Magma Shares. The Company's Board considered the possibility that the
synergies predicted by the Company's management may ultimately fail to occur
but determined that such an occurrence would not be material to the Company's
Board's approval of the payment in the Merger of the premium to market price
and book value represented by the Merger Consideration. The Company's Board
gave significant weight to the Company's pro forma analysis, which indicates
the Company's belief that, among other things, on a consolidated basis,
consummation of the Offer and the Merger will be accretive to per share
earnings and will not materially increase the Company's debt to equity ratio.

RECOMMENDATION OF THE COMPANY'S BOARD

On September 19, 1994, the Company's Board approved a proposal to acquire
the outstanding Magma Shares for $35.00 per Magma Share for consideration
consisting of cash and Common Stock, and authorized certain officers of the
Company to negotiate modifications to the foregoing proposal (including the
final price and form of the consideration) in consultation with members of
the Executive Committee of the Company. On December 6, 1994, the Company's
Board unanimously approved the Merger Agreement and the transactions
contemplated thereby. The Company's Board recommends that the Company's
stockholders vote FOR each of Proposal I and Proposal II.

<PAGE>

In the course of reaching its decision to approve the Merger Agreement,
the Company's Board consulted with its financial advisors regarding the
financial aspects and fairness of the Merger, and its legal advisors
regarding the legal terms of the transaction and the obligations of the
Company's Board in its consideration of the Merger Agreement. The Company's
Board concluded that the Merger will further the Company's objectives in part
because of its belief that Magma is an excellent strategic fit and that the
acquisition will create significant benefits, including: (i) expansion and
enhancement of development efforts, (ii) benefits of increased size, (iii)
opportunities for operational and administrative cost savings, and (iv)
diversification in sources of revenue and operations. For a further
discussion of these factors, see "BUSINESS OF THE COMPANY AND MAGMA AND
RELATED INFORMATION--General--Reasons For the Merger."

In reaching its determinations and recommendations with respect to the
Merger Agreement and the transactions contemplated thereby, the Company's
Board took into account numerous factors, including, among other things, in
addition to the foregoing, the following:

(i) The Company's knowledge and review of the business, operations,
properties, assets, financial condition and operating results of each of
the Company and Magma. The Company's Board found that these factors
supported their determinations and recommendations because, as a result of
its favorable view of Magma, the Board believed the Company would realize
benefits that would improve the Company's competitive position, including
expansion and enhancement of development efforts, the benefits of
increased size, opportunities for operational and administrative cost
savings and diversification in sources of revenues and operations;

(ii) The terms and conditions of the Merger Agreement, which were the
product of arms' length negotiations, including the amount and form of the
consideration. The Company's Board found that these factors supported
their determinations and recommendations because (a) the terms of the
Merger Agreement were generally evenhanded, (b) the pricing structure gave
the Company the option of alternative forms of consideration, (c) the
two-tier structure contemplated by the Merger Agreement allowed the
Company to obtain control of Magma at the earliest possible time, thereby
laying the groundwork for realizing the benefits of the transaction sooner
rather than later and (d) the Merger Agreement (including the tender offer
conditions) gave the Company adequate protection against possible
misrepresentations as to the business and operations of Magma;

(iii) The Gleacher Report and the Gleacher Opinion delivered to the
Company's Board (as discussed more fully below) that the Consideration (as
defined below) to be paid by the Company pursuant to the Offer and the
Merger is fair to the Company from a financial point of view. The
Company's Board found that these factors supported their determinations
and recommendations because the Gleacher Report and the Gleacher Opinion
spoke directly to the fairness of the transaction to the Company, the
Board felt comfortable with the scope of work performed by Gleacher and
the Board believed that Gleacher had done a competent and professional
job;

(iv) The fact that the effect of the Merger would be accretive on a
pro forma per share basis. The Company's Board found that this factor
supported their determinations and recommendations because it indicated a
reasonable likelihood that earnings per share of Common Stock would
increase as a result of the transaction; and

(v) Current industry, economic and market conditions. The Company's
Board found that these factors supported their determinations and
recommendations because (a) the development of new opportunities,
particularly internationally, is a key component of the Company's
strategy, (b) the international power production market is characterized
by numerous strong and capable competitors and (c) based on the Company's
belief that potential customers consider both the price of power and the
provider's capacity to fulfill its obligations as primary factors in the
selection of power suppliers, the Company believes that increased size is
an important factor in determining the success of an independent power
producer competing in the global power market.

The Company's Board considered each of the factors listed above during the
course of its deliberations and negotiations prior to entering into the
Merger Agreement. Each of the foregoing

<PAGE>

factors, which constitute all material factors considered by the Company's
Board, was viewed positively by the Company's Board, and the Company's Board
neither identified nor discussed any material negative factor in connection
with its deliberations with respect to the Merger Agreement. The Company's
Board evaluated the factors listed above in light of their knowledge of the
business and operations of Magma and their business judgement. In view of the
wide variety of factors considered in connection with the evaluation of the
Offer and the Merger, the Company's 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 determinations.

OPINION OF THE COMPANY'S FINANCIAL ADVISOR

On December 6, 1994, Gleacher delivered its written opinion to the
Company's 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 the Company pursuant to the Offer and the Merger
is fair to the Company from a financial point of view. For purposes of the
Gleacher Opinion, the term "Consideration" means the consideration paid by
the Company pursuant to the Offer together with, at the Company's option,
either (i) $39.00 per Magma Share in a combination of cash and a number of
shares of Common Stock to be determined in accordance with the Merger
Agreement, or (ii) $38.50 per Magma Share in cash, in either case to be paid
by the Company 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 this Proxy Statement as
Annex A. The Gleacher Opinion is directed only to the fairness of the
Consideration to be paid by the Company from a financial point of view. The
summary of the Gleacher Opinion set forth in this Proxy Statement is
qualified in its entirety by reference to the full text of such Opinion. The
analyses that are summarized below represent all material analyses performed
and relied on by Gleacher in rendering the Gleacher 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 the Company (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 Magma Shares and the
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 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 the Company, and did not
independently verify such information or make or obtain an independent
evaluation or appraisal of the assets of the Company or Magma. With respect
to the Projections, Gleacher assumed without independent investigation that
the Projections were reasonably prepared by the Company, and were generated
on bases reflecting the best currently available estimates and judgments of
the Company's management as to the expected future financial performance of
the Company 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.

In arriving at the Gleacher Opinion and making its presentation to the
Company's Board at the meeting held on December 6, 1994, Gleacher considered
and discussed certain financial analyses and

<PAGE>

other factors. In connection with its presentation, Gleacher provided the
Company's 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 the Company assuming that the All Cash Component Amount was exercised by
the Company to the price per Magma 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 Magma
Share during the six-month period before the Offer commenced (resulting in an
implied premium to Magma stockholders of approximately 30%). Gleacher then
compared such premiums to premiums paid in recent public merger and
acquisition transactions generally and concluded that the premium being paid
by the Company is at the low end of the range of the premiums paid in such
recent public merger and acquisition transactions. Gleacher used its
experience and knowledge of the markets and the premiums being paid in recent
public merger and acquisition transactions generally over the last few years
to arrive at its conclusion. Gleacher did not perform an analysis of premiums
in comparable acquisitions because, it is the belief of Gleacher, there are
no acquisitions of comparable public companies to Magma in terms of its line
of business and, as a result, Gleacher gave little weight to the results of
this analysis in rendering the Gleacher Opinion. 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 for 1995 (14.4x). Gleacher then compared such multiples to the
Company's current trading multiples, and noted that the Company's trading
multiples in general were higher. Gleacher calculated the Company's trading
value at December 5, 1994 as a multiple of (i) the Company's twelve-month
earnings before interest and taxes (8.6x), (ii) net income (16.5x), (iii)
book value (2.8x) and (iv) projected net income for 1994 (17.4x) and for 1995
(14.6x). Gleacher further noted that the Consideration to be paid by the
Company should not have an adverse impact in general on the Company's trading
multiples.

Discounted Cash Flow Analysis. Gleacher performed two discounted cash flow
analyses of Magma. The first, which was derived from publicly available
information, was based upon estimates of financial performance as prepared by
the Company for each of Magma's power projects in operation and for a limited
number of projects in development but under signed contracts or awards. For
this analysis, no value was accorded to any future development efforts by
Magma, and as a result did not necessarily reflect Magma's potential future
financial performance. The second analysis was based upon estimates of
financial performance as prepared by Magma and as provided to the Company and
Gleacher for each of Magma's power projects including (a) certain projects
under development and (b) benefits of a specific technology expected to be
implemented, including certain planned operational enhancements. 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 discount rates in the first analysis of
10%, 12% and 15% and an after-tax cash flow multiple of 14x to Magma's
after-tax cash flows. Using this valuation method for the first analysis, the
implied values per Magma Share were approximately equal to $30. In the second
discounted cash flow analysis, Gleacher applied a 12% discount rate. For this
analysis, value was accorded to substantially all of Magma's future
development projects. By including such future development projects in the
analysis, this analysis resulted in an implied value per Magma Share of in
excess of $50. Gleacher then compared the results obtained from the second
discounted cash flow analysis to the Consideration to be paid by the Company.
Because the first discounted cash flow analysis was based solely on publicly
available information, and the second discounted cash flow analysis was based
on both information provided by Magma and the results of additional due
diligence conducted on Magma, Gleacher's presentation to the Company's Board
indicated that it discounted the results of the first analysis and gave
substantially more weight to the second discounted cash flow analysis. The
discount rates and after-tax cash flow multiple used by Gleacher in its
analyses were based upon discussions with the management of the Company and
Gleacher's judgments as to the manner in which companies in the Comparable
Group (as defined below) are valued. The "Comparable Group" included the
Company, The AES Corporation, Destec Energy, Inc. and Sithe Energies, Inc.

<PAGE>

Trading Valuation. Gleacher reviewed and compared certain actual and
estimated financial and operating results and stock market performance of
Magma and the Comparable Group. Gleacher applied trading multiples of the
Comparable Group to Magma's financial performance. These trading multiples
consisted of (i) trailing twelve-month revenues of 4x to 5x, (ii) earnings
before interest, taxes, depreciation and amortization of 6.5x to 7.5x, (iii)
earnings before interest and taxes of 9x to 10x, (iv) net income of 14x to
16x and (v) projected net income for 1994 of 13x to 15x and for 1995 of 12x
to 14x. Gleacher then derived a range of values for the Magma Shares.
Gleacher then added control premiums of 25% and 50% to the calculated range
for the Magma Shares. The control premium range was determined by Gleacher
based upon its experience and knowledge of premiums generally paid to acquire
control of a company. Gleacher then calculated the implied values per Magma
Share, which ranged from approximately $39 to $54. Gleacher then noted that
the Consideration to be paid by the Company was at the low end of such range.

Pro Forma Analyses. Gleacher analyzed the pro forma impact of the Merger
on earnings per share of Common Stock for periods following consummation of
the Merger, and compared such amounts to projected earnings per share on a
stand-alone basis for the Company based on the Company's base operating plan.
In conducting its pro forma analyses, Gleacher assumed the following: the
Company achieves synergies and cost savings in 1995 and thereafter resulting
from the Merger of approximately $10 million, the All Cash Component Amount
is exercised by the Company, interest rate on the Company's borrowings is 9%,
opportunity cost of the Company's cash is 5% and the Company sells
approximately 14,800,000 shares of Common Stock at $16.50 per share based on
the then current market price. The foregoing assumptions were all of the
assumptions used by Gleacher in performing the pro forma analyses. Gleacher
estimated that the Merger could result in a percentage increase in the
earnings per share for the Common Stock, of approximately (i) 1% in 1995, 10%
in 1996 and 22% in 1997, based upon, with respect to Magma, publicly
available information and estimates of financial performance as prepared by
the Company for each of Magma's power projects in operation and for a limited
number of projects in development but under signed contracts or awards, and
approximately (ii) 2% in 1995, 25% in 1996 and 26% in 1997, based upon, with
respect to Magma, estimates of financial performance as prepared by Magma for
each of Magma's power projects, including the results of additional due
diligence conducted on Magma. Because both pro forma analyses produced
percentage increases in earnings per share for the Common Stock, Gleacher did
not place more weight on either set of results.

Stock Trading Analysis. Gleacher reviewed and analyzed historical trading
prices and volumes for the Magma Shares during the 30-month period preceding
the Offer. The trading prices per Magma Share over such period ranged from
$20.00 to $39.25 and the weekly trading volumes for Magma Shares ranged from
49,100 to 4,919,700. Gleacher then compared such historical trading prices to
the Consideration to be paid by the Company. This comparison indicated that
the Consideration to be paid by the Company is approximately equal to the
high point of the trading value per Magma Share during such 30-month period.

In arriving at the Gleacher Opinion and in presenting the Gleacher Report,
Gleacher decided to perform a purchase price multiples analysis, a discounted
cash flow analysis, a trading valuation analysis and pro forma analyses, the
material portions of which are summarized above, based on industry practice
and its experience in merger and acquisition transactions. Gleacher concluded
that the results of such analyses, when considered as a whole, support the
Gleacher Opinion. 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, or
quantifying the value assigned to any particular analysis performed, 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 the Company pursuant to the Offer
and the Merger is fair to the Company 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 the Company'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

<PAGE>

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 Company's Board selected Gleacher to act
as the Company's exclusive financial advisor based on Gleacher's familiarity
with the Company and Gleacher's substantial experience in mergers and
acquisitions and in securities valuation generally. No limitations were
imposed by the Company's Board 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 the Company and Gleacher (the "Gleacher Engagement Letter"), the
Company 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 the Company, 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 the Company; 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 the Company.

In addition to any fees payable to Gleacher pursuant to the terms of the
Gleacher Engagement Letter, the Company 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, the Company 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.

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 Magma Shares in the Offer and the Merger, taken as a unitary transaction,
was fair to the holders of Magma Shares receiving such Consideration (other
than the Company and its affiliates). For purposes of Goldman Sachs' opinion,
the term "Consideration" means the consideration to be received by the
holders of Magma Shares in the Offer and the Merger, taken as a unitary
transaction (regardless of the payment option chosen by the Company with
respect to the Merger as discussed under the caption "Description of the
Merger Agreement--The Merger Consideration"). The full text of the

<PAGE>

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 Proxy Statement as Annex B and is incorporated herein by
reference.

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 the Company for the five years ended
December 31, 1993; certain interim reports to stockholders and Quarterly
Reports on Form 10-Q of Magma and the Company; certain other communications
from Magma and the Company 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
the Company prepared by the management of the Company. Goldman Sachs also
held discussions with members of the senior managements of each of Magma and
the Company 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 Magma Shares and the Common Stock, compared
certain financial and stock market information for Magma and the Company,
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
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
the Company 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 Magma 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 the Company
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 the
Company 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 the Company 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 Magma
Shares.

<PAGE>

The following is a summary of the material financial analyses utilized by
Goldman Sachs in connection with providing its opinion to the Magma Board on
December 5, 1994.

Stock Trading Analysis. Goldman Sachs reviewed and analyzed the historical
trading prices and volumes for the common stock of Magma and of the Company
during the trailing five and three year periods, respectively, for trading
prices and volumes. During the period commencing on December 2, 1993 and
ending on December 2, 1994, the intra-day high was $38 per Magma Share.
Goldman Sachs noted that the Consideration was at a price above such
intra-day high. Goldman Sachs reviewed the volume of Magma Shares which
traded during the specified period to determine the weighted average price of
Magma Shares during the period reviewed. Goldman Sachs determined that the
average weighted price for a Magma Share during the trailing one year period
was $33.44 and during the trailing three year period was $32.59 and noted
that Consideration was higher than such weighted average prices.

Selected Company Analysis. Goldman Sachs reviewed and compared certain
actual and estimated financial, operating and stock market information of
Magma, the Company and selected companies in the independent power production
industry, specifically, the AES Corporation, Destec Energy, Inc., KENETECH
Corporation and Sithe Energies, Inc. (collectively, excluding Magma and the
Company, the "Selected Companies"). Based upon the closing market price for
Magma Shares on December 2, 1994 ($35.50), such analysis indicated that, for
the Selected Companies, the median values of the estimated 1994 and estimated
1995 price/earnings ratios were 24.9x and 12.3x, as compared to corresponding
values of 18.1x and 15.3x for the Company and 14.5x and 13.4x for Magma.
Based upon a Consideration of $38.75 per Magma Share, the price/earnings
ratio for Magma had an estimated value of 15.6x in 1994 and 14.4x in 1995.
Based upon a Consideration of $39.00 per Magma Share, the price/earnings
ratio for Magma had an estimated value of 15.7x in 1994 and 14.4x in 1995.
The estimated price/earnings ratios for 1994 and 1995 for each of the Company
and Magma were within the range of the price/earnings ratios for the same
period for the Selected Companies, and, as such, indicated that the
valuations for both Magma and the Company were not inconsistent with the
valuations of the Selected Companies. Accordingly, in the case of Magma, the
fact that Magma's estimated price/earnings ratios for 1994 and 1995, based
upon a Consideration of either $38.75 or $39.00, were within the range of
estimated price/earnings ratios for the same period for the Selected
Companies was indicative that the Magma Shares at the Consideration prices
were not under-valued vis-a-vis the Selected Companies, and, in the case of
the Company, the estimated price/earnings ratios for 1994 and 1995 based on
the then Common Stock price were within the range of appropriate values for
purposes of serving as consideration in the Merger.

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. Goldman Sachs
conducted its discounted cash flow analysis using a bottom-up approach which
is based upon the net present value of the cash flow generated by each of the
individual projects for the life of each such project. Such analysis
indicated that assuming discount rates ranging from 9% to 13% for domestic
projects and 11% to 19% for international projects, the net after-tax present
value of Magma's future cash flows (plus net cash of approximately $107
million) ranged from $577 million to $1,250 million, or from $24 to $52 per
Magma Share. The Consideration on a per Magma Share basis was within the
range (and at approximately the midpoint of the range) indicated by the
discounted cash flow analysis.

Pro Forma Analyses. Goldman Sachs reviewed certain forecasted financial
information prepared by the respective managements of Magma and the Company
for their respective companies as well as certain pro forma financial
information for the combined entity prepared by the Company 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 the Company
in the Merger. Further, in conducting its analysis with respect to
information provided by Magma and the Company managements' for their
respective companies, Goldman Sachs also assumed that synergies from the
Merger aggregated in the amount of $5 million. The foregoing analysis
indicated that the estimated earnings per share for the pro forma combined
entity would be accretive to

<PAGE>

earnings per share for the Common Stock in the range of 2% to 11% in 1995 and
13% to 22% in 1996 depending on the market price of the Common Stock at the
time of consummation of the Merger. In addition, Goldman Sachs evaluated the
pro forma information for the combined entity as provided by the Company
management (including certain other assumptions made therein). The foregoing
analysis indicated that the estimated earnings per share for the pro forma
combined entity would be accretive to earnings per share for the Common Stock
by 1% in 1995 and 11% in 1996.

Goldman Sachs also reviewed the value of the Consideration to be received
by the holders of the Magma Shares on a per Magma Share basis assuming (i)
that all outstanding Magma Shares were tendered in the Offer, (ii) that the
option to pay the All Cash Component Amount was not exercised by the Company
in the Merger, and (iii) a range of market prices for Common Stock between
$10 per share to $20 per share. The foregoing analysis indicated that the
value of the Consideration had a range between $35.86 per Magma Share (if
Common Stock traded at $10 per share) and $39.71 per Magma Share (if 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. Goldman Sachs noted that the
selected transactions analysis did not provide any consistent indication of
value, and, accordingly, did not rely upon this analysis.

Other Analyses. 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, which did not indicate a likelihood of an alternative transaction
achieving a greater value for Magma stockholders than did the Consideration
being offered by the Company.

General. As described above, certain of the analyses performed by Goldman
Sachs relied on estimates of future financial performance provided by the
managements of the Company and Magma, including certain financial forecasts
for the pro forma combined entity resulting from the Merger prepared by the
management of the Company 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 the Magma Board as to the fairness of
the Consideration to the holders of Magma Shares (other than the Company 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.

DESCRIPTION OF THE MERGER AGREEMENT

The following description of the Merger Agreement summarizes its material
terms.

Conditions to the Obligations of Each Party to Effect 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 Common Stock in order to effectuate the Merger by the requisite vote of
the Company's stockholders, (iii) the 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 the Company on Form S-4 under the Securities Act for
the purpose of registering the shares of 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

<PAGE>

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.

The Merger Consideration. In the Merger, each outstanding Magma Share
(other than Magma Shares held by the Company and the Purchaser or any other
direct or indirect subsidiary of the Company and Magma Shares held in the
treasury of Magma), will be converted into the right to receive, at the
Company's option, 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 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
Magma Shares outstanding at the Effective Time less (y) $39.00 multiplied by
the number of Magma Shares owned by the Company and any of its affiliates
immediately prior to the Effective Time, divided by (B) the number of Magma
Shares outstanding at the Effective Time (other than Magma Shares owned by
the Company 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 Magma Shares outstanding at the Effective Time less (y) $39.00
multiplied by the number of Magma Shares owned by the Company and any of its
affiliates immediately prior to the Effective Time, divided by (B) the number
of Magma Shares outstanding at the Effective Time (other than Magma Shares
owned by the Company and any of its affiliates). The "Average Closing Price"
shall mean the average closing price of Common Stock on the 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.

The foregoing formula for determining the consideration to be paid in the
Merger was determined so that (i) if the Company determines to pay the Merger
Consideration with a combination of cash and Common Stock, the consideration
paid by the Company in the Offer and the Merger would consist, on a blended
basis, of $28.50 per Magma Share in cash and $10.50 per Magma Share in market
value of Common Stock, based on the Average Closing Price and subject to the
Collar Provision, and (ii) if the Company determines to pay only cash
consideration in the Merger, the blended consideration paid by the Company in
the Offer and the Merger would be $38.75 per Magma Share. The consideration
to be paid in the Offer and the Merger, including the terms of the Collar
Provision, was negotiated on an arms' length basis between the Company and
Magma. The purpose of the Collar Provision is to limit the number of shares
of 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
Common Stock required to be issued in the Merger if the Average Closing Price
exceeds $18.73. It is the Company's current intention to pay the Merger
Consideration solely in cash, but such intention is subject to change if (i)
the proposed underwriters for the public offering determine that they cannot
or will not proceed with such offering upon terms reasonably satisfactory to
the Company or (ii) market conditions would require the issuance of a greater
number of shares of Common Stock in order to fund an all cash Merger than
would be required to be issued in a Merger with a mixed cash and Common Stock
consideration. The total maximum cash amount to be paid by the Company for
Magma Shares in the Merger will be approximately equal to $440.3 million. Set
forth below is a chart which shows the form and amount of consideration to be
paid in the Merger under various assumptions:

MERGER CONSIDERATION

At the Company's option, each Magma Share to be converted in the Merger
can be converted into the right to receive either the amounts of cash and
Common Stock set forth in columns B and C, respectively, assuming the Average
Closing Prices set forth in column A, or the amounts set forth in column F.
For purposes of the calculations set forth below, it has been assumed that
the number of Magma

<PAGE>

Shares outstanding at the Effective Time will be equal to 24,043,000 (the
number of Magma Shares outstanding as of September 30, 1994). In addition, it
has been assumed that the number of Magma Shares owned by the Company and any
of its affiliates immediately prior to the Effective Time will be equal to
12,600,000, 12,400,000 of which were acquired pursuant to the Offer.

<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F)
- ------------ ----------- ----------- ---------- --------------- ---------------
ALL CASH MERGER
CASH AND STOCK MERGER CONSIDERATION CONSIDERATION
----------------------------------------------------- ---------------
ASSUMED NUMBER OF
AVERAGE MIXED CASH SHARES OF VALUE OF ALL CASH
CLOSING COMPONENT COMMON COMMON TOTAL COMPONENT
PRICE AMOUNT STOCK STOCK CONSIDERATION AMOUNT
- ------------ ----------- ----------- ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$14.00 (1) $16.94 1.546 $21.64 $38.58 $38.47
15.00 16.94 1.471 22.06 39.00 38.47
16.00 16.94 1.379 22.06 39.00 38.47
17.00 16.94 1.298 22.06 39.00 38.47
18.00 16.94 1.226 22.06 39.00 38.47
19.00 (1) 16.94 1.178 22.38 39.32 38.47
20.00 (1) 16.94 1.178 23.56 40.50 38.47
<FN>
- ---------------
(1) The Collar Provision applies.
</TABLE>

The foregoing table is based on the number of Magma Shares outstanding as of
September 30, 1994. If, prior to the Effective Time, the maximum number of
Magma Shares (582,478) are issued in respect of outstanding options and
deferred stock awards, (i) the All Cash Component Amount in all cases would
be $38.49, (ii) the Mixed Cash Component Amount in all cases would be $17.50,
and (iii) the "Number of Shares of Common Stock", the "Value of Common Stock"
and the "Total Consideration" would be, respectively, for the following
Assumed Average Closing Prices: for an Assumed Average Closing Price of
$14.00, 1.507, $21.09 and $38.59; for an Assumed Average Closing Price of
$15.00, 1.433, $21.50 and $39.00; for an Assumed Average Closing Price of
$16.00, 1.344, $21.50 and $39.00; for an Assumed Average Closing Price of
$17.00, 1.265, $21.50 and $39.00; for an Assumed Average Closing Price of
$18.00, 1.195, $21.50 and $39.00; for an Assumed Average Closing Price of
$19.00, 1.148, $21.81 and $39.31; and for an Assumed Average Closing Price of
$20.00, 1.148, $22.96 and $40.46.

Magma Stock Options. Each option outstanding immediately prior to the
Effective Time under 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 Magma
Shares previously subject to such option and (y) the excess, if any, of
$39.00 or, if the Company has elected the All Cash Component Amount, $38.75,
over the exercise price per Magma Share previously applicable to such option.
Each unvested share of deferred stock under Magma's 1994 Equity Participation
Plan (as defined in the Merger Agreement) or as otherwise described in Magma
Disclosure Schedule (as defined in the Merger Agreement) 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 or, if the Company
has elected the All Cash Component Amount, $38.75. The treatment of the Magma
stock options in the Merger was determined subsequent to the determination of
the Merger Consideration. The parties agreed on this treatment because they
believed such treatment, which provides for the payment in cash of the
"spread" on the options, is customary in transactions similar to the Merger.

Board Representation. Pursuant to the Merger Agreement, on January 10,
1995, the Company obtained majority representation on the Magma Board. The
Magma Board currently consists of six designees of the Company and two
individuals of Magma who were directors of Magma at the time the Merger
Agreement was executed. Prior to the Effective Time, any amendment of the
Merger Agreement

<PAGE>

or Magma's Restated Articles of Incorporation or Restated Bylaws, any
extension by Magma of the time for the performance of any of the obligations
or other acts of the Company or the Purchaser, 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 the Company or the Purchaser ("Disinterested
Directors").

The Company 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 Company's
Board.

Other Proposals. The Merger Agreement further provides that neither Magma
nor any of its subsidiaries, or any of their respective directors, officers,
agents, financial advisors or otherwise may, directly or indirectly, solicit,
initiate or knowingly encourage the 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 Magma 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. The Magma Board 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 Magma Board 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 the Merger Agreement.
"Competing Transaction" shall mean any of the following involving Magma or
any of its subsidiaries: (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
the assets of Magma and its 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 Magma 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 Magma 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.

Representations and Warranties. The Merger Agreement contains customary
representations and warranties of the parties thereto, including
representations by each of Magma and the Company 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.

Certain Covenants of Magma, the Company and the Purchaser. Magma has
agreed that, prior to the Effective Time, unless the Company 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 the
Company: (a) (i) issue, sell, pledge, dispose of, encumber, authorize, or
propose the issuance, sale, pledge, disposition, encumbrance or authorization
of any Magma Shares or shares of its subsidiaries' capital stock of any
class,

<PAGE>

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 Magma 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 Magma 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 its
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 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 the Company provided that the
Company has been given the opportunity to review the

<PAGE>

relevant financing documents and Magma has given the Company 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 the
Company; (iii) Magma may make planned capital and operational expenditures
with respect to its Malitbog project, without the consent of the Company;
(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 the Company and the
Company's consent; (v) Magma may honor all existing contractual obligations
relating to projects in operation or construction without the consent of the
Company; 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 the Company and the Company's
consent.

The Company has agreed that, prior to the Effective Time, unless the All
Cash Component election has been made or unless Magma shall otherwise consent
in writing, and except as is otherwise permitted by the Merger Agreement,
neither the Company nor any of the Company 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 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 the Company to exercise the All Cash Component election; (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 the Company, 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.

Employee Benefits. The Merger Agreement provides that the Company 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 December 5, 1994 between Magma or one of
its subsidiaries and any employee of Magma or one of its subsidiaries, or
maintained for the benefit of any employee of Magma or one of its
subsidiaries, and (y) honor all bonus determinations for the fiscal year
ending December 31, 1994 made by Magma or any of its subsidiaries prior to
December 5, 1994 with respect to the bonus plans and arrangements of Magma
and its subsidiaries. For a period of one year commencing on the Effective
Time, the Company shall cause the Surviving Corporation to provide active
employees of Magma and its subsidiaries with benefits (including, without
limitation, welfare benefits) that are no less favorable, taken as a whole,
than the benefits provided under Magma Benefit Plans (as defined in the
Merger Agreement) (other than equity-based plans and bonus plans) as in
effect immediately prior to the Effective Date. 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 Magma or any of its
subsidiaries. The Company shall as promptly as practicable after the
Effective Time cause the Surviving Corporation to (or Magma may prior to the
Effective Time) amend each demand note made in favor of Magma by an employee
of Magma or one of its subsidiaries to provide that (x) such demand note will
not be repayable on demand from Magma 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. With respect to

<PAGE>

each employee of Magma (other than employees of Magma which are parties to a
"change in control" or "severance" agreement) who is, within the one year
period following the closing of the Offer, either (i) terminated without
cause or (ii) terminated as a result of a reduction in force, the Company
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 Magma, a payment equal to three months base
salary plus an amount equal to one-fourth of the prior year's 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
Magma, a payment equal to six months base salary plus an amount equal to
one-fourth of the prior year's 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 the Company 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 foregoing severance payments and simultaneously
receive any severance payments under Magma's severance policy described in
the first two sentences of this paragraph.

Amendment. The Merger Agreement may be amended by action taken by the
Company and the Purchaser, and by action taken by or on behalf of the Magma
Board at any time before the Effective Time; provided, however, that, after
approval of the Merger by the stockholders of Magma, no amendment may be made
which would materially adversely impact the interests of Magma's stockholders
or reduce the amount or change the type of consideration into which each
Magma Share will be converted upon consummation of the Merger.

Termination. The Merger Agreement provides that it may be terminated
before the Effective Time in the following circumstances: (a) by mutual
consent of the Boards of Directors of the Company and Magma; or (b) by Magma
or the Company if the Effective Time shall not have occurred on or prior to
September 30, 1995; or (c) by either the Company 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 the Company 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 Magma 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 the Company
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 Magma Shares; or (f) by
Magma or the Company 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 (ii) any person (including, without limitation, Magma or
any affiliate thereof), other than the Company or any affiliate of the
Company, shall have become the beneficial owner of more than 50% of the then
outstanding Magma Shares; or (g) by either the Company 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.

<PAGE>

Miscellaneous. The Merger Agreement contains customary indemnification
provisions pursuant to which the directors, officers, employees, fiduciaries
and agents of Magma and its subsidiaries are required to be indemnified to
the fullest extent permitted by applicable law, and regardless of whether the
Merger becomes effective, by Magma and, after the Effective Time, by the
Surviving Corporation and the Company, from costs or expenses (including
attorney's fees), judgments, fines, losses, claims, damages, and liabilities
and amounts paid in settlement in connection with any claim, action, suit,
proceeding or investigation arising out of or pertaining to the transactions
contemplated by the Merger Agreement, including liabilities under the
securities laws in connection with the Merger. In addition, except as set
forth above, all costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby will be paid by the party
incurring such costs and expenses.

Confidentiality and Standstill Agreements. The Company and Magma have
entered into a confidentiality agreement, dated December 4, 1994, pursuant to
which the Company has agreed to maintain the confidentiality of proprietary
information that may be disclosed to the Company and its representatives in
connection with the transactions contemplated by the Merger Agreement. In
addition, the Company and Magma have entered into a standstill agreement,
dated December 5, 1994 (the "Standstill Agreement"), pursuant to which the
Company has agreed that neither the Company nor any of its subsidiaries will,
for a period of three years from December 5, 1994, among other things,
acquire any securities of Magma or participate in any proxy solicitation with
respect to voting securities of Magma, except in connection with the Offer
and the Merger or a tender offer for all Magma Shares at a price no less than
$38.75 per Magma Share net to the seller in cash.

Required Vote at Magma stockholders' meeting. An affirmative vote
approving and adopting the Merger Agreement at a Magma stockholders' meeting
by the holders of a majority of the outstanding Magma Shares is required to
consummate the Merger. As a result of the completion of the Offer pursuant to
which the Purchaser acquired 12,400,000 Magma Shares for $39.00 per Magma
Share in cash (representing approximately 51% of the issued and outstanding
Magma Shares), the Purchaser owns a sufficient number of Magma Shares to
approve the Merger without the affirmative vote of any other Magma
stockholder.

Dissenters' Rights. Neither holders of the Common Stock nor holders of the
Magma Shares have appraisal rights as a result of the Offer and the Merger or
from the authorization or issuance of Common Stock in connection therewith.

CONFLICTS OF INTEREST OF MEMBERS OF THE MAGMA BOARD

The Merger Agreement, including the consideration to be paid in the
Merger, was negotiated by the Company and Magma at arms' length. The Company
does not believe that any party to the negotiation of the Merger Agreement
had a material conflict of interest in respect thereof. However, stockholders
of the Company 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 and that these same members of
Magma's management and the Magma Board participated in the negotiation of the
terms of the Merger Agreement on behalf of Magma's stockholders. 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:

<PAGE>

(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.

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 Magma 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.

<PAGE>

At a regular scheduled meeting of the Magma Board 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.

ANTITRUST

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), certain acquisition transactions may not be consummated
unless certain information has been furnished to the Federal Trade Commission
("FTC") and the Antitrust Division of the Department of Justice (the
"Antitrust Division") and certain waiting period requirements have been
satisfied. As a result of termination of the HSR Act waiting period in
connection with a previous tender offer for Magma Shares by the Company (the
"Previous Offer"), no waiting period is required in connection with the
Offer.

The Antitrust Division, the FTC and state authorities frequently
scrutinize the legality under the antitrust laws of transactions such as the
acquisition of Magma Shares pursuant to the Offer. At any time before or
after the consummation of any of such transactions, the Antitrust Division,
the FTC or state authorities could take such action under the antitrust laws
as it deems necessary or desirable in the public interest, including seeking
to enjoin the purchase of Magma Shares pursuant to the Offer or otherwise or
the consummation of the Merger, or seeking the divestiture of Magma Shares
acquired by the Purchaser or the divestiture of substantial assets of the
Company. Private parties may also seek to take action under the antitrust
laws. The Purchaser believes that the acquisition of Magma Shares pursuant to
the Offer will not violate the antitrust laws. However, and notwithstanding
termination of the HSR Act waiting period in connection with the Previous
Offer, there can not be any assurance that a challenge to the Offer on
antitrust grounds will not be made, or if such a challenge is made, what the
result will be.

REGULATORY APPROVALS

ACCOUNTING TREATMENT

The Merger will be accounted for under the purchase method of accounting.

FEDERAL INCOME TAX CONSEQUENCES

The purchase for cash and/or Common Stock of Magma Shares pursuant to the
Offer and the Merger will be taxable for federal income tax purposes (and may
also be taxable under applicable state, local, foreign and other tax laws).
Accordingly, a holder of Magma Shares will recognize gain or loss for federal
income tax purposes equal to the difference between (i) the sum of the cash
and the fair market value of Common Stock received in the Offer and the
Merger and (ii) the holder's adjusted tax basis for the Magma Shares. Such
gain or loss will be capital gain or loss if the Magma Shares were held as a
capital asset.

STOCK EXCHANGE LISTING

The Common Stock is listed on the NYSE. Application will be made to list
the Common Stock to be issued pursuant to the Offer on such exchange. See
"PROPOSAL 2--APPROVAL OF THE ISSUANCE OF COMMON STOCK TO HOLDERS OF MAGMA
SHARES AS PART OF THE MERGER CONSIDERATION IN THE PENDING ACQUISITION."

EFFECTS OF THE PENDING ACQUISITION

In the event that the Company elects to include Common Stock as
consideration in the Merger, former stockholders of Magma will own
approximately 32.2% of the outstanding shares of Common Stock after giving
effect to the Pending Acquisition at a price of $16.50 per share of Common
Stock of the Company.

<PAGE>

SOURCE AND AMOUNT OF FUNDS

If the Company elects to pay the Merger Consideration with a combination
of cash and Common Stock, the Company estimates that approximately $710.9
million 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 the Company elects to pay the Merger Consideration solely in
cash, approximately $957.4 million 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 the Company from the Company's
general corporate funds and, if the Company elects to pay the Merger
Consideration solely in cash, the net proceeds of the 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.

The Company has received a fully underwritten financing commitment letter
from Credit Suisse (the "Commitment Letter") which states that Credit Suisse
will provide to the Purchaser, on specified terms and subject to customary
conditions, (i) a facility of up to $250,000,000 to capitalize the Purchaser
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 Magma Shares
pursuant to the Offer, the Company borrowed approximately $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 the Purchaser
in exchange for a secured term note of the Purchaser (the "Purchaser Note").
The economic terms of the Purchaser 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 the Company and Credit Suisse. Borrowings
under the Tender Facility are secured by an assignment and pledge of the
Purchaser Note, which in turn is secured by an assignment and pledge of the
12,400,000 Magma Shares purchased by the Purchaser pursuant to the Offer and
an additional 200,000 Magma Shares contributed by the Company to the capital
of the Purchaser. 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 the Purchaser and its subsidiaries; a
limitation on guaranties by the Company and the Purchaser; a limitation on
mergers and sales of assets by the Company and its subsidiaries; a limitation
on investments in other persons by the Company and its subsidiaries; a
prohibition on dividends and other payments by the Company and its
subsidiaries to the Company 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 the Purchaser and its subsidiaries; a prohibition on
the incurrence of additional debt by the Purchaser and its subsidiaries; a
requirement that the Company deliver each month a certificate as to the
absence of material adverse changes in (i) the Company and its subsidiaries,
taken as a whole, and (ii) the Purchaser and its subsidiaries, taken as a
whole, which in either case could reasonably be expected to materially affect
the ability of the Company 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 the Company 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 the Company, 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 when due; and the failure of the pledge agreement with
respect to the Magma Shares and the Purchaser Note to be in full force and
effect.

<PAGE>

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
the Company on a non-recourse basis, and the Company will lend the proceeds
of such loans to Magma in exchange for secured term note of Magma (the "Magma
Note"). 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 the Company of the Magma Notes and 100% of the capital stock of
Magma. The Magma Notes 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 the Base
Rate for Term Loan A, and 3.00% above LIBOR (adjusted for reserves) or 2.00%
above the Base Rate for Term Loan B. The LIBOR spreads are subject to upward
adjustment in certain instances. The Company may elect to have the loans bear
interest based on either LIBOR or the Base Rate (as defined in the Merger
Facilities).

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
limitation on dividends and other payments by Magma and its subsidiaries to
the Company unless the proceeds are used to pay down the Merger Facilities in
amounts to be agreed upon; a prohibition 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 the Company deliver
each fiscal quarter a certificate as to the absence of material adverse
changes in the Company or Magma which could reasonably be expected to
materially affect the ability of the Company 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 the Company, 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 the Purchaser in an amount and form satisfactory to Credit
Suisse, and (b) the absence of certain material adverse changes.

The Company 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.

<PAGE>

CAPITALIZATION OF THE COMPANY

MERGER CONSIDERATION CONSISTING OF A COMBINATION OF CASH AND COMMON STOCK

The following table sets forth the consolidated capitalizations of the
Company and Magma at September 30, 1994 and as adjusted to reflect borrowings
of up to $500 million under the Merger Facilities, the purchase by the
Purchaser of all the Magma Shares and the issuance as a part of the Merger
Consideration of shares of Common Stock. The following table should be read
in conjunction with the other pro forma financial information and the
consolidated financial statements and notes thereto of the Company and Magma
contained in this Proxy Statement.

<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1994
-------------------------
PRO FORMA PRO FORMA
COMPANY 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:
Company preferred stock--Series A of no
par value; authorized 2,000 shares ...... -- -- -- --
Company Common Stock of $0.0675 par value;
authorized 60,000 shares; Outstanding
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) Proposal I relates to an increase in the number of authorized shares of
Common Stock to 80,000,000. Outstanding shares (actual and as adjusted) do
not include (i) 9,435,229 shares of Common Stock reserved for issuance
upon the exercise of presently outstanding stock options; (ii) 4,444,444
shares of Common Stock issuable upon the conversion of the Company's 5%
Convertible Subordinated Debentures due July 31, 2000; and (iii) 3,393,197
shares of Common Stock issuable upon conversion of the 1,247 issued and
outstanding shares of the Company'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 the
Company and Magma at September 30, 1994 and as adjusted to reflect borrowings
of up to $500 million under the Merger Facilities, the purchase by the
Purchaser of all the Magma Shares for cash and the sale to the public of
shares of Common Stock offered pursuant to a prospectus filed with the
Commission. The following table should be read in conjunction with the other
pro forma financial information and the consolidated financial statements and
notes thereto of the Company and Magma contained in this Proxy Statement.

<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1994
-------------------------
PRO FORMA PRO FORMA
COMPANY 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:
Company preferred stock--Series A of no
par value; authorized 2,000 shares ...... -- -- -- --
Company Common Stock of $0.0675 par value;
authorized 60,000 shares; outstanding
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 63,492 306,257
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>
- ---------------

The accompanying notes to the pro forma unaudited condensed combined
financial data are an integral part of these statements.

<PAGE>

COMPARISON OF CERTAIN UNAUDITED DATA

MERGER CONSIDERATION CONSISTING OF A COMBINATION OF CASH AND 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 the Company and Magma, (ii) on a pro
forma combined basis of the Company to reflect the Merger and (iii) on an
equivalent pro forma basis per Magma Share assuming that each Magma Share is
converted into cash and 1.337 shares of 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 the Company and Magma and the selected historical and pro forma
financial data, including the notes thereto, appearing elsewhere in this
Proxy Statement . See "PRO FORMA UNAUDITED CONDENSED COMBINED FINANCIAL
DATA."

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMPANY MAGMA ADJUSTMENTS 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 stockholders .... $ 38,444 $ 52,135 $ (47,745) $ 42,834
Net income from continuing operations
available to common stockholders 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 stockholders .... $ 27,688 $ 46,843 $ (35,808) $ 38,723
Net income from continuing operations
available to common stockholders per
common share
Assuming no dilution ................. $ 0.77 $ 1.95 $ -- $ 0.75
Assuming full dilution ............... $ 0.76 $ 1.95 $ -- $ 0.73
Weighted average number of common
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
</TABLE>

<PAGE>

<TABLE>
<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 the Company as
displayed above will also receive a portion of their consideration in
cash, which can be reinvested.

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 the Company and Magma, and (ii) on a
pro forma combined basis of the Company 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 the Company and Magma and the selected historical and pro
forma financial data, including the notes thereto, appearing elsewhere in
this Proxy Statement. See "PRO FORMA UNAUDITED CONDENSED COMBINED FINANCIAL
DATA."

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMPANY MAGMA ADJUSTMENTS 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 stockholders .............................. $ 38,444 $ 52,135 $ (46,982) $ 43,597
Net income from continuing operations available to
common stockholders 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 stockholders .............................. $ 27,688 $ 46,843 $ (35,236) $ 39,295
Net income from continuing operations available to
common stockholders 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 ................................ 775,534 201,323 500,000 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 THE COMPANY

The following table sets forth selected historical consolidated financial
and operating data, which should be read in conjunction with "THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO" and "THE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." The unaudited consolidated financial statements of the Company
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 the Company.

<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
========== ========= ========== ========== ========== ========= ==========
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
</TABLE>

<PAGE>

<TABLE>
<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 the Company'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, the Company 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

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" and "MAGMA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- ----------------------
1989 1990 1991 1992 1993 1993 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES)
<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 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
</TABLE>

<TABLE>
<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
</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 dilutive 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>

BUSINESS OF THE COMPANY AND MAGMA
AND RELATED INFORMATION

GENERAL

THE COMPANY

The Company was founded in 1971 to develop geothermal power production
facilities. The Company 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.

Following completion of the Merger, the Company will be the largest
independent geothermal power producer in the world (on the basis of aggregate
MW of electric generating capacity in operation and under construction). The
Company will have an aggregate net ownership interest of 354 MW of electric
generating capacity in power production facilities in the United States
having an aggregate net capacity of 571 MW. All of these facilities will be
managed and operated by the Company and are principally located in Southern
California. In addition to the electricity sales revenue earned from its net
ownership position in such facilities, the Company receives significant fee
and royalty income from operating such plants and managing the production
from the geothermal reservoirs for such facilities. The Company will have an
aggregate net ownership interest of 409 MW of electric generating capacity in
three geothermal power projects in the Philippines, having an aggregate net
capacity of 500 MW, which projects are financed and under construction. The
Company is also developing eight additional projects with executed or awarded
power sales contracts in the Philippines, Indonesia and the United States.
The Company will have an approximate net ownership interest of 935 MW in
these development projects representing an aggregate net capacity of 1,589 MW
of additional potential electric generating capacity.

PKS is an approximate 44% stockholder of the Company (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 initial PKS
investment in the Company in 1991 (which at that time represented
approximately 25% of the Common Stock on a fully diluted basis), a new
management team has been installed and the Company's net income has increased
from $12 million for the 12-month period ended December 31, 1990 to $29.4
million for the nine-month period ended September 30, 1994.

The principal executive offices of the Purchaser and the Company are
located at 10831 Old Mill Road, Omaha, Nebraska 68154 and their telephone
number is (402) 330-8900. The Purchaser is a wholly owned subsidiary of the
Company and has not conducted any business except in connection with the
Offer. The Company and the Purchaser were incorporated in 1971 and 1994,
respectively, under the laws of the State of Delaware.

Magma's principal executive offices are located at 4365 Executive Drive,
Suite 900, San Diego, California 92121, and its telephone number is (619)
622-7800.

REASONS FOR THE MERGER

The Company believes that Magma is an excellent strategic fit and that the
acquisition of Magma will create significant benefits, including:

o EXPANSION AND ENHANCEMENT OF DEVELOPMENT EFFORTS

Development of new opportunities, particularly internationally, is a key
component of the Company's strategy. Since 1990, the Company 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, the Company 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.

<PAGE>

Furthermore, the Company will have available to it technology of both
companies. The Company owns production technology compatible with the
relatively low mineral content of its wells at the Coso Project, and Magma
owns technology compatible with the high levels of mineral precipitates found
in the geothermal resource at the Salton Sea Projects. The Company 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.

o BENEFITS OF INCREASED SIZE

The Company believes that size is an important factor in determining the
success of an independent power producer. This view is based on the Company's
belief that potential customers consider both the price of power and the
provider's capacity to fulfill its obligations as primary factors in the
selection of power suppliers. The expanded size and capabilities of the
combined companies is expected to further enhance the Company's reputation
and credibility with sovereign governments and state utility customers and
therefore enhance its ability to successfully compete for new projects.
Following the Merger, the Company will have over $2 billion of total assets
and an aggregate net ownership interest of 1,698 MW of electric generating
capacity in projects in operation, under construction or in development,
which projects have an aggregate net generating capacity of 2,770 MW. The
Company also believes that the combination with Magma will create the
opportunity to reduce the Company's average cost per kWh by expanding its
asset base, without materially expanding its cost structure. This will allow
the Company to be more price competitive with other geothermal power
producers and traditional fossil fuel power plants, which the Company
believes will be its primary competition in the future.

o OPPORTUNITIES FOR OPERATIONAL AND ADMINISTRATIVE COST SAVINGS

Based in part on its experience in restructuring the operations of the
Company since 1991, management of the Company believes that it can achieve
meaningful cost savings upon the combination of Magma and the Company.
Through the implementation of the Company's existing organizational
structure, management policies and cost controls, the Company presently
expects that the cost of duplicate functions will be substantially eliminated
and that the productivity of its combined operating and administrative staff
will be significantly increased.

o DIVERSIFICATION IN SOURCES OF REVENUE AND OPERATIONS

The combination of the Company's and Magma's operations will increase the
Company's sources of revenue and increase the number of operating sites
(including projects under construction) from eight to 16. The Company
believes that the resulting diversification in sources of revenue and
operations can be expected to reduce the risk profile of the Company, thereby
enhancing its overall credit position and improving its access to capital in
relation to competitors with more concentrated sources of revenue 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.

<PAGE>

GEOTHERMAL ENERGY

#############################################################################

IMAGE OMITTED:

[Schematic representing Geothermal Energy]

(SEE ALSO "APPENDIX FOR GRAPHICS AND IMAGE MATERIAL"
AFTER LAST PAGE OF THESE PROXY MATERIALS.)

#############################################################################

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, 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.

<PAGE>

AREAS OF POTENTIAL GEOTHERMAL ACTIVITY

#############################################################################

IMAGE OMITTED:

[Map depicting areas of Potential Geothermal Energy]

(SEE ALSO "APPENDIX FOR GRAPHICS AND IMAGE MATERIAL"
AFTER LAST PAGE OF THESE PROXY MATERIALS.)

#############################################################################

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 as well as
to lessen reliance on imported fuels. 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 been placed in
service 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 through 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 in
the United States, and the terms and conditions of any such contract may be
less favorable than those in prior agreements.

Large amounts of new electric power generating capacity are required in
developing countries. The movement toward privatization in some developing
countries has created significant new markets outside the United States. 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. The Company believes that this significant need for power has
created strong local support for private power

<PAGE>

projects in many foreign countries and increased the availability of
attractive long-term power contracts. The Company intends to take advantage
of opportunities in these new markets and to develop, construct and acquire
power generation projects outside the United States.

STRATEGY

Domestically, the Company is focusing on market opportunities in which it
believes it has relative competitive advantages due to its geotechnical,
project management and operating expertise. In addition, the Company 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.

The Company 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,
the Company pursues development opportunities in countries which it believes
have an acceptable risk profile and where the Company'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. Subsequent to the Merger, the Company will have
financed and have under construction three projects representing an aggregate
of 409 MW of net ownership of electric generating capacity in the
Philippines. In addition, the Company is currently pursuing a number of other
electric power project opportunities in countries including the Philippines
and Indonesia. These countries are ideally suited for the Company to develop,
finance and operate power projects successfully because of their excellent
population demographics, extensive geothermal resources and stated
commitments to the development of private power programs. The Company'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, the Company 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, the Company intends to own a
significant equity interest in, and to operate, the projects it develops or
acquires. In order to compete more effectively internationally, the Company'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. The Company
also believes that it is important in foreign transactions to work with local
partners who are knowledgeable concerning local culture, politics and
commercial practices and who provide a visible local presence and local
project representation.

With respect to emerging market projects, the Company'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 date, all of the Company's executed power
contracts contain provisions which index the Company's returns to U.S.
dollars or provide for the payment of capacity payments in U.S. dollars. To
the extent possible, the Company attempts to secure "political risk"
insurance from the Overseas Private Insurance Corporation ("OPIC") or similar
multilateral agencies to limit its risk in emerging market countries. In
addition, the Company endeavors to involve the World Bank, export credit
agencies or multilateral funding sources in its international project
financings. The Company 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. The Company believes that the involvement of these institutions
will enhance an international project's position in emerging market
countries.

The Company has an international joint venture agreement with PKS which
the Company believes enhances the Company's capabilities in foreign power
markets. The joint venture agreement is limited to international activities
and provides that if both the Company and PKS agree to participate in a
project,

<PAGE>

they will share all development costs equally. Each of the Company and PKS
will provide 50% of the equity required for financing a project developed by
the joint venture and the Company will operate and manage such project. The
agreement creates a joint development structure under which, on a project by
project basis, the Company 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 the Company
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

Upon completion of the Merger, the Company will have net ownership
interests of an aggregate of (i) 354 MW in 13 projects in operation
representing an aggregate net capacity of 571 MW of electric generating
capacity, (ii) 409 MW 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 the Company's
various projects in operation, under construction and in the latter stages of
development pursuant to signed power sales agreements or awarded mandates in
each case subsequent to the Merger.

<PAGE>

INTERNATIONAL PROJECTS

PROJECTS UNDER CONSTRUCTION
<TABLE>
<CAPTION>
FACILITY FACILITY NET PROJECTED
GROSS NET OWNERSHIP COMMERCIAL POWER
CAPACITY CAPACITY INTEREST OPERATION CONTRACT CONTRACT PURCHASER
PROJECT IN MW(1) (IN MW)(2) (IN MW) LOCATION DATE EXPIRATION(3) TYPE (4)
- ---------------- ---------- ---------- ----------- ------------- ------------ ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Upper Mahiao ... 128 119 119 Leyte, the 1996 CO+10 Build, PNOC- EDC
Philippines Own, (GOP)(5)
Transfer
Mahanagdong(6) . 180 165 74 Leyte, the 1997 CO+10 Build, PNOC- EDC
Philippines Own, (GOP)(5)
Transfer
Malitbog-Phase I Leyte, the 1996-1997 CO+10 Build, PNOC- EDC
and II ........ 231 216 216 Philippines Own, (GOP)(5)
Transfer
Total Under 539 500 409
Construction ..
========== ========== ===========
<CAPTION>
PROJECTS WITH SIGNED POWER SALES CONTRACTS OR AWARDED DEVELOPMENT RIGHTS

FACILITY
FACILITY NET NET PROJECTED
GROSS CAPACITY OWNERSHIP COMMERCIAL POWER
CAPACITY (IN INTEREST OPERATION CONTRACT CONTRACT PURCHASER
PROJECT (IN MW)(7) MW)(2)(7) (IN MW)(7) LOCATION DATE EXPIRATION TYPE (4)
- --------------- ---------- ---------- ----------- -------------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dieng(6) ....... 400 400 188 Central Java, 1997-1999 CO+30 Build, PLN (GOI)
Indonesia Own,
Transfer
Patuha(6) ...... 400 400 140 Western Java, 1997-1999 CO+30 Build, PLN (GOI)
Indonesia Own,
Transfer
Casecnan(8) ... 140 140 98 Luzon, the 1998 CO+20 Build, NIA
Philippines Own, (GOP)(5)
Transfer
Bali(8)(9) ..... 350 350 210 Bali, 1998-1999 CO+30 Build, PLN (GOI)
Indonesia Own,
Transfer
Alto Peak ...... 70 70 70 Leyte, the 1997 CO+10 Build, PNOC- EDC
Philippines Own, (GOP)(5)
Transfer
Total
Contracted/
Awarded ....... 1,360 1,360 706
---------- ---------- -----------
Total
International
Projects ...... 1,899 1,860 1,115
---------- ---------- -----------
<FN>
- ---------------
(1) Actual MW may vary depending on operating reservoir conditions and
plant design. Facility Gross Capacity (in MW) for projects under
construction represents gross electric output of the facility prior
to subtraction of the parasitic load. Parasitic load is electrical
output used by the facility and not made available for sale to
utilities or other outside purchasers. Facility Gross Capacity (in
MW) does not necessarily reflect electric output available for sale
to utilities or other purchasers.
(2) Facility Net Capacity (in MW) represents Facility Gross Capacity (in
MW) less parasitic load.
(3) Commercial Operation (CO).
(4) Philippine National Oil Company-Energy Development Company
(PNOC-EDC); Government of the Philippines (GOP); P.T. PLN
(Persero)(PLN); Government of Indonesia (GOI); and Philippine
National Irrigation Administration (NIA).
(5) Government of the Philippines undertaking supports PNOC-EDC's and
NIA's respective obligations.
(6) PKS has elected to exercise its ownership option pursuant to its
joint venture agreement with the Company.
(7) Actual MW may vary depending on operating and reservoir conditions
and final plant design. Facility Gross Capacity (in MW) for awarded
projects equals maximum sales amount. Significant contingencies exist
in respect of awards, including without limitation, the need to
obtain financing, permits and licenses, and the completion of
construction.
(8) PKS has not indicated whether it intends to exercise its ownership
option pursuant to its joint venture agreement with the Company and
such net ownership interest remains subject to the PKS option. The
Casecnan Project is a combined hydroelectric and irrigation project
and will also sell water to NIA.
(9) Geothermal resource development rights have been awarded and the
power sales contract is subject to negotiation.
</TABLE>

<PAGE>

DOMESTIC PROJECTS

PROJECTS IN OPERATION(1)

<TABLE>
<CAPTION>
FACILITY
FACILITY NET NET
GROSS CAPACITY OWNERSHIP DATE OF POWER
CAPACITY (IN INTEREST COMMERCIAL CONTRACT CONTRACT PURCHASER
PROJECT (IN MW)(1) MW)(2)(3) (IN MW) LOCATION OPERATION EXPIRATION TYPE (5)
- ------------------- ---------- ---------- ----------- ---------------- ------------ ------------ ------------ -----------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Navy I ............. 96 88 41 China Lake, CA 8/1987 8/2011 SO4 SCE
BLM ................ 96 88 42 China Lake, CA 3/1989 3/2019 SO4 SCE
Navy II ............ 96 88 44 China Lake, CA 1/1990 1/2010 SO4 SCE
Vulcan ............. 41 34 17 Imperial Valley, 2/1986 2/2016 SO4 SCE
CA
Hoch (Del Ranch) .. 46 38 19 Imperial Valley, 1/1989 12/2018 SO4 SCE
CA
Elmore ............. 46 38 19 Imperial Valley, 1/1989 12/2018 SO4 SCE
CA
Leathers ........... 46 38 19 Imperial Valley, 1/1990 12/2019 SO4 SCE
CA
Salton Sea I ....... 11 8 8 Imperial Valley, 7/1987 6/2017 Negotiated SCE
CA
Salton Sea II ...... 20 18 18 Imperial Valley, 4/1990 4/2020 SO4 SCE
CA
Salton Sea III ..... 54 50 50 Imperial Valley, 2/1989 2/2019 SO4 SCE
CA
Yuma Cogen ......... 55 50 50 Yuma, AZ 5/1994 5/2024 Negotiated SDG&E
Roosevelt Hot
Springs ........... 25 23 17 Milford, UT 5/1984 1/2021 Gathered UP&L
Steam
Desert Peak ........ 10 10 10 Desert Peak, NV 12/1985 12/1995 Negotiated SPPC Power

---------- ---------- ----------- ---------------- ------------ ------------ ------------ -----------

Total in Operation 642 571 354
========== ========== ===========
</TABLE>

PROJECTS WITH SIGNED POWER SALES CONTRACTS OR AWARDED DEVELOPMENT RIGHTS

<TABLE>
<CAPTION>
FACILITY
FACILITY NET NET PROJECTED
GROSS CAPACITY OWNERSHIP COMMERCIAL POWER
CAPACITY (IN INTEREST OPERATION CONTRACT CONTRACT PURCHASER
PROJECT (IN MW)(5) MW)(2)(5) (IN MW) LOCATION DATE EXPIRATION TYPE (5)
- ------------------ ---------- ---------- ----------- ---------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BRPU(7) ........... 163 163 163 Imperial Valley, TBD TBD FSO4 SCE
CA
Fish Lake(8) ...... 36 36 36 Imperial Valley, est. 1996 CO+30 Negotiated SCE
CA
Newberry .......... 30 30 30 Bend, OR est. 1997 CO+50 Negotiated BPA/EWEB
---------- ---------- ----------- ---------------- ------------ ------------ ------------ -----------
Total
Contracted/Awarded 229 229 229
---------- ---------- -----------
Total Domestic
Projects ......... 871 800 583
---------- ---------- -----------
Total Projects ... 2,770 2,660 1,698
========== ========== ===========
<FN>
- ---------------
(1) In addition to the electricity sales revenue earned from its net
ownership position in such facilities, the Company receives
significant fee and royalty income from operating such plants and
managing the production from the geothermal reservoirs for such
facilities.

(2) Actual MW may vary depending on operating and reservoir conditions
and plant design. Facility Gross Capacity (in MW) for projects in
operation represents gross electric output of the facility prior to
subtraction of the parasitic load. Parasitic load is electrical
output used by the facility and not made available for sale to
utilities or other outside purchasers. Facility Gross Capacity (in
MW) does not necessarily reflect electric output available for sale
to utilities or other outside purchasers.

(3) Facility Net Capacity (in MW) represents Facility Gross Capacity (in
MW) less parasitic load.

(4) 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.

(5) Southern California Edison Company (SCE); San Diego Gas & Electric
Company (SDG&E); Utah Power & Light Company (UP&L); Sierra Pacific
Power Company (SPPC); Bonneville Power Authority (BPA); and Eugene
Water and Electric Board (EWEB).

(6) Actual MW may vary depending on operating and reservoir conditions
and final plant design. Facility Gross Capacity (in MW) for awarded
projects equals maximum sales amount. Significant contingencies exist
in respect of awards, including without limitation, the need to
obtain financing, permits and licenses, and the completion of
construction.

(7) SCE is contesting the BRPU award; accordingly, no power sales
contract is currently signed.

(8) Combined Fish Lake and Salton Sea Expansion.
</TABLE>

<PAGE>

INTERNATIONAL PROJECTS--DISCUSSION

PROJECTS IN CONSTRUCTION

The Philippines. The Company 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 Philippine 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 1994, certain amendments to
Republic Act No. 6957 were approved by the Philippine Congress and signed
into law (R.A. 7718). Among other things, such amendments provide for the
financing of "unsolicited proposals" on a "build-operate-transfer" basis.

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.

The Company 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 the Company's aggregate net ownership interest
is 409 MW subsequent to the Merger.

<PAGE>

MAP OF THE PHILIPPINES

#############################################################################

IMAGE OMITTED:

[Map of the Republic of the Philippines with Project locations]

(SEE ALSO "APPENDIX FOR GRAPHICS AND IMAGE MATERIAL"
AFTER LAST PAGE OF THESE PROXY MATERIALS.)

#############################################################################

Upper Mahiao. The Company has closed the financing and commenced
construction of the Upper Mahiao Project, a 128 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 the Company. 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 ExIm Bank. The
Company's equity contribution to the Upper Mahiao Project is $56 million.
Subject to the pledge of the project company's stock to the lenders, the
Company 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 "Upper Mahiao EPC"), 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 Upper Mahiao EPC provides liquidated damage protection
of up to 30% of the Upper Mahiao EPC price. Ormat's performance under the
Upper Mahiao EPC is substantially backed by a completion guaranty of Ormat,
by letters of credit, and by a limited guaranty of Ormat Industries, Ltd., an
Israeli corporation and the parent of Ormat, in each case for the benefit of
the project lenders.

<PAGE>

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 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 U.S. dollars and paid in Philippine pesos at the then-current
exchange rate, except for the Energy Fee, which will be used to pay
Phillipine peso-denominated expenses. The convertibility of Phillipine 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 supported by the Government of
the Philippines through a performance undertaking.

The payment of the Capacity Fee 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. The Company 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 the Company and 50% by PKS. Up to a 10% financial interest in CE
Luzon may be sold at completion to another industrial company at the option
of such 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 capital structure consists of

<PAGE>

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. The Company'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,
the Company 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"). The obligations of the EPC Consortium
under the Mahanagdong EPC are supported by a guaranty of KCG at an aggregate
amount equal to approximately 50% of the Mahanagdong EPC 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
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. The Company has provided a guaranty of BHCO's
obligations under the Mahanagdong EPC Contract.

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. At the end
of the cooperation period, the facility will be transferred to PNOC-EDC at no
cost. All of PNOC-EDC's obligations under the Mahanagdong ECA are supported
by the Government of 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 approximately $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 was $70 million. Magma's
equity participation is covered by political risk insurance from OPIC.

The Malitbog Project will be constructed by Sumitomo Corporation
("Sumitomo") pursuant to a fixed-price, date-certain, turnkey supply and
construction contract (the "Malitbog EPC"). The Malitbog EPC provides that
certain liquidated damages will be paid by Sumitomo for failure to meet
certain scheduled performance test dates, including the payment of any
liquidated damages or penalties required to be paid by VGPC to PNOC-EDC under
an energy conversion agreement (the "Malitbog ECA") (subject to limitations
on the total amount of liquidated damages payable by Sumitomo). The Malitobg
EPC also provides for the payment of certain liquidated damages on a per unit
basis if upon completion of the facility, tests do not demonstrate such
unit's ability to operate at a net generating capacity of at least 74.1 MW.
The liquidated damages for each generating unit are capped at 13 1/3 % of the
total Malitbog EPC price. 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 Malitbog EPC.

<PAGE>

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
Investors Service, Inc. ("Moody's"). The Malitbog EPC 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 in July 1996, and commercial operation of unit 2 and
unit 3 scheduled to commence in July 1997.

The terms of the 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.
The cooperation period is ten years from the completion of unit 3. At the end
of the cooperation period, the facility will be transferred to PNOC-EDC at no
cost. All of PNOC-EDC's obligations under the Malitbog ECA are supported by
the Government of 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, the Company 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 (Cagayan) watershed in Northern
Luzon to the Pampanga watershed and the Pantabangan Reservoir for irrigation
use in the Central Luzon Valley. The Casecnan Multipurpose Project, which has
satisfied the requirements for an unsolicited proposal under the amended BOT
law, 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 Project and 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
Casecnan Multipurpose Project will be transferred to NIA at no cost. The
Company anticipates commencing construction in 1995.

Completion of such Project remains subject to a number of significant
uncertainties, including arranging financing, obtaining certain required
permits and licenses and completing construction, none of which can be
assured.

Alto Peak. The Alto Peak Project is a smaller geothermal project in the
same general area of Leyte as the Upper Mahiao, Mahanagdong and Malitbog
Projects. 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 such project. Consequently, Magma has not commenced financing
arrangements for the Alto Peak Project.

Indonesia. Indonesia, which has the world's fourth largest population, has
experienced rapid growth in electricity demand. The Company believes that
load growth has exceeded 13% since 1980. Furthermore, the Company 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 liquified natural gas, 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.

<PAGE>

The Indonesian state-owned utility, has recently been converted to a
limited liability company, P.T. PLN (Persero) ("PLN"), as a first step toward
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 (more than 50% of
which have been reported to 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" by Moody's and "BBB-" by Standard & Poor's
Ratings Group ("S&P"). The Company believes that Indonesia represents an
attractive development opportunity, as it combines growing power needs with
ample geothermal resources and creditworthy contract parties.

<PAGE>

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The following is a summary description of certain information concerning
the Company'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 the Company's efforts
generally, will be successful.

Dieng. On December 2, 1994, a subsidiary of the Company 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 the Company 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 the Company 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 the Company 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 effectiveness of the Dieng JOC 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

<PAGE>

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 the Company 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.

The Company 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. The Company
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 Project is estimated to approximate $1
billion. The Company anticipates a consortium consisting of KCG and BHCO will
submit a proposal for the design and construction of the Dieng Project, and
that the Company, 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. The Company 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. The Company is also developing a geothermal power plant with
respect to the Patuha geothermal field in Java, Indonesia (the "Patuha
Project"). The Company has entered into a joint venture (the "Patuha Joint
Venture") 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 the Company 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 and an energy sales contract, 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. The
Company estimates that the total cost will be approximately $1 billion. The
Company 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. The Company and PT Panutan 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 (the "Bali Project") and to
obtain a power sales contract from PLN.

The Company 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
the Company will pursue the Bali Project or that it will proceed or reach
commercial operation.

<PAGE>

DOMESTIC PROJECTS--DISCUSSION

MAP OF THE WESTERN UNITED STATES

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PROJECTS IN OPERATION

The Coso Project. In 1979, the Company 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, the Company 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.
The Company 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 Project").

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"). The Company holds ownership interests of approximately 46% in
the Navy I Partnership; approximately 48% in the BLM Partnership, after
payout to the Company and Caithness; and 50% in the Navy II Partnership. The
Company consolidates its respective share of the operating results of the
Coso Partnerships into its financial statements. In addition, the Company
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.

<PAGE>

Each of the Coso Joint Ventures is managed by a management committee which
consists of two representatives from the Company and two representatives from
the Company's partners. The Company operates the Coso Project, for which it
receives fees from the Coso Partnerships.

The Coso Project sells 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 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 11.0cents per kWh in 1994 to 14.6cents
per kWh in 2000. The Company'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 Navy I, BLM and Navy II 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. Based on an assumed
net capacity of 80 MW, the Navy I Project 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.

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. Based on an assumed
capacity of 80 MW, the BLM Project 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.

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. Based on an assumed
capacity of 80 MW, the Navy II Project 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.

In December 1992, the Coso Joint Ventures refinanced the existing bank
debt on the Coso Project 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 "Baa3" by Moody's, "BBB-" by S&P 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 the Company. Coso
Funding may look solely to each Coso Partnership's pledged assets for
satisfaction of such Coso Partnership's loan. In addition, the 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.

<PAGE>

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 the
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 Project plant. In the case of the other three
Partnership Project plants, Magma owns the geothermal resources and receives
royalty payments from the Del Ranch, Elmore and Leathers Partnerships. In the
first nine months of 1994, such royalties together with the royalties from
the East Mesa Plant and Mammoth Plants (as defined below) totaled $15.1
million. Magma's share of the aggregate electricity 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 Project plant into its financial statements. A subsidiary of
Magma operates each of the Salton Sea Project plants and the Partnership
Project plants.

The Salton Sea Projects operated at a combined contract nameplate 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 contract nameplate 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, respectively.
Under the SO4 Agreement, SCE is obligated to pay the Vulcan Project a
capacity payment, a capacity bonus payment and an energy 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 Avoided Cost of
Energy. The energy payment per kWh is 10.9cents for 1994, 11.8cents for 1995
and 12.6cents 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 contract
capacity and contract nameplate are 34 MW and 38 MW, respectively. The
provisions of such SO4 Agreement are substantially the same as 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 payments per kWh for the first ten-year period, which
expires on December 31, 1998, are fixed at rates ranging from 10.9cents for
1994 to 14.6cents for 1998. Thereafter, the energy payments will be based on
SCE's 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 contract capacity and
contract nameplate are 34 MW and 38 MW, respectively. The provisions of such
SO4 Agreement are substantially the same as 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 energy payments per kWh 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 Avoided Cost of Energy.

<PAGE>

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 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 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 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 energy payments are based on SCE's
Avoided Cost of Energy.

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 contract capacity and contract nameplate are each 10 MW. The Salton
Sea I Project may add subsequent increments of contract capacity (subject to
notification requirements) the sum of which may not exceed 20 MW (the "Salton
Sea I 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 Salton Sea I PPA. 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 PPA 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 and contract nameplate are 15 MW and 18 MW,
respectively. 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. Thereafter, the monthly energy payments will be SCE's
Avoided Cost of Energy. For the period April 1, 1994 through March 31, 2004,
SCE is entitled to receive, at no cost, 5% of all energy delivered in excess
of 80% of contract capacity.

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 contract nameplate is 50 MW. The SO4 Agreement requires SCE
to make capacity payments, capacity bonus payments and energy payments for
the life of the SO4 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 payments 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

<PAGE>

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
million with an initial maturity date of February 27, 1995.

Yuma. During 1992, the Company 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 of Energy. 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, the Company 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 the Company
believes it would obtain QF status. A natural gas supply and transportation
agreement has been executed with Southwest Gas Corporation, terminable under
certain circumstances by the Company and Southwest Gas Corporation. The Yuma
Project is unleveraged other than intercompany debt.

Roosevelt Hot Springs. The Company 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. The
Company 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. The Company must make certain penalty payments to UP&L if
the steam produced does not meet certain quantity and quality requirements.

Desert Peak. The Company 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 4.5cents per
kWh. The Company is currently negotiating the terms of an extension to this
contract.

Mammoth Plants. Magma receives royalty revenues from a 10 MW and a 12 MW
contract nameplate 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 for the Mammoth Plants is
50% of the excess of annual gross electricity sales revenues over an annual
revenue standard based on the Mammoth Plants operating at 85% of contract
capacity.

The East Mesa Plant. Magma also receives royalty revenues from a 37 MW
contract nameplate geothermal power plant (with two units) at East Mesa in
Imperial Valley, California (the "East Mesa Plant"). Electricity from the
plant is sold to SCE pursuant to two SO4 Agreements formerly held by

<PAGE>

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 payments as royalty income.

PROJECTS IN DEVELOPMENT

The BRPU Process. Magma is seeking new long-term final standard offer no.
4 power purchase agreements 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-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 is a 30-year contract providing for a contract capacity
of 14 MW and a contract nameplate 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 kW-year. The capacity portion (plus bonus
capacity) of such revenues is levelized at approximately 2.5cents 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 will be based on 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 ISO4, 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 30-year power purchase agreement (the "Amended
PPA") in conjunction with the Salton Sea I PPA.

If approved, the Amended PPA will consolidate the Salton Sea I 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, the Company is developing a 30 MW net geothermal project within the
Newberry known geothermal resource area of Deschutes County, 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, the Company has agreed to sell 20 MW to BPA and
10 MW 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 Newberry Project under certain
circumstances. In a public-private development effort, the Company is
responsible for development, permitting, financing, construction and
operation of the project (which will be 100% owned by the Company), 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.

<PAGE>

REGULATORY AND ENVIRONMENTAL MATTERS

Environmental Regulation. The projects of the Company 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 the Company and Magma believes
that the other projects of the Company 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 the Company and Magma conduct their businesses.

Federal Energy Regulations. The principal federal regulatory legislation
relating to the Company'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 the Company'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
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.

The Company'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. The Company has obtained certain permits, approvals
and certificates necessary for the current exploration, development and
operation of its projects. Similar permits,

<PAGE>

approvals and certificates will be required for any future expansion of the
Coso Project and for any development of the Company's other geothermal
properties or for other power project development by the Company. Such
compliance is costly and time consuming, and may in certain instances be
dependent upon factors beyond the Company's control.

The Company 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 the
Company's current operations or delay the development of new geothermal
properties, or which may otherwise have an adverse impact on the Company.

EMPLOYEES

As of December 31, 1993, the Company 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 the Company 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.

<PAGE>

PROPERTIES

The Company's most significant physical properties are its four operating
power facilities and its related real property interests. The Company 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
the Company owns the approximately 42 acre site in Yuma, Arizona where the 50
MW gas fired cogeneration facility is being constructed.

The Company owns a one-story office building in Omaha, Nebraska, which
houses it principal executive offices. The Company 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 the Company'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 (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 the Company nor Magma is a party to any material legal
proceedings.

<PAGE>

THE COMPANY 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, the Company 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 SEPTEMBER
30 NINE MONTHS ENDED 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.

<PAGE>

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):

<TABLE>
<CAPTION>
CAPACITY
THREE MONTHS ENDED ENERGY AND BONUS TOTAL
- -------------------- -------- ----------- --------
<S> <C> <C> <C>
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*
<FN>
- ----------
* Represents annualized price per kWh. Typically, the capacity price is
significantly higher in the months June through September.
</TABLE>

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. The Company has an approximate 70% interest in the
Roosevelt Hot Springs field.

The Desert Peak power plant operated at 101.1% of its nine net megawatt
capacity in the third quarter of 1994. For the nine months ended September
30, 1994, the Desert Peak plant capacity factor was 105.5%.

Interest and other income increased in the third quarter of 1994 to $9,026
from $4,824 for the same period in 1993. For the nine months ended September
30, interest and other income increased to $21,980 in 1994 from $12,294 for
the same period in 1993. The increase primarily reflects interest income on
higher average cash balances from the issuance of the Senior Discount Notes.

The Company's expenses as a percentage of sales of electricity and steam
were as follows:

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER ENDED SEPTEMBER
30 30
---------------- ----------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
Plant operations (net of the Company's
operator fees) ....................... 17.5% 11.5% 17.3% 15.4%
General and administration ............ 6.5% 5.7% 8.1% 8.5%
Royalties ............................. 7.1% 7.3% 6.7% 6.5%
Depreciation and amortization ......... 11.4% 10.5% 13.2% 12.9%
Interest (less amounts capitalized) .. 31.4% 15.7% 31.5% 17.0%
------- ------- ------- -------
73.9% 50.7% 76.8% 60.3%
</TABLE>

<PAGE>

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.

The provision for income taxes decreased to $6,340 in the third quarter of
1994 from $7,493 in the third quarter of 1993, a 15.4% decrease. For the nine
months ended September 30, the provision for income taxes decreased to
$14,067 in 1994 from $14,295 in 1993, a 1.6% decrease. The decreases are due
to a lower income before tax attributable to higher interest costs as
previously discussed.

The Company's effective 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

<PAGE>

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 the Company'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 the Company'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):

<TABLE>
<CAPTION>
ENERGY CAPACITY & BONUS TOTAL
-------- ---------------- -------
<S> <C> <C> <C>
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
</TABLE>

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
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 the Company's share of the cash reserves established
in the refinancing of the Coso Project debt in December 1992.

<PAGE>

The Company's cost per kWh* was as follows (in cents):

<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Plant operations (net of the Company'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
====== ====== ======
<FN>
- ----------
* Cost per kWh includes electrical production from the Desert Peak
facility and the electrical production equivalent of the Company's share of
geothermal steam produced at the Roosevelt Hot Springs field, acquired in
March and January 1991, respectively.
</TABLE>

The Company's expenses* as a percentage of sales of electricity and steam
were as follows:

<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Plant operations (net of the Company'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%
======= ======= =======
<FN>
- ---------
* 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.
</TABLE>

The Company'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, the Company'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

<PAGE>

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 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 the Company'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 the Company's
repurchase of Common Stock during 1992 at an average price of approximately
$12.00 per share. The Company purchased 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

The Company's cash and investments were $316,349 at September 30, 1994 as
compared to $127,756 at December 31, 1993. In addition, the Company's share
of Coso Project retained cash and investments in project control accounts at
September 30, 1994 and December 31, 1993 was $27,088 and $14,943,
respectively. Distributions out of the project control account are made
monthly to the Company for operation and maintenance and capital costs and
semiannually to each Coso Joint Venture partner for profit sharing under a
prescribed calculation subject to mutual agreements by the partners. In
addition, the Company recorded separately restricted cash and short-term
investments of $127,380 and $48,105 at September 30, 1994 and December 31,
1993, respectively. The restricted balances were comprised primarily of
amounts deposited in restricted accounts from which the Company will source
its equity contribution requirements relating to the Upper Mahiao and
Mahanagdong projects and of its proportionate share of Coso Project cash
reserves for a debt service reserve fund. The Coso Project established these
reserves in conjunction with the refinancing of its previous bank debt.

In March 1994, the Company issued $400,000 of 10 1/4 % Senior Discount
Notes which accrete to an aggregate principal amount of $529,640 at maturity
in 2004. The original issue discount (the difference between $400,000 and
$529,640) will be amortized from issue date through January 15, 1997, during
which time no cash interest will be paid on the Senior Discount Notes.
Commencing July 15, 1997, cash interest on the Senior Discount Notes will be
payable semiannually on January 15 and July 15 of each year. The Senior
Discount Notes are redeemable at any time on or after January 15, 1999. The
redemption prices commencing in the twelve month period beginning January 15,
1999 (expressed in percentages of the principal amount) are 105.125%,
103.417%, 101.708%, and 100% for 1999, 2000, 2001, and 2002, respectively,
plus accrued interest through the redemption date in each case. The Senior
Discount Notes are unsecured senior obligations of the Company.

<PAGE>

The Company's Senior Notes in the principal amount of $35,730 which were
due in March 1995, together with the fixed 12% interest due thereon, were
defeased in the first quarter of 1994 in conjunction with the issuance of the
Senior Discount Notes. The 1994 contingent interest component of these Senior
Notes, calculated by reference to the Company's share of available cash flow
from the Coso Project, remains undefeased and outstanding through the end of
the calculation period, December 31, 1994.

In June of 1993, the Company issued $100,000 principal amount of 5%
Convertible Subordinated Debentures ("Debentures") due July 31, 2000. The
Debentures are convertible into shares of 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 the Company. The redemption prices
commencing in the twelve month period beginning July 31, 1996 (expressed in
percentages of the principal amount) are 102%, 101%, 100% and 100% for 1996,
1997, 1998 and 1999, respectively. The Debentures are unsecured general
obligations of the Company and subordinated to all senior indebtedness of the
Company.

In December 1992, the Company entered into an agreement with Community
Energy Alternatives Incorporated ("CEA") to purchase CEA's interest in the
Coso Project for $9,800. The terms of the agreement granted the Company's
Coso Project Joint Venture Partner an option to purchase the CEA interest for
a price which provided the Company with a 17% per annum return for the period
the Company owned the CEA interest. In April 1994, the Coso Project Joint
Venture Partner purchased the CEA interest from the Company for the defined
price.

In May 1994, pursuant to a special antidilution provision of the 1991
Stock Purchase Agreement between the Company and Kiewit Energy Company, the
Company increased Kiewit Energy Company's existing option (granted in 1991)
to purchase 3 million shares at $12 per share by an additional 289,163 shares
as a final adjustment under such provision.

Proceeds from options for shares of common and treasury stock exercised in
the nine months ended September 30, 1994 aggregated approximately $677.

As of September 30, 1994 the Company has repurchased 3,420 shares of
Common Stock at a cost of $59,516. This repurchase provides shares for
issuance under the Company's employee stock option and share purchase plans
and other outstanding convertible securities. The shares may also be used for
any future convertible securities or employee benefit plans.

The Company is actively seeking to develop, construct, own and operate new
power projects utilizing geothermal and other technologies, both domestically
and internationally, the completion of any of which is subject to substantial
risk. Development can require the Company to expend significant sums for
preliminary engineering, field development, permitting, legal and other
expenses in preparation for competitive bids which the Company may not win or
before it can be determined whether a project is feasible, economically
attractive or capable of being financed. Successful development is contingent
upon, among other things, negotiation of construction, fuel supply and power
sales contracts with other project participants on terms satisfactory to the
Company, and receipt of required governmental permits and consents. Further,
there can be no assurance that the Company will obtain access to the
substantial debt and equity capital required to develop and construct
electric power projects or to refinance projects for which the Company has
provided initial construction financing. The Company's future growth is
dependent, in large part, upon the demand for significant amounts of
additional electrical generating capacity and the Company's ability to obtain
contracts to supply portions of this capacity. There can be no assurance that
development efforts on any particular project, or the Company's efforts
generally, will be successful.

The Company believes that the international independent power market holds
the majority of new opportunities for financially attractive private power
development in the next several years. The financing and development of
projects outside the United States entail significant political and financial
risks (including, without limitation, uncertainties associated with first
time privatization efforts in the countries

<PAGE>

involved, currency exchange rate fluctuations, currency repatriation
restrictions, political instability, civil unrest and expropriation) and
other structuring issues that have the potential to cause substantial delays
or material impairment of value to the project being developed, which the
Company may not be fully capable of insuring against. The uncertainty of the
legal environment in certain foreign countries in which the Company may
develop or acquire projects could make it more difficult for the Company to
enforce its rights under agreements relating to such projects. In addition,
the laws and regulations of certain countries may limit the ability of the
Company to hold a majority interest in some of the projects that it may
develop or acquire. The Company's international projects may, in certain
cases, be terminated by a government.

In April 1994, the Company closed the financing for the 128 GMW Upper
Mahiao geothermal power project located in the Philippines. The total project
cost for the facility is approximately $218,000. The Company will supply
approximately $56,000 of equity and project debt financing will constitute
the balance of approximately $162,000. A syndicate of international
commercial banks is providing the construction financing. The Export-Import
Bank of the U.S. ("Ex-Im Bank") is providing political risk insurance to the
commercial banks for the construction loan and will provide the preponderance
of project term financing upon satisfaction of conditions associated with
commercial operation. As of September 30, 1994, draws on the construction
loan totalled $20,636, equity investments made by a subsidiary of the Company
totalled $12,712, and the Company has invested $1,236. The Overseas Private
Investment Corporation ("OPIC") is providing political risk insurance on the
equity investment by the Company in this project. The Upper Mahiao project
has begun construction, and is expected to be in service by July of 1996. The
project is structured as a ten year Build-Own-Transfer ("BOT"), in which the
Company's subsidiary CE Cebu Geothermal Power Company, Inc., the project
company, will be responsible for implementing construction of the geothermal
power plant and, as owner, for providing operations and maintenance during
the ten year BOT period. The electricity generated by the Upper Mahiao
geothermal power plant will be sold to the Philippine National Oil
Company--Energy Development Corporation ("PNOC-EDC"), which is also
responsible for supplying the facility with the geothermal steam. After a ten
year cooperation period, and the recovery by the Company of its capital
investment plus incremental return, the plant will be transferred to PNOC-EDC
at no cost. Ormat Inc. of Sparks, Nevada is the turnkey contractor for the
project.

In 1993 the Company and PNOC-EDC signed an Energy Conversion agreement for
a 180 GMW project at the Mahanagdong geothermal site with a target completion
date of July 1997. As with the Upper Mahiao project, the Mahanagdong project
is structured as a ten year Build-Own-Transfer ("BOT"), in which the Company
will be responsible for implementing construction of the geothermal power
plant and, as owner for providing operations and maintenance for the ten year
BOT period. The electricity generated by the geothermal power plant will be
sold to PNOC-EDC, which is also responsible for supplying the facility with
the geothermal steam. After a ten year cooperation period, and the recovery
by the Company of its capital investment plus incremental return, the plant
will be transferred to PNOC-EDC at no cost.

The Mahanagdong project will be built, owned and operated by CE Luzon
Geothermal Power Company, a Philippine corporation, that is expected to be
owned post completion as follows: 45% by the Company, 45% by Kiewit, and up
to 10% by another industrial company. The turnkey contractor consortium
consists of Kiewit Construction Group, Inc. (with an 80% interest) and The
Ben Holt Co., Inc., a wholly owned subsidiary of the Company (with a 20%
interest).

In August 1994, the Company completed the financing on the Mahanagdong
project with a total project cost of approximately $320 million. The capital
structure consists of a term loan of $240 million and approximately $80
million in equity contributions. The construction debt financing facility
will be provided by OPIC and a consortium of commercial lenders led by Bank
of America NT&SA. The debt provided by the commercial lenders will be insured
against political risks by Ex-Im Bank. Ten-year term debt financing will be
provided by Ex-Im Bank (which will replace the construction debt) and by
OPIC.

The Mahanagdong project has commenced construction and as of September 30,
1994, the Company's proportionate share of draws on the construction loan
totalled $443, equity investments made by a subsidiary of the Company
totalled $3,899, and the Company has invested $6,711.

<PAGE>

The Yuma Cogeneration Associates ("YCA") 50 MW cogeneration power plant
commenced commercial operation pursuant to its power purchase agreement with
San Diego Gas & Electric ("SDG&E") at the end of May, 1994. In June 1994
SDG&E filed a complaint in U.S. District Court seeking to be released from
its power purchase agreement with YCA. In September 1994 SDG&E dismissed its
case against the Company without payment by either party. YCA, a wholly owned
subsidiary of the Company, received all outstanding amounts due from SDG&E.

LIQUIDITY AND CAPITAL RESOURCES THROUGH DECEMBER 31, 1993

The Company'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 the
Company'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 the Company for operation and maintenance and capital costs and
semiannually to each Coso Joint Venture partner for profit sharing under a
prescribed calculation subject to mutual agreement by the partners. In
addition to these liquid instruments, the Company 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
the Company'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, the Company 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 the Company'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
the Company.

In connection with the Coso Project refinancing, the Company 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 the Company in its proportionate
share.

<PAGE>

On May 3, 1993, the transmission line dispute was settled and the
transmission line deposit of approximately $7,700 was released to the
Company.

In June of 1993, the Company issued $100,000 principal amount of 5%
convertible subordinated debentures (the "Convertible Subordinated
Debentures"), due July 31, 2000. The Convertible Subordinated Debentures are
convertible into shares of 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 the Company and
subordinated to all existing and future senior indebtedness of the Company.

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 the
Company'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), the
Company 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
the Company 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 Common Stock
exercised in 1993 and 1992 aggregated approximately $1,400 and $8,065,
respectively. In addition, in September 1993, the Company 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.

The Company repurchased 157 shares of Common Stock during 1993 for the
aggregate amount of $2,897. The Company purchased common stock to be held as
treasury stock in anticipation of their reissue upon the exercise of options.
The Company repurchased 565 shares of 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, the Company 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 the Company with proceeds of
$1,200. On October 27, 1992, the Company 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, the Company called the Company'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 Common Stock and, accordingly, the Company
issued 954.9 shares of common stock.

In 1991, the Company and Kiewit Energy signed a stock purchase agreement
and related agreements (see Note 12 to the consolidated financial statement).
In addition, in 1991 the Company issued 1,000 shares of its Series C
redeemable preferred stock to Kiewit Energy for $50,000 per share.

On March 31, 1993, the Company 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.

The Company 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,

<PAGE>

the completion of any of which is subject to substantial risk. The Company 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 the Company
to expend significant sums for preliminary engineering, permitting, legal and
other expenses in preparation for competitive bids which the Company may not
win or before it can be determined whether a project is feasible,
economically attractive or 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 the
Company, and receipt of required governmental permits and consents. Further,
there can be no assurance that the Company will obtain access to the
substantial debt and equity capital required for the acquisition or
development and construction of electric power projects. To the extent the
Company 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 the Company may not be fully
capable of insuring against. There can be no assurance that development
efforts on any particular project, or the Company's acquisition or
development efforts generally, will be successful.

In particular, the Company is developing a number of international
projects, for which it may have significant capital requirements. In 1994,
the Company intends to incur capital expenditures in excess of $40,000 for
international project development. In addition to its international projects,
the Company plans to incur domestic geothermal capital expenditures in the
approximate aggregate amount of $30,000 in 1994. The Company'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.

The Company 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 the Company's operating cash
flows.

Inflation has not had a substantial impact on the Company'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, the Company adopted FAS 109. The adoption of FAS 109
changes the Company's method of accounting for income taxes from the deferred
method as required by Accounting Principles Board No. 11 to an asset and
liability approach. Under FAS 109, the net excess deferred tax liability as
of January 1, 1993 was determined to be $4,100. This amount is reflected in
1993 income as the cumulative effect of a change in accounting principle. It
primarily represents the recognition of the Company's tax credit
carryforwards as a deferred tax asset. There was no cash impact to the
Company upon the required adoption of FAS 109. Under FAS 109, the effective
tax rate 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 the Company'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:

<TABLE>
<CAPTION>
THIRD QUARTER
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Total Kilowatt Hours produced (kWh amounts in 000s) 352,564 349,201
Contract Capacity Factor(1) ......................... 121.4% 120.3%
Nameplate Capacity Factor(1) ........................ 107.9% 106.9%
</TABLE>

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:

<TABLE>
<CAPTION>
THIRD QUARTER
--------------------
1994 1993
--------- ---------
<S> <C> <C>
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%
<FN>
- ----------
(1) Does not exclude scheduled maintenance hours. Calculation is based on
a 92-day (2,208 hours) third quarter.
</TABLE>

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.

<PAGE>

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
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:

<TABLE>
<CAPTION>
FIRST NINE MONTHS FISCAL YEAR
------------------------ -------------
1994 1993 1993
----------- ----------- -------------
<S> <C> <C> <C>
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%
<FN>
- ---------
(1) Does not exclude scheduled maintenance hours. Calculation is based on
a 273 day (6,552 hour) nine month period in 1994 and 1993.
</TABLE>

The combined "contract" and "nameplate" capacity factors of the three
Salton Sea Plants during the period are shown in the table below:

<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED DECEMBER ENDED DECEMBER
31, 1994 31, 1993
-------------- --------------
<S> <C> <C>
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%
<FN>
- ----------
(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.
</TABLE>

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.

<PAGE>

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

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

<PAGE>

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 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

<PAGE>

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
3.0cents 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
9.3cents 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.

<PAGE>

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 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.

<PAGE>

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 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.

<PAGE>

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 "Magma
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 2.5 cents 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
10.9 cents per kWh, which along with the fixed capacity payments results in a
total time period weighted average price for electricity of approximately
13.4 cents 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 2.4 cents 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 10.6 cents per kWh for the 20MW Salton Sea Plant 2, which along
with their fixed capacity payments results in a total time period weighted
average price of electricity of approximately 12.2 cents and 13 cents 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

<PAGE>

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
3.2 cents 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
4.8 cents per kWh, which along with the capacity payment of approximately
1.7 cents per kWh (assuming a 90% nameplate capacity factor) results in a
total payment of approximately 6.5 cents per kWh.

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 the
Company 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 the Company. 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 THE COMPANY,"
"SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA OF MAGMA" and
the consolidated financial statements, including the notes thereto, of the
Company and Magma contained in this Proxy Statement.

The Company 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
the Company 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
Magma Shares are purchased.

The pro forma data do not reflect operating efficiencies and cost
reductions which the Company anticipates are achievable. The savings would be
largely attributable to the economies of scale obtained through the
combination of the Company'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 COMMON STOCK)
COMPANY AND MAGMA
AS OF SEPTEMBER 30, 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMPANY 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
============ ========== ============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
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 (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.

<PAGE>

PRO FORMA UNAUDITED CONDENSED COMBINED STATEMENTS OF EARNINGS
(MERGER CONSIDERATION CONSISTING OF A COMBINATION OF CASH AND COMMON STOCK)
COMPANY 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 FORMA
ADJUSTMENT PRO FORMA ADJUSTMENT PRO FORMA
COMPANY MAGMA (4D) COMBINED COMPANY MAGMA (4D) 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 (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
stockholders ................. $ 38,444 $ 52,135 $(47,745) $ 42,834 $ 27,688 $ 46,843 $(35,808) $ 38,723
========== ========== ============ ========== ========== ========== ============ ==========
Income per common and common
equivalent 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>

NOTES TO PRO FORMA UNAUDITED CONDENSED COMBINED FINANCIAL DATA
(MERGER CONSIDERATION CONSISTING OF A COMBINATION OF CASH AND COMMON STOCK)
COMPANY 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 the Company
and Magma. The final adjustments will be based on the fair value of 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 Magma Shares will be acquired and
that the fair value of the 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 Magma 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 Common Stock (see "Description of the Merger Agreement
- --The 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 Common Stock.

B. The adjustments which have been made to the net assets of Magma and the
Company to give effect to the Merger follow:

<TABLE>
<CAPTION>
<S> <C> <C>
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 the Company .... 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
===========
</TABLE>

C. The additional cash which the Company will be required to pay in order
to effect the Merger has been provided for in the pro forma adjustments as
follows:

<TABLE>
<CAPTION>
<S> <C>
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
==========
</TABLE>

<PAGE>

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. The Company'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
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 Common Stock to be exchanged for the outstanding Shares.

5. The pro forma combined income from continuing operations available to
common stockholders 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 Magma Shares are acquired by
the Company and (2) the market value of Common Stock issued to the present
stockholders 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 stockholders 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 Magma Shares are acquired by
the Company and (2) the market value of Common Stock issued to the present
stockholders 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)
COMPANY AND MAGMA
AS OF SEPTEMBER 30, 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMPANY 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
============ ========== ============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
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)
COMPANY 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 FORMA
ADJUSTMENT PRO FORMA ADJUSTMENT PRO FORMA
COMPANY MAGMA (5D) COMBINED COMPANY 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) 58,903
Provision for income taxes ... 18,184 22,778 (25,656) 15,306 14,067 21,072 (19,242) 15,897
---------- ---------- ------------ ---------- ---------- ---------- ------------ ----------
Income from continuing
operations ................... 43,074 52,135 (46,982) 48,227 31,399 46,843 (35,236) 43,006
Preferred dividends ........... 4,630 -- -- 4,630 3,711 -- -- 3,711
---------- ---------- ------------ ---------- ---------- ---------- ------------ ----------
Income available to common
stockholders ................. $ 38,444 $ 52,135 $(46,982) $ 43,597 $ 27,688 $ 46,843 $(35,236) $ 39,295
========== ========== ============ ========== ========== ========== ============ ==========
Income per common and common
equivalent 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)
COMPANY 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 the Company
and Magma. The final adjustments will be based upon the net proceeds to the
Company from the Public Offering 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 Common Stock will be sold at a price sufficient to
provide net proceeds of $16.00 per share to the Company, all of which will be
used to fund a portion of the cost of the Merger. The Company treasury stock
will be canceled.

3. 23,843,000 Magma Shares outstanding as of September 30, 1994 will be
purchased for cash in an amount of $483,600,000 as to 12,400,000 Magma Shares
and cash in an amount of $440,266,000 as to 11,443,000 Magma 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 Common Stock, and the cancellation of Company treasury stock.

B. The adjustments which have been made to the net assets of Magma and the
Company to give effect to the Merger follow:

<TABLE>
<CAPTION>
<S> <C> <C>
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 the Company 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
===========
</TABLE>

<PAGE>

C. The cash which the Company will be required to pay in order to effect
the Merger has been provided for in the pro forma adjustments as follows:

<TABLE>
<CAPTION>
<S> <C> <C>
Reduce cash on hand .................... $190,699
Net proceeds from sale of 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
==========
</TABLE>

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. The Company'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
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 assumptio 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 Common Stock to be sold.

<PAGE>

MARKET PRICES AND DIVIDENDS

<TABLE>
<CAPTION>
QUARTER HIGH LOW
- -------------------------- -------- --------
<S> <C> <C>
1995:
First (through
January 20) ........... $17.88 $15.75
1994:
Fourth .................. 17.13 15.25
Third ................... 17.75 16.00
Second .................. 18.13 16.00
First ................... 19.25 17.13
1993:
Fourth .................. 20.13 18.13
Third ................... 18.38 16.00
Second .................. 20.13 17.25
First ................... 21.50 16.50
</TABLE>

The agreements relating to senior notes issued by the Company prohibit the
payment of dividends unless the Company has a net worth of at least $50
million, after giving effect to the payment of such dividends, and dividends
do not exceed 50% of the Company's net income accumulated after December 31,
1987. The Certificate of Designation with respect to the Series C Preferred
Stock prohibits cash dividend payments with respect to the Common Stock
unless all accumulated dividends on the Series C Preferred Stock have been
paid.

The Company's ability to pay dividends is dependent upon receipt of
dividends or other distributions from the Company's subsidiaries and the
partnerships and joint ventures in which the Company has interests. The
availability of distributions from one of the Company's joint ventures is
subject to the satisfaction of various covenants and conditions contained in
the venture's financing documents and the Company anticipates that future
project level financings will contain certain conditions and similar
restrictions on the distribution of cash flow to the Company.

<PAGE>

<TABLE>
<CAPTION>
QUARTER HIGH LOW
- ------------------------- -------- --------
<S> <C> <C>
1995:
First (through
January 20) ........... $38.25 $37.50
1994:
Fourth ................. 37.69 34.25
Third .................. 34.88 26.50
Second ................. 32.75 28.00
First .................. 35.00 30.75
1993:
Fourth ................. 39.50 30.25
Third .................. 39.00 29.75
Second ................. 40.00 30.75
First .................. 39.50 31.00
</TABLE>

As of October 10, 1994, there were approximately 2,238 holders of record
of the Magma Shares.

<PAGE>

SECURITY OWNERSHIP OF SIGNIFICANT STOCKHOLDERS AND MANAGEMENT

The following table sets forth certain information with respect to all
stockholders known by the Company to beneficially own more than 5% of either
the 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 the Company (and all directors and
executive officers of the Company, as a group) of Common Stock. All
information is as of September 30, 1994, unless otherwise indicated.

<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME (AND ADDRESS IF REQUIRED) OF BENEFICIALLY PERCENTAGE
BENEFICIAL OWNER OWNED (1) CLASS (1)
- ---------------------------------------- -------------- ------------
<S> <C> <C>
SERIES C PREFERRED STOCK:
Kiewit Energy Company 1000 Kiewit Plaza
Omaha, Nebraska 68131 .................. 1,247 100%
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%
<FN>
(1) Includes shares of 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 Common Stock which the listed beneficial owner has the right to
acquire within 60 days.

(2) Includes the 7,436,112 shares of 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 Common Stock and
3,393,197 shares of 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 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 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 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 Common Stock held jointly with his spouse.
</TABLE>

<PAGE>

OTHER MATTERS

The Company's Board knows of no other matters which are likely to be
brought before the Special Meeting. However, if any other matters are brought
before the Special Meeting, the proxy-holders will vote proxies granted by
the Stockholders in accordance with their best judgment.

STOCKHOLDER PROPOSALS

Any proposal which a stockholder intended to present at the 1995 Annual
Meeting of Stockholders must have been received by the Company no later than
November 25, 1994 in order to be considered for inclusion in the proxy
statement relating to such meeting. Any such proposals should have been
directed to the Secretary, California Energy Company, Inc., 10831 Old Mill
Road, Omaha, Nebraska 68154.

ACCOUNTANT'S REPRESENTATIVES

It is expected that representatives of Deloitte & Touche LLP, the
Company's independent auditors, will be present at the Special Meeting to
respond to appropriate questions of stockholders and to make a statement if
they desire.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such materials can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Common Stock is listed and
traded on the NYSE, the PSE and the LSE. Reports, proxy statements and other
information concerning the Company can also be inspected at the offices of
the NYSE at 20 Broad Street, New York, New York 10005, at the offices of the
PSE at 301 Pine Street, San Francisco, California 94104 and 233 South Beaudry
Avenue, Los Angeles, California 90012 and at the offices of the LSE at
International Stock Exchange, Throgmorton Street, EC2N 1HP, London, England,
on which the shares of 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.

By order of the Board of Directors

DAVID L. SOKOL
Chairman of the Board, President and
Chief Executive Officer

January 23, 1995
Omaha, Nebraska

<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S> <C>
THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO
Financial Statements for Period Ending December 31, 1993
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
Financial Statements for Period Ending September 30, 1994
INDEPENDENT ACCOUNTANTS' REPORT ........................... F-27
CONSOLIDATED BALANCE SHEETS ............................... F-28
CONSOLIDATED STATEMENTS OF OPERATIONS ..................... F-29
CONSOLIDATED STATEMENTS OF CASH FLOWS ..................... F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................ F-31
MAGMA'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
Financial Statements for Period Ending December 31, 1993 .
REPORT OF INDEPENDENT ACCOUNTANTS ......................... F-37
CONSOLIDATED BALANCE SHEETS ............................... F-38
CONSOLIDATED STATEMENTS OF OPERATIONS ..................... F-39
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-40
CONSOLIDATED STATEMENTS OF CASH FLOWS ..................... F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................ F-42
Financial Statements for Period Ending September 30, 1994
CONSOLIDATED BALANCE SHEETS ............................... F-52
CONSOLIDATED STATEMENTS OF OPERATIONS ..................... F-53
CONSOLIDATED STATEMENTS OF CASH FLOWS ..................... F-54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................ F-55
IMPERIAL VALLEY GEOTHERMAL INTERESTS (ACQUIRED BY MAGMA)
FINANCIAL STATEMENTS ....................................
REPORT OF INDEPENDENT ACCOUNTANTS ......................... F-56
STATEMENT OF NET ASSETS ACQUIRED .......................... F-57
HISTORICAL SUMMARIES OF GROSS REVENUES AND DIRECT OPERATING
EXPENSES ................................................ F-58
NOTES TO THE STATEMENT OF NET ASSETS ACQUIRED AND
HISTORICAL SUMMARIES OF GROSS REVENUES AND DIRECT
OPERATING EXPENSES ...................................... F-59
</TABLE>

F-1

<PAGE>

THE COMPANY'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

F-2

<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) ..... 58,800 54,350
Redeemable preferred stock (Note 10)
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.

F-3

<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.

F-4

<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONAL
OUTSTANDING COMMON PAID-IN RETAINED TREASURY
COMMON 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.

F-5

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
(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:
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.

F-6

<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

The Company 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.

The Company 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. The Company 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, the Company is exploring
geothermal resources in Northern California, Washington and Oregon
(collectively, the Pacific Northwest). In January 1991, the Company acquired
a power plant and an interest in steam fields in Nevada and Utah (see Note
4--Nevada and Utah Properties). In 1992, the Company 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, the Company 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 the Company,
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.

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.

WELL, RESOURCE DEVELOPMENT AND EXPLORATION COSTS. The Company 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
the Company'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.

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.

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.

F-7

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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.

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.

REVENUE RECOGNITION. Revenues are recorded based upon service rendered and
electricity and steam delivered to the end of the month.

MANAGEMENT FEE AND INTEREST REVENUE RECOGNITION. The Company 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 the
Company has invested is deferred until each Coso Joint Venture commences
operations. Revenue previously deferred is amortized over the lives of the
related assets of the Coso Joint Ventures as each Coso Joint Venture becomes
operational.

DEFERRED INCOME TAXES. On January 1, 1993, the Company adopted Statement
of Financial Accounting Standard No. 109 (FAS 109), "Accounting for Income
Taxes." The adoption of FAS 109 changes the Company'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.

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.

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. The Company
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.

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,
the Company's portion of the balance is $20,300 (restricted cash and
investments), from a variable rate to a fixed rate. The Company'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. The Company'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.

F-8

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

In September 1993, the Company 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. The Company 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 the Company 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>

OPERATING FACILITIES. The Coso operating facilities comprise the Company'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 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 the Company.

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, the Company's share of profits and losses before and after
payout is approximately 45% and 48%, respectively. During 1990, the
Company upgraded the cooling tower and turbines to increase the plant's
capacity to 80 NMW from the initial level of 70 NMW.

F-9

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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.

SIGNIFICANT CUSTOMER. All of the Company'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 the
Company's revenue, remains fixed during the entire period of the contract. In
addition, the Company 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.

The Company 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.

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 the Company 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.

PACIFIC NORTHWEST GEOTHERMAL EXPLORATION COSTS. In the Pacific Northwest,
the Company 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 the
Company'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, the Company will be
able to realize its exploration costs through the generation of electricity
for sale.

F-10

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NEVADA AND UTAH PROPERTIES. On May 3, 1990, the Company 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.

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, the Company
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, the
Company 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.

The Company 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 the Company, 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.

F-11

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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 the Company 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 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, the Company entered
into an agreement with Community Energy Alternatives Incorporated ("CEA") for
the Company to purchase at the close of the Coso Project refinancing CEA's
interest in the Coso Project. Until the close of the Coso Project

F-12

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

refinancing, CEA had been a partner in a partnership structure organized by
the Company's Joint Venture Partner in the BLM project. The Company purchased
the CEA interest under certain terms and conditions which are designed to
provide the Company with a 17% per annum return on the CEA interest purchase
price of $9,800. The Company's 17% per annum return is secured in part by a
pledge and assignment to the Company of certain cash flows to be received by
the Company's Coso Project Joint Venture Partner (and certain affiliates)
from Coso Project distributions. The Company has granted its Coso Project
Joint Venture Partner the right to purchase the CEA interest for a price
which will provide the Company a 17% per annum return for the duration the
Company 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 the Company'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 the Company 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, the Company issued $100,000 principal amount of 5%
convertible subordinated debentures (debentures) due July 31, 2000. The
debentures are convertible into shares of the Company's common stock at any
time prior to redemption or maturity at a conversion price of $22.50 per
share, subject to adjustment in certain circumstances. Interest on the
debentures is payable 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 the Company. The
redemption prices commencing in the twelve month period beginning July 31,
1996 (expressed in percentages of the principal amount) are 102%, 101%, 100%
and 100% in 1996, 1997, 1998 and 1999, respectively. The debentures are
unsecured general obligations of the Company and subordinated to all existing
and future senior indebtedness of the Company. 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, the Company adopted Statement of Financial Accounting
Standard No. 109 (FAS 109), "Accounting for Income Taxes." The adoption of
FAS 109 changes the Company'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 the Company's tax
credit carryforwards as a deferred tax asset. There was no cash impact to the
Company upon the required adoption of FAS 109. Under FAS 109, the effective
tax rate increased to approximately 30% from 23.5% in 1992. This increase was
due to the Company's tax credit carryforward being recognized as an asset and
unavailable to reduce the current period's effective tax rate for computing
the Company's provision for income taxes.

F-13

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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.

F-14

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

As of December 31, 1993, the Company 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, the
Company has unused investment and geothermal energy tax credit carryforwards
of approximately $40,106 expiring between 2002 and 2008. The Company also has
approximately $12,018 of alternative minimum tax credit carryforwards which
have no expiration date.

9. COMMITMENTS

The Company'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. The Company 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:

<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER
31, AMOUNT
- -------------- --------
<S> <C>
1994 .......... $318
1995 .......... 186
1996 .......... 8
--------
Total ......... $512
========
</TABLE>

10. PREFERRED STOCK

SERIES A. On December 1, 1988, the Company 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
the Company's common stock or announces a tender or exchange offer for 30% or
more of the Company'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.

SERIES B. On November 15, 1990, the Company 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, the Company called the preferred stock for
conversion into common stock. Each Series B preferred stock was converted
into two shares of common stock; accordingly, the Company issued 954.9 shares
of common stock.

SERIES C. On November 19, 1991, the Company 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%,

F-15

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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.

The Company 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, the
Company may redeem all, or any portion consisting of at least $5,000, of the
preferred stock, Series C. then outstanding, provided that the Company'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.

The Company 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 the Company 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 the Company.

No cash dividends shall be paid or declared on the Company's common stock
unless all accumulated dividends on the Series C preferred stock have been
paid.

The Company 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

The Company 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, the Company 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, the Company had issued approximately 138 options to consultants on
terms similar to those issued under the 1986 Plan. The non-1986 Plan options
are primarily options granted to Kiewit Energy; see Note 12.

F-16

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

TRANSACTIONS IN STOCK OPTIONS.

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------
SHARES AVAILABLE
FOR GRANT UNDER OPTION PRICE PER
1986 OPTION PLAN SHARES 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.

WARRANTS. The Company has granted warrants in connection with various
financing activities to purchase shares of common stock as follows:

<TABLE>
<CAPTION>
WARRANTS OUTSTANDING
-----------------------------------
WARRANT PRICE PER
SHARES 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>

F-17

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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 the Company with proceeds of $1,224.

On October 27, 1992, the Company 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, the Company 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 the Company's
acquisition of Chevron's interest in Roosevelt Hot Springs, Utah.

The Company and Kiewit Energy signed a Stock Purchase Agreement and
related agreements, dated as of February 18, 1991. Kiewit Energy is a
subsidiary of 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, the Company 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 the
Company's directors, and (iii) the Company 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,
the Company 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 the Company with
$13,500 in cash. The Company 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 the Company 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

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 the Company 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.

F-18

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

On June 9, 1993, MPE and the Mission Power Group, subsidiaries of
SCECorp, and the Coso Joint Ventures and the Company 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.

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 (the Company'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 pursued with SCE at the CPUC.

SETTLEMENT OF ANTITRUST LAWSUIT. On January 31, 1991, the Company 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.

SETTLEMENT WITH JOINT VENTURE PARTNER. The Company 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, the Company's principal Coso Joint Venture partner (the J.V.
Partner) served the Company and certain of the Company'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 the Company.

On March 19, 1991, the Company 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

F-19

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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 the Company. During 1992, the Company
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 the Company on behalf of the
partnership into a Coso Joint Venture note payable to the Company 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 the Company. 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

The Company 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

The Company 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 the Company. The
Company 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.

F-20

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

17. QUARTERLY FINANCIAL DATA (Unaudited)

Following is a summary of the Company'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> <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
----------- ---------- ----------- ----------
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
=========== ========== =========== ==========
</TABLE>

F-21

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED*
------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1992 1992 1992 1992
----------- ---------- ----------- ----------
<S> <C> <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>
- ----------
* The Company's operations are seasonal in nature with a
disproportionate percentage of income earned in the second and third
quarters.

F-22

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

18. SUMMARIZED COMPANY (PARENT ONLY) FINANCIAL STATEMENTS

COMPANY (PARENT ONLY) BALANCE SHEETS
AS OF DECEMBER 31, 1993 AND 1992
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Assets
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.

F-23

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

COMPANY (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 2,836
--------- --------- ---------
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.

F-24

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

COMPANY (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.

F-25

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

COMPANY (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.

F-26

<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

F-27

<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.

F-28

<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
--------- --------- ---------- ----------
Costs and expenses:
Plant operations ............................ 9,846 5,878 23,887 18,898
General and administration .................. 3,216 2,359 9,536 8,596
Royalties ................................... 3,504 3,004 7,898 6,525
Depreciation and amortization ............... 5,639 4,344 15,439 13,044
Interest expense ............................ 17,653 8,184 44,480 20,993
Less interest capitalized ................... (2,087) (1,682) (7,518) (3,822)
--------- --------- ---------- ----------
Total costs and expenses .................. 37,771 22,087 93,722 64,234
--------- --------- ---------- ----------
Income before income taxes .................... 20,753 24,170 45,466 49,106
Provision for income taxes .................... 6,340 7,493 14,067 14,295
--------- --------- ---------- ----------
Income before extraordinary item and change in
accounting principle ........................ 14,413 16,677 31,399 34,811
Extraordinary item (less applicable income
taxes of $945) (Note 8) ..................... -- -- (2,007 ) --
Cumulative effect of change in accounting
principle ................................... -- -- -- 4,100
--------- --------- ---------- ----------
Net income .................................... 14,413 16,677 29,392 38,911
Preferred dividends (paid in kind)* ........... 1,275 1,179 3,711 3,429
--------- ---------- ----------
Net income attributable to common 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
========= ========= ========== ==========
<FN>
- --------
* Reflects dividends on the Company's Series C Redeemable Convertible
Preferred Stock, which are payable in kind.
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-29

<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.

F-30

<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 the Company
and its wholly owned subsidiaries, and its proportionate share of the
accounts of the partnerships and joint ventures in which it has invested.

The results of operations for the three and nine months ended September
30, 1994 and 1993 are not necessarily indicative of the results to be
expected for the full year.

Certain amounts in the 1993 financial statements and supporting footnote
disclosures have been reclassified to conform to the 1994 presentation. Such
reclassification did not impact previously reported net income or retained
earnings.

2. OTHER FOOTNOTE INFORMATION

Reference is made to the Company's most recently issued annual report that
included information necessary or useful to the understanding of the
Company's business and financial statement presentations. In particular, the
Company's significant accounting policies and practices were presented as
Note 2 to the consolidated financial statements included in that report.

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 ............ $304,030 $246,219
Wells and resource development ................ 171,802 162,776
--------------- --------------
475,832 408,995
Less accumulated depreciation and amortization (85,010) (69,823)
--------------- --------------
Net facilities ................................. 390,822 339,172
Resource development in progress ............... 421 939
--------------- --------------
Total project costs ............................ 391,243 340,111
--------------- --------------
Yuma plant --construction in progress ......... -- 41,461
Upper Mahiao plant --construction in progress . 34,584 --
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, the Company issued $400,000 of 10-1/4% Senior Discount
Notes which accrete to an aggregate principal amount of $529,640 at maturity
in 2004. The original issue discount (the difference

F-31

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER KWH DATA)

between $400,000 and $529,640) will be amortized from issue date through
January 15, 1997, during which time no cash interest will be paid on the
Senior Discount Notes. Commencing July 15, 1997, cash interest on the Senior
Discount Notes will be payable semiannually on January 15 and July 15 of each
year. The Senior Discount Notes are redeemable at any time on or after
January 15, 1999. The redemption prices commencing in the twelve month period
beginning January 15, 1999 (expressed in percentages of the principal amount)
are 105.125%, 103.417%, 101.708%, and 100% for 1999, 2000, 2001, and 2002,
respectively, plus accrued interest through the redemption date in each case.
The Senior Discount Notes are unsecured senior obligations of the Company.

5. COMMITMENTS AND CONTINGENCIES

In April 1994, the Company closed the financing for the 128 GMW Upper
Mahiao geothermal power project located in the Philippines. The total project
cost for the facility is approximately $218,000. The Company will supply
approximately $56,000 of equity and project debt financing will constitute
the balance of approximately $162,000. A syndicate of international
commercial banks is providing the construction 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 the Company
totalled $12,712, and the Company has invested $1,236. The Overseas Private
Investment Corporation ("OPIC") is providing political risk insurance on the
equity investment by the Company in this project. The Upper Mahiao project
has begun construction, and is expected to be in service by July of 1996. The
project is structured as a ten year Build-Own-Transfer ("BOT"), in which the
Company's subsidiary CE Cebu Geothermal Power Company, Inc., the project
company, will be responsible for implementing construction of the geothermal
power plant and, as owner, for providing operations and maintenance during
the ten year BOT period. The electricity generated by the Upper Mahiao
geothermal power plant will be sold to the Philippine National Oil Company
- --Energy Development Corporation ("PNOC-EDC"), which is also responsible for
supplying the facility with the geothermal steam. After a ten year
cooperation period, and the recovery by the Company of its capital investment
plus incremental return, the plant will be transferred to PNOC-EDC at no
cost. Ormat Inc. of Sparks, Nevada is the turnkey contractor for the project.

In 1993 the Company and PNOC-EDC signed an Energy Conversion agreement for
a 180 GMW project at the Mahanagdong geothermal site with a target completion
date of July 1997. As with the Upper Mahiao project, the Mahanagdong project
is structured as a ten year Build-Own-Transfer ("BOT"), in which the Company
will be responsible for implementing construction of the geothermal power
plant and, as owner, for providing operations and maintenance for the ten
year BOT period. The electricity generated by the geothermal power plant will
be sold to PNOC-EDC, which is also responsible for supplying the facility
with the geothermal steam. After a ten year cooperation period, and the
recovery by the Company of its capital investment plus incremental return,
the plant will be transferred to PNOC-EDC at no cost.

The Mahanagdong project will be built, owned and operated by CE Luzon
Geothermal Power Company, a Philippine corporation, that is expected to be
owned post completion as follows: 45% by the Company, 45% by Kiewit, and up
to 10% by another industrial company. The turnkey contractor consortium
consists of Kiewit Construction Group, Inc. (with an 80% interest) and The
Ben Holt Co., a wholly owned subsidiary of the Company (with a 20% interest).

F-32

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER KWH DATA)

term debt financing will be provided by Ex-Im Bank (which will replace the
construction debt) and by OPIC. The Mahanagdong project has commenced
construction and as of September 30, 1994, the Company's proportionate share
of draws on the construction loan totalled $443, equity investments made by a
subsidiary of the Company totalled $3,899, and the Company has invested
$6,711.

The Company has made an offer (the "Offer to Purchase") to acquire all of
the outstanding shares of Magma Power Company ("Magma") for $38.50 per share,
comprised of $28.50 in cash and $10.00 in market value of the Company's
common stock. As the first step in implementing its proposal to acquire all
Magma shares, CE Acquisition Company, Inc. (the "Purchaser"), a wholly owned
subsidiary of the Company, commenced a cash tender offer (the "Offer") to
purchase 12,400 shares, or approximately 51% of the common stock of Magma
Power Company, at a price of $38.50 net per share to be followed by a second
step merger for a combination of cash and the Company common stock, which
when completed would result in an aggregate blended consideration of $28.50
in cash and $10.00 in market value of the Company's common stock for each
share of Magma purchased by the Company. The Offer currently is set to expire
on December 2, 1994. Magma's Board of Directors (the "Board") has recommended
that their shareholders not accept the Company's $38.50 per share Offer.

In order to facilitate consummation of its acquisition offer, the Company
is soliciting requests to call a special meeting of Magma stockholders and
has established November 7, 1994 as the record date for its solicitation
period which will also expire on December 2, 1994. The Company has stated
that it intends to withdraw its $38.50 per share acquisition proposal if it
has not signed a merger agreement with Magma or received a sufficient number
of requests from Magma stockholders to call a special meeting by December 2,
1994. The special meeting will provide Magma stockholders the opportunity to
consider and vote on the Company's special meeting proposals which, if
approved, would result in certain bylaw amendments that would facilitate the
Company's proposal and the election of four Company nominees to Magma's
Board, who would be committed to removing any impediments to shareholders
being able to freely choose whether to accept the Offer and approve the
proposed merger, thereby ensuring that the Offer and proposed merger get a
full and fair hearing. The Company also intends to call a special meeting of
its shareholders to approve the issuance of the Company's stock in connection
with the transaction. Kiewit, the Company's largest shareholder, which
beneficially owns approximately 43.8% of the common shares, has already
approved the proposed transaction.

The Company anticipates that a substantial portion of the cash required to
purchase Magma shares and rights pursuant to the Offer and the proposed
merger will be provided through a secured bank credit facility. The Company
has received a fully underwritten financing commitment letter which states
that the lender will provide up to $500,000 in secured bank financing in
connection with the Offer and the proposed merger. Such funds, together with
a portion of the Company's general corporate funds, will be sufficient to pay
the cash portion of the consideration for the Offer and proposed merger and
related expenses.

The commitment letter contemplates (i) a facility of up to $250,000 to
capitalize the Company for the purpose of financing the Offer and (ii)
facilities of up to $500,000 for, among other things, refinancing the tender
facility and effectuating the proposed merger.

The term of the tender facility will be 12 months, extendible for a term
of up to three years from the initial funding at the mutual consent of the
Company and the lender. The tender facility will be a margin loan
collateralized by the shares purchased pursuant to the Offer.

The merger facility will be composed of (i) up to a 6-year amortizing term
loan ("Term Loan A") in an expected amount of up to $500,000 less the amount
of Term Loan B (as defined below) and (ii) up to an 8-year amortizing term
loan ("Term Loan B") in an expected amount not to be less than $150,000. The
merger facilities are to be amortized from internally generated funds and
will be secured by an assignment and pledge of Magma stock and all
unencumbered assets of Magma.

F-33

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER KWH DATA)

The lender's commitment to provide the facilities is subject to certain
customary conditions, including without limitation (a) a capital investment
by the Company in an amount and form satisfactory to the lender, (b) the
absence of certain material adverse changes and (c) the lender's satisfaction
with its due diligence with respect to the Company and Magma.

The definitive documentation relating to the facilities will contain
representations, warranties, covenants, events of default and conditions
customary for transactions of this size and type.

On October 3, 1994, Magma filed a complaint entitled Magma Power Company
v. California Energy Company, Inc., Case No. CV-N-94-06160, against the
Company in the Second Judicial District Court of the State of Nevada in and
for the County of Washoe. The complaint seeks a declaratory 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. The Company subsequently removed this action to the
United States District Court for the District of Nevada.

On October 17, 1994, the Company filed its answer and counterclaims in
response to Magma's complaint. The counterclaims name the Purchaser as an
additional counterclaim plaintiff and Magma's directors as counterclaim
defendants in addition to Magma. The Company's counterclaims seek primarily:
(i) a declaratory 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 the Company's and the Purchaser's Schedule 14D-1 and the Offer
to Purchase therein; and (ii) declaratory and injunctive relief with respect
to certain allegedly false and misleading statements made in the Company's
preliminary Request Solicitation Statement filed with the Commission pursuant
to Section 14(a) of the Exchange Act on October 13, 1994.

On October 19, 1994, the Company and the Purchaser filed their answer to
Magma's amended complaint and amended their counterclaims which, in addition
to the relief requested in the original counterclaims, seek an injunction
requiring Magma to correct additional false and misleading statements
reflected in an amendment to its Schedule 14D-9 and in other statements made
by Magma.

On October 25, 1994, the Company and the Purchaser filed their second
amended counterclaims which, in addition to the relief requested in the
original and amended counterclaims, seek an injunction requiring Magma to
refrain from (i) taking actions to damage its international development
projects, including the Karaha project, or (ii) taking other actions designed
to waste corporate assets and block the Offer and the proposed merger.

On November 3, 1994, the Company and the Purchaser filed their third
amended counterclaims which, among other things, seek a ruling that the
Control Share Statute does not apply to the Offer.

F-34

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER KWH DATA)

The Company intends to take any action necessary to have attempted
impediments to the Offer and the proposed merger set aside.

On October 14, 1994, Ben Holt, a stockholder of Magma, and a director of
the Company, filed a complaint entitled Ben Holt v. Magma Power Company, Case
No. CV94-06432, against Magma in the Second Judicial District Court for the
State of Nevada in and for the County of Washoe (the "Court"), alleging,
among other things, that Magma has infringed the plaintiff's right as a
stockholder by denying his statutory right under the NGCL to demand access to
Magma's stockholder list and certain related material necessary to
communicate with Magma's stockholders. The plaintiff sought an order
directing Magma to comply with the demand for the stockholder list and
related information necessary to communicate with stockholders.

On October 25, 1994, the Court issued an order directing Magma forthwith
and without delay to turn over to Mr. Holt a complete record or list of
Magma's stockholders together with certain other information concerning
stockholders of Magma requested by Mr. Holt in his demand letter to Magma.
The Court ruled expressly that Mr. Holt satisfied the requirements of the
NGCL governing requests for stockholder information in that he had been a
stockholder of Magma for more than six months as of the time of his demand,
and had complied with Magma's request for an affidavit concerning his
request; that Mr. Holt's purpose for requesting stockholder information of
Magma, which was to facilitate the Company's request for a special meeting of
stockholders of Magma and otherwise to communicate with the other
stockholders of Magma concerning the Company's proposal to acquire Magma
through the Offer and the proposed merger was a proper purpose for which to
request stockholder information; and that the public interest is served by
granting Mr. Holt's request for stockholder information.

The Yuma Cogeneration Associates ("YCA") 50 MW cogeneration power plant
commenced commercial operation pursuant to its power purchase agreement with
San Diego Gas & Electric ("SDG&E") at the end of May 1994. In June 1994 SDG&E
filed a complaint in U.S. District Court seeking to be released from its
power purchase agreement with YCA. In September 1994 SDG&E dismissed its case
against the Company without payment by either party. YCA, a wholly owned
subsidiary of the Company, received all outstanding amounts due from SDG&E.

6. INCOME TAXES

On January 1, 1993, the Company adopted Statement of Financial Accounting
Standard No. 109 ("FAS 109"), Accounting for Income Taxes. The adoption of
FAS 109 changed the Company's method of accounting for income taxes from the
deferred method as required by Accounting Principles Board No. 11 to an asset
and liability approach. Under FAS 109, the net excess deferred tax liability
as of January 1, 1993 was determined to be $4,100. This amount was reflected
in 1993 income as the cumulative effect of a change in accounting principle.
It primarily represented the recognition of the Company's tax credit
carryforwards as a deferred tax asset. There was no cash impact to the
Company upon the required adoption of FAS 109. Under FAS 109, the effective
tax rate has increased due to the Company's tax credit carryforwards being
recognized as an asset upon the adoption of FAS 109 and unavailable to reduce
the current period's effective tax rate for computing the Company's provision
for income taxes.

The Company's effective tax rate continues to be less than the statutory
rate primarily due to the depletion deduction and the generation of energy
tax credits in 1994. The significant components of the deferred tax liability
are the temporary differences between the financial reporting basis and
income tax basis of the power plant and the well and resource development
costs, and in addition, the offsetting benefits of operating loss
carryforwards and investment and geothermal energy tax credits. The income
tax provision for the nine months ended September 30, 1994, is approximately
54% current tax expense and 46% deferred tax expense.

7. EARNINGS PER SHARE

Fully diluted earnings per share assumes the conversion of the Convertible
Subordinated Debentures into common shares at a conversion price of
$22.50/share. The conversion has become dilutive because

F-35

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER KWH DATA)

of the significant repurchase by the Company of the Company's common stock
which has materially reduced the number of shares outstanding and thereby
increased the relative effect of the conversion.

8. EXTRAORDINARY ITEM

In conjunction with the Company's Senior Discount Note offering (See Note
4), the 12% Senior Notes were defeased. This resulted in an extraordinary
item in the amount of $2,007, after the income tax effect of $945. The
extraordinary item represents the amount necessary to defease the interest
payments and the unamortized portion of the deferred financing costs on the
$35,730 Senior Notes. The 1994 contingent interest component of these Senior
Notes, calculated by reference to the Company's share of available cash flow
from the Coso Project, remains undefeased and outstanding through the end of
the calculation period, December 31, 1994.

F-36

<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

F-37

<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.

F-38

<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>
YEAR ENDED DECEMBER 31, 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.

F-39

<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.

F-40

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
(FOR THE THREE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991)
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
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.

F-41

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNT)

1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

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.

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.

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:

<TABLE>
<CAPTION>
<S> <C>
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*
</TABLE>

* 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.

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.

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-42

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNT)

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.

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.

RETIREMENT PLANS. Magma maintains two defined contribution plans covering
all eligible employees. Contributions to the plans are funded annually.

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 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.

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.

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.

F-43

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNT)

As of December 31, marketable securities and other investments consisted
of the following:

<TABLE>
<CAPTION>
MARKETABLE
SECURITIES
(MATURING MATURITIES OF
WITHIN ONE OTHER OTHER
1993 YEAR) INVESTMENTS INVESTMENTS
- ---------------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
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
---------- ----------
<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

F-44

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNT)

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:

<TABLE>
<CAPTION>
<S> <C>
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
=========
</TABLE>

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>

F-45

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNT)

7. LOANS PAYABLE

At December 31, loans payable consisted of the following (dollars in
thousands):

<TABLE>
<CAPTION>
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.

F-46

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNT)

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 PARTNERSHIP
PLANTS 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 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.

F-47

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNT)

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
========= ========== =========
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.

F-48

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNT)

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>
1991
---------
<S> <C>
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>

F-49

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNT)

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, 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
<FN>
(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.
</TABLE>

F-50

<PAGE>

FINANCIAL STATEMENTS FOR PERIOD ENDING
SEPTEMBER 30, 1994

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.

F-51

<PAGE>

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
=============== ==============
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.

F-52

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED 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.

F-53

<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.

F-54

<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.

F-55

<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

F-56

<PAGE>

IMPERIAL VALLEY GEOTHERMAL INTERESTS
(ACQUIRED BY MAGMA POWER COMPANY)
STATEMENT OF NET ASSETS ACQUIRED
MARCH 31, 1993
(IN THOUSANDS)

<TABLE>
<CAPTION>
<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.

F-57

<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.

F-58

<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:

<TABLE>
<CAPTION>
<S> <C>
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
==============
</TABLE>

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.

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

F-59

<PAGE>

1. BASIS OF PRESENTATION, Continued:

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.

F-60

<PAGE>

ANNEX A

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
similar, in whole or in part, to those of Magma;

(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.

A-1

<PAGE>

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 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

A-2

<PAGE>

ANNEX B

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. ("Purchaser"), 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

(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

B-1

<PAGE>

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 this 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 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 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 Calfornia 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.

B-2

<PAGE>

ADDITIONAL INFORMATION

If you have any questions, or require any additional information
concerning this proxy material or the Offer, please contact MacKenzie
Partners as set forth below. If your shares are held in the name of a
brokerage firm or bank nominee or other institution, only they can vote your
shares. Accordingly, please contact the person responsible for your account
and give instructions for your shares to be voted.

MACKENZIE PARTNERS, INC.
[LOGO]

156 Fifth Avenue
New York, New York 10010
(212) 929-5500 (call collect)
or
1-800-322-2885

APPENDIX FOR GRAPHIC AND IMAGE MATERIAL

Graphics or images which cannot be reproduced in the ASCII format
required for EDGAR have been omitted from the pages of the preceding document
as listed below. Pursuant to Rule 304 of Regulation S-T, the substantive
information contained in these graphics or images is conveyed in tabular and/or
narrative form:

Page in
Typeset Copy Description
- ------------ -----------
43 Schematic representing Geothermal Energy

44 Map depicting areas of Potential Geothermal
Energy

50 Map of the Republic of the
Philippines with Project locations

55 Map of Indonesia and Neighboring
Countries with Project locations

57 Map of the Western United States
with Project locations