As filed with the Securities and Exchange
Commission on January 17, 1995
REVISED PRELIMINARY 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 / /
Checked the appropriate box:
/X/ Preliminary proxy statement
/ / Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to ss. 240.14a-11(c) or ss. 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 Rules 0-11(c)(1)(ii), 14a-6(i)(1),
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 011.
1) Title of each class of securities to which transaction
applies:
----------------------------------------------------------------
2) Aggregate number of securities to which transaction 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:
-----------------------------------------------------------------
/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
---------------------------------------------------------------
<PAGE>
<PAGE>
[LOGO]
CALIFORNIA ENERGY COMPANY, INC.
10831 OLD MILL ROAD
OMAHA, NE 68154
January 18, 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,
David L. Sokol
Chairman of the Board, President and Chief
Executive Officer
<PAGE>
<PAGE>
90440391
[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
David L. Sokol
Chairman of the Board, President and Chief
Executive Officer
January 18, 1995
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
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 .................. 4
Opinions of Financial Advisors ......................... 4
Description of the Merger Agreement .................... 4
Conflicts of Interest of Members of the Magma Board .... 6
Regulatory Approvals ................................... 6
Accounting Treatment ................................... 6
Stock Exchange Listing ................................. 6
Dissenters' Rights ..................................... 6
Market Prices and Dividends ............................ 6
VOTING AND VOTE REQUIRED ........................................ 8
PROPOSAL 1 ...................................................... 9
PROPOSAL 2 ...................................................... 10
THE PENDING ACQUISITION AND THE MERGER AGREEMENT ................ 11
The Pending Acquisition ................................ 11
Background of the Merger................................ 11
Reasons for the Pending Acquisition .................... 16
Recommendation of the Company's Board .................. 16
Opinion of the Company's Financial Advisor ............. 17
Opinion of Magma's Financial Advisor ................... 20
Description of the Merger Agreement .................... 23
Conflicts of Interest of Members of the Magma Board .... 30
Antitrust .............................................. 32
Regulatory Approvals ................................... 32
Accounting Treatment ................................... 32
Federal Income Tax Consequences ........................ 33
Stock Exchange Listing ................................. 33
Effects of the Pending Acquisition ..................... 33
Source and Amount of Funds ............................. 33
CAPITALIZATION OF THE COMPANY ................................... 36
Merger Consideration Consisting of a Combination of Cash
and Common Stock....................................... 36
Merger Consideration Consisting of All Cash ............ 37
COMPARISON OF CERTAIN UNAUDITED DATA ............................ 38
Merger Consideration of a Combination of Cash and Common
Stock.................................................. 38
Merger Consideration Consisting of All Cash ............ 40
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND
OPERATING DATA OF THE COMPANY ................................. 42
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
AND OPERATING DATA OF MAGMA ................................... 44
BUSINESS OF THE COMPANY AND MAGMA
AND RELATED INFORMATION ....................................... 46
General ................................................ 46
International Projects ................................. 51
Domestic Projects ...................................... 53
International Projects -- Discussion ................... 54
Domestic Projects -- Discussion ........................ 60
Regulatory and Environmental Matters ................... 66
Employees .............................................. 67
Properties ............................................. 68
Legal Proceedings ...................................... 69
THE COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................... 69
General................................................. 69
Results of Operations Through September 30, 1994 ....... 69
Results of Operations for Three Years Ended December 31,
1993, 1992, and 1991 .................................. 73
Liquidity and Capital Resources Through September 30,
1994 ................................................... 76
Liquidity and Capital Resources Through December 31,
1993 ................................................... 79
Adoption of Financial Accounting Standard No. 109 ....... 82
MAGMA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................... 82
Results of Operations: Third Quarter 1994 Compared to
Third Quarter 1993 .................................... 82
<PAGE>
Nine Months Ended September 30, 1994 Compared to Nine Months
Ended September 30, 1993 ............................. 83
Results of Operations: 1993 Compared to 1992 .......... 85
Results of Operations: 1992 Compared to 1991 .......... 88
Liquidity and Capital Resources ........................ 90
Seasonality ............................................ 92
Inflation .............................................. 92
Future Rates ........................................... 92
PRO FORMA UNAUDITED CONDENSED COMBINED FINANCIAL DATA ........... 93
Pro Forma Unaudited Condensed Combined Balance Sheet
(Merger Consideration Consisting of a Combination of
Cash and Common Stock) ............................... 94
Pro Forma Unaudited Condensed Combined Statements of
Earnings
(Merger Consideration Consisting of a Combination of
Cash and Common Stock) ................................ 95
Notes To Pro Forma Unaudited Condensed Combined Financial
Data
(Merger Consideration Consisting of a Combination of
Cash and Common Stock) ................................ 96
Pro Forma Unaudited Condensed Combined Balance Sheet
(Merger Consideration Consisting of All Cash) .......... 99
Pro Forma Unaudited Condensed Combined Statements of
Earnings
(Merger Consideration Consisting of All Cash) .......... 100
Notes To Pro Forma Unaudited Condensed Combined Financial
Data
(Merger Consideration Consisting of All Cash) .......... 101
MARKET PRICES AND DIVIDENDS ....................................... 103
SECURITY OWNERSHIP OF SIGNIFICANT STOCKHOLDERS AND MANAGEMENT ..... 105
OTHER MATTERS ..................................................... 106
STOCKHOLDER PROPOSALS ............................................. 106
ACCOUNTANT'S REPRESENTATIVES ...................................... 107
AVAILABLE INFORMATION ............................................. 107
INDEX TO FINANCIAL STATEMENTS ..................................... F-1
Annex A Opinion of Gleacher & Co. Inc.
Annex B Opinion of Goldman, Sachs & Co.
<PAGE>
<PAGE>
90440391
As filed with the Securities and Exchange
Commission on January 17, 1995
REVISED PRELIMINARY PROXY MATERIALS
CALIFORNIA ENERGY COMPANY, INC.
10831 Old Mill Road
Omaha, NE 68154
----------------
PROXY STATEMENT
----------------
SPECIAL MEETING OF STOCKHOLDERS
February 10, 1995
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 18, 1995.
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
<PAGE>
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.
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.
<PAGE>
<PAGE>
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 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 any other action (which order, decree
<PAGE>
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.
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 16) $17.25 $15.75
1994:
Fourth 17.13 15.25
Third 17.75 16.00
Second 18.13 16.00
<PAGE>
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 16, 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 $17.25. 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 16) $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>
On January 16, 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 $38.00. 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.
Holders of Common Stock are entitled to receive dividends from funds
legally available therefor when, as and if declared by the Board of Directors of
the Purchaser. The Board of Directors of the Purchaser presently intends to
continue the policy of not paying quarterly cash dividends. Future dividends of
the Purchaser will depend upon the earnings of the Purchaser and its
subsidiaries, their financial condition and other factors including applicable
government regulations and policies.
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,
[31,835,592] 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
<PAGE>
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 $____
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.
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) [31,835,592]
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 ______ 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 ______
shares of Common Stock would have to be made available for issuance, and 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 ______ 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 ______) 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
<PAGE>
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.
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
Common Stock would represent approximately 40% of the Common Stock outstanding
prior to such issuance, or approximately ___% of the Common Stock prior to such
issuance on a fully diluted basis.
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.
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
<PAGE>
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 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
<PAGE>
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
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
<PAGE>
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 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.
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.
<PAGE>
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.
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.
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 -- Rationale 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;
(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;
(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;
(iv) The fact that the effect of the Merger would be accretive on a
pro forma per share basis; and
(v) Current industry, economic and market conditions.
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 factors 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
<PAGE>
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 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 previous merger and acquisition transactions.
Gleacher also calculated the value of such Consideration as a multiple of (i)
Magma's trailing twelve-month earnings before interest and taxes (10.5x), (ii)
net income (14.6x), (iii) book value (2.4x), and (iv) projected net income for
1994 (15.5x) and 1995 (14.4x). Gleacher then compared such multiples to the
Company's current trading multiples in order to assess the financial impact of
the transaction on the Company.
Discounted Cash Flow Analysis. Gleacher performed two discounted cash
flow analyses of Magma based upon (i) estimates of financial performance as
prepared by the Company for each of Magma's power projects in operation,
financed and in construction, excluding any other projects under development and
(ii) estimates of financial performance as prepared by Magma for each of Magma's
power projects including (a) certain projects under development and (b) benefits
of a specific technology expected to be implemented. Using these projections,
Gleacher discounted to the present (i) the projected stream of proportionate
cash flows through year 2012 and (ii) the projected terminal value of Magma at
such year based upon a multiple of projected after-tax cash flows. After-tax
cash flows were calculated as projected earnings adjusted for all non-cash
items, less capital expenditures and principal payments on debt obligations.
Gleacher applied several discount rates (ranging from 10% to 15%) and an
after-tax cash flow multiple of 14x to Magma's after-tax cash flows. The
discount rates and after-tax cash flow multiple used by Gleacher in its analysis
were based upon discussions with the management of 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. Using this valuation
<PAGE>
method, the implied value of the Magma Shares ranged from approximately $30 per
share to in excess of $50 per share, respectively. Gleacher then compared such
implied values per Magma Share to the Consideration to be paid by the Company.
Trading Valuation. Gleacher reviewed and compared certain actual and
estimated financial and operating results and stock market performance of Magma
and the Comparable Group. Applying trading multiples of the Comparable Group to
Magma's financial performance, and adding an assumed control premium of 25% -
50% to Magma's trading value, the implied value of the Common Stock of Magma was
estimated to be in excess of $40 per Magma Share. Gleacher then compared such
implied value per Magma Share to the Consideration to be paid by the Company.
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.
Assuming that the Company achieves a modest level of synergies in 1995 resulting
from the Merger, and assuming that the All Cash Component Amount was exercised
by the Company, such analyses estimated that the Merger would be accretive to
earnings per share for the Common Stock by 1.0% in 1995, 10.6% in 1996 and 22.6%
in 1997.
Stock Trading Analysis. Gleacher reviewed and analyzed the historical
trading prices and volumes for the Magma Shares during the 30-month period
preceding the Offer. Gleacher then compared such historical trading prices to
the Consideration to be paid by the Company.
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 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,
<PAGE>
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 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.
The following is a summary of certain financial analyses utilized by
Goldman Sachs in connection with providing its opinion to the Magma Board on
<PAGE>
December 5, 1994 and does not purport to be a complete description of the
analyses performed by Goldman Sachs.
Financial Statement Analysis. Goldman Sachs reviewed and analyzed
selected historical and forecasted income statement, balance sheet and cash flow
information for each of Magma and the Company.
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. In addition, Goldman Sachs compared such trading
prices to the Standard & Poor's 400 Index and an index of selected companies
within the independent power production industry (including The AES Corporation,
Destec Energy, Inc., KENETECH Corporation and Sithe Energies, Inc.) for the
period commencing January 1994.
Selected Company Analysis. Goldman Sachs reviewed and compared certain
actual and estimated financial, operating and stock market information of Magma,
the Company and selected companies in the independent power production industry
including The AES Corporation, Destec Energy, Inc., KENETECH Corporation and
Sithe Energies, Inc.
Discounted Cash Flow Analysis. Goldman Sachs estimated the net present
value of Magma as a going concern based on estimates of future project cash
flows and the likelihood of successful project development where appropriate,
all as provided by Magma management. Goldman Sachs performed a variety of
sensitivity analyses on such cash flow information based upon a variety of
factors, including utility avoided costs and discount rates.
Pro Forma Analyses. Goldman Sachs reviewed certain forecasted financial
information prepared by the respective managements of Magma and 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. 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 analyses indicated that earnings per
share for the pro forma combined entity would be higher as compared with
forecasted earnings per share for the Company as a stand alone entity.
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.
Other Analyses. Goldman Sachs reviewed selected investment research
reports on, and earnings estimates for, the Company and Magma and analyzed
available information regarding the ownership of Magma Shares and Common Stock.
Goldman Sachs also considered the status of discussions with certain third
parties which may have had a potential interest in entering into a business
combination transaction or a strategic alliance with Magma.
General. As described above, certain of the analyses performed by
Goldman Sachs relied on estimates of future financial performance provided by
the managements of 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)
<PAGE>
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 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, although such intention is subject to change based on market conditions
and other factors. 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 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 Mixed Number of
Average 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>
<PAGE>
$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
</TABLE>
- ---------------
(1) The Collar Provision applies.
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 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
<PAGE>
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, 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 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
<PAGE>
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 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
<PAGE>
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.
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.
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
<PAGE>
aware of these interests when it considered and approved the Merger and the
Merger Agreement.
In November 1993, the Compensation Committee of the Magma Board (the
"Compensation Committee") determined that, in order to attract and retain key
executives of Magma, from time to time it would be in Magma's best interests to
enter into "change in control" agreements with key executives. The Compensation
Committee authorized Magma to enter into such agreements, subject to the
following parameters:
(A) provision for up to two times base and bonus salary;
(B) accelerated vesting of options; and
(C) continuation of health and insurance benefits.
Each of the items referred to in (A) through (C) would be triggered by
a Change in Control (as defined below) of Magma followed by termination of the
relevant officer's employment by Magma within a specified period, other than for
cause, disability or retirement.
On September 15, 1994, Magma entered into such change in control
agreements with each of its six current executive officers (Paul M. Pankratz,
Chairman of the Board, Ralph W. Boeker, President and Chief Executive Officer,
Jon R. Peele, Executive Vice President, General Counsel and Secretary, Kenneth
Kerr, Senior Vice President--Commercial Development, Trond Aschehoug, Vice
President--North American Operations, and Wallace C. Dieckmann, Vice President
and Chief Financial Officer) ("Agreement I") and with nine other officers (Tom
Hinrichs, Vice President--Government Affairs, David Olsen, Vice
President--Marketing, Jim Runchey, Vice President--Human Resources and
Administration, Russ Tenney, Vice President--Asian Operations, Steven Jaye, Vice
President--Legal Affairs, Mark Robinson, Vice President--Business Development,
Paul Zapf, Corporate Controller, Joe Asiala, Director--Resource Development and
Management, and Jim Turner, Director--Engineering and Technology) ("Agreement
II").
The agreements provide for certain severance payments to those officers
in the event of the termination of their employment following a Change in
Control of Magma, consistent with the enabling resolutions passed by the
Compensation Committee in the fall of 1993. Each agreement has a term expiring
on December 31, 1997, renewable at the end of such term if mutually agreed to by
the officer and Magma.
Agreement I provides that if the officer's employment is terminated by
Magma for any reason other than for Cause, Disability or Retirement (as such
terms are defined in Agreement I) or by the officer for Good Reason (as such
term is defined in Agreement I) within two years following a Change of Control
(as defined below), (i) Magma will pay the officer, within 30 days of the date
of termination, a cash payment (the "Severance Payment") equal to 200% of the
sum (the "Sum") of (A) the officer's base salary for the twelve months
immediately preceding the Change in Control and (B) the officer's entire
targeted bonus payable under Magma's Management Incentive Bonus Plan or other
executive bonus plan then in effect and (ii) all Magma deferred shares or
similar Magma securities and all options to purchase Magma securities then held
by the officer shall immediately vest. Magma will continue to provide the
officer and his or her dependents group life and health insurance benefits
substantially the same as those in effect prior to the Change of Control,
increased to the extent that such benefits are increased following the Change of
Control, for 24 months following the officer's date of termination. In the event
that any payments or benefits under the agreement would not be deductible (in
whole or in part) by Magma as a result of the application of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), the Severance Payment
will be reduced until no portion of the Severance Payment and benefits is not
deductible as a result of Section 280G of the Code.
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.
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
<PAGE>
("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
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.
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.
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 $[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
<PAGE>
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.
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 Credit
Suisse's Base Rate for Term Loan A, and 3.00% above LIBOR (adjusted for
reserves) or 2.00% above Credit Suisse's Base Rate for Term Loan B. The Company
may elect to have the loans bear interest based on either LIBOR or Credit
Suisse's Base Rate.
The Merger Facilities will contain affirmative and negative covenants
customary for similar credit facilities. Such covenants will include: a negative
pledge of all stock and unencumbered assets of Magma and its subsidiaries; a
limitation on guaranties by Magma and its subsidiaries; a limitation on mergers
and sales of assets by Magma and its subsidiaries; a limitation on investments
in other persons by Magma and its subsidiaries; a 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; Issued
32,230 shares-actual; 47,529
shares-as adjusted(1) 2,407 - 802 3,209
Magma common stock of $0.10 par value;
authorized 30,000 shares; 24,043 issued - 2,401 (2,401) -
Additional paid in capital 100,000 142,765 49,350 292,115
Unrealized gain from marketable securities - (677) 677 -
Retained earnings 136,769 250,797 (250,797) 136,769
Less treasury stock - 3,420 shares at cost (59,516) - 59,516 -
--------- --------- --------- ----------
Total stockholders' equity 179,660 395,286 (142,853) 432,093
--------- --------- --------- ----------
$1,017,544 $596,609 $357,147 $1,971,300
========= ========= ========= ==========
</TABLE>
- ---------------
(1) Proposal I relates to an increase in the number of authorized shares
of Common Stock to 80,000,000. Issued 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>
<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>
- ---------------
(1) Proposal I relates to an increase in the number of authorized shares
of Common Stock to 80,000,000. Issued 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>
<PAGE>
COMPARISON OF CERTAIN UNAUDITED DATA
Merger Consideration 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 $ 38,444 $ 52,135 $ (47,745) $ 42,834
operations available to common
stockholders
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 $ 27,688 $ 46,843 $ (35,808) $ 38,723
stockholders
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
<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.
<PAGE>
<PAGE>
Merger Consideration Consisting of All Cash
The following table contains certain unaudited comparative data related to
common stockholders' equity, cash dividends declared, and revenues and earnings
(i) on a historical basis for 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 $ 38,444 $ 52,135 $ (46,982) $ 43,597
operations available to common
stockholders
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 $ 27,688 $ 46,843 $ (35,236) $ 39,295
stockholders
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>
<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, 34,781 59,401 74,057 82,346 102,459 79,321 97,867
amortization, interest, income taxes,
extraordinary item and cumulative effect of
change in accounting principle (1)
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)
</TABLE>
<PAGE>
<PAGE>
<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 (Continued):
Cumulative effect of change in
accounting principle per share (3) $ - $ - $ - $ - $0.11 $0.11 $ -
-------- -------- --------- -------- -------- --------- ----------
Net income per share
Assuming no dilution $0.38 $0.44 $0.75 $0.79 $1.11 $0.92 $0.71
======== ======== ========= ======== ======== ========= ==========
Assuming full dilution (4) $0.38 $0.44 $0.75 $0.79 $1.11 $0.92 $0.70
======== ======== ========= ======== ======== ========= ==========
Weighted average shares
outstanding (5) 27,019 27,254 35,471 37,495 38,485 38,436 36,174
Capital expenditures 124,749 32,514 68,377 32,446 87,191 64,250 78,892
<CAPTION>
December 31, September 30,
1989 1990 1991 1992 1993 1993 1994
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Property-power plant, net $302,514 $321,303 $373,948 $389,646 $458,974 $440,527 $522,268
Total assets 349,282 393,853 517,994 580,550 715,984 710,659 1,087,064
Total debt 260,120 270,738 257,038 299,334 382,610 390,972 775,534
Preferred stock - 4,705 54,705 54,350 58,800 57,650 62,350
Stockholders' equity 42,163 55,088 143,128 168,764 211,503 206,675 179,660
</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>
<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 amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $63,103 $ 85,599 $94,891 $108,966 $167,138 $124,781 $146,104
Operating revenues(1) 56,743 76,893 84,135 100,313 162,943 121,146 142,238
Income from operations 26,892 36,694 41,204 49,667 74,913 57,957 67,915
Income before cumulative 22,295 30,166 33,941 36,358 52,135 39,469 46,843
effect of accounting change
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
<CAPTION>
December 31, September 30,
1989 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Property, plant and $124,062(5) $120,125 $118,541 $113,922 $265,215 $256,561
equipment, net
Exploration and development 46,681 44,782 48,644 52,001 107,069 104,271
costs, net
Total assets 282,624 325,131 353,788 396,650 611,311 630,422
Long-term obligations(6) 98,212 99,297 89,808 87,339 200,509 164,313
Total debt(7) 100,517 102,842 97,541 96,126 226,008 188,969
Stockholders' equity 150,142 192,626 226,872 282,260 351,918 395,286
</TABLE>
- ---------------
(1) Excludes interest and other income.
(2) The cumulative effect of Magma's adoption of SFAS 109 increased net income
by $17,833, or $.77 per share. See Note 11, Provision for Income Taxes,
accompanying the consolidated financial statements for the year ended
December 31, 1992 for Magma incorporated by reference in its Annual Report
on Form 10-K for the year ended December 31, 1993.
(3) Excludes the impact of cumulative effect of change in accounting for income
taxes.
(4) Fully diluted earnings per share reflects the dilative effect of stock
options and warrants at the end of the reporting period.
(5) Projects in progress reclassified to appropriate asset classification.
(6) Consists of the noncurrent portion of long-term loans payable and other
long-term liabilities.
(7) Represents loans payable, including the current
portion of long-term loans payable.
<PAGE>
<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 347 MW of electric
generating capacity in power production facilities in the United States having
an aggregate net capacity of 553 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 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 9-month period ended September
30, 1994. Following the consummation of the Merger, PKS will be an approximate
31.0% stockholder of the Company (on a fully diluted basis).
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:
- 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.
Furthermore, the Company will have available to it technology
of both the Company and Magma. 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.
- 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 upon the Company's belief that potential customers consider both
the price of power and the provider's capacity to fulfil 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,
<PAGE>
the Company will have over $2 billion of total assets and an aggregate
net ownership interest of 1,691 MW in projects in operation, under
construction or in development, which projects have an aggregate net
generating capacity of 2,642 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 it 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.
- 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.
- 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 and in
development) 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 revenues and operations.
GEOTHERMAL ENERGY
Geothermal energy is a clean, renewable and generally sustainable
energy source that releases significantly lower levels of emissions than result
from energy generation based on the burning of fossil fuels. Geothermal energy
is derived from the natural heat of the earth when water comes sufficiently
close to hot molten rock to heat the water to temperatures of 400 degrees
Fahrenheit or more. The heated water then ascends naturally toward the surface
of the earth where it can be extracted by drilling geothermal wells. The energy
necessary to operate a geothermal power plant is typically obtained from several
such wells which are drilled using established technology similar to that
employed in the oil and gas industry.
Geothermal production wells are normally located within approximately
one to two miles of the power plant as geothermal fluids cannot be transported
economically over longer distances. From the well heads, the heated fluid flows
through pipelines to a series of separators where it is separated into water,
brine and steam. The steam is passed through a turbine which drives a generator
to generate electricity. Once the steam has passed through the turbine, it is
then cooled and condensed back into water which, along with any brine, is
returned to the geothermal reservoir via injection wells. Geothermal plants in
the United States are eligible to be qualifying facilities ("QFs") under the
Public Utility Regulatory Policies Act of 1978 ("PURPA"), which provides for
certain beneficial Federal regulatory treatment. The geothermal reservoir is a
renewable source of energy if natural ground water sources and re-injection of
extracted geothermal fluids are adequate over the long term to replenish the
geothermal reservoir after the withdrawal of geothermal fluids.
The generation of electric power from geothermal resources has certain
advantages when compared to other methods of electric power generation.
Geothermal energy facilities generate significantly less emissions than fossil
fuel power plants. Geothermal energy facilities typically have higher capital
costs but tend to have significantly lower variable costs than fossil fuel based
power plants. As a result, geothermal power facilities tend to have a more
predictable life cycle than fossil fuel-based power facilities. 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.
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.
<PAGE>
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 generation 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 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. The Company has successfully financed and has under
construction three projects representing an aggregate of 409 MW of net ownership
of electric generating capacity in the Philippines and 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,
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
<PAGE>
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
The Company has net ownership interests of an aggregate of (i) 347 MW
in 13 projects in operation representing an aggregate net capacity of 553 MW of
electric generating capacity, (ii) 409 in three projects under construction
representing an aggregate net capacity of 500 MW of electric generating capacity
and (iii) 935 MW in eight projects in development stages with signed power sale
agreements or under award representing an aggregate net capacity of 1,589 MW of
electric generating capacity. The following table sets out 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.
<PAGE>
<PAGE>
International Projects
<TABLE>
<CAPTION>
PROJECTS UNDER CONSTRUCTION
Facility Facility Net Projected
Gross Net Ownership Commercial
Capacity Capacity Interest Operation Contract Contract Power
Project in MW(1) (in MW)(2) (in MW) Location Date Expiration(3) Type Purchaser(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(1) 180 165 74 Leyte, the 1997 CO+10 Build, PNOC-EDC
Philippines Own, (GOP)(5)
Transfer
Malitbog-Phase I and II 231 216 216 Leyte, the 1996 CO+10 Build, PNOC-EDC
Philippines Own, (GOP)(5)
Transfer
Total Under Construction 539 500 409
--- --- ---
<CAPTION>
PROJECTS WITH SIGNED POWER SALES CONTRACTS OR AWARDED DEVELOPMENT RIGHTS
Facility Facility Net Projected
Gross Net Ownership Commercial
Capacity Capacity Interest Operation Contract Contract Power
Project (in MW)(6) (in MW)(2) (in MW) Location Date Expiration Type Purchaser(4)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dieng(7) 400 400 188 West Java, 1997-1999 CO+30 Build, PLN
Indonesia Own, (GOI)
Transfer
Patuha(7) 400 400 140 Central Java, 1997-1999 CO+30 Build, PLN
Indonesia Own, (GOI)
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
Indonesia Own, (GOI)
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
===== ===== =====
</TABLE>
- ----------------------------
(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 outside purchasers.
(2) Facility Net Capacity (in MW) represents Facility Gross Capacity (in MW)
less parasitic load.
(3) Commercial Operation (CO).
(4) Phillipine National Oil Company-Energy Development Company (PNOC-EDC); P.T.
PLN (Persero)(PLN); Phillipine National
Irrigation Administration (NIA).
(5) Government of the Philippines undertaking supports PNOC-EDC and NIA's
respective obligations.
(6) Actual MW may vary depending on operating and reservoir conditions and final
plant design. Facility Gross Capacity (in MW) for awarded projects equal
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) PKS has elected to exercise its ownership option pursuant to its joint
venture agreement with the Company.
<PAGE>
(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 revenues 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.
<PAGE>
<PAGE>
DOMESTIC PROJECTS
PROJECTS IN OPERATION
<TABLE>
<CAPTION>
Facility Net
Net Ownership Date of
Capacity Interest Commercial Contract Contract Power
Project (in MW)(7) (in MW) Location Operation Expiration Type Purchaser(8)
<S> <C> <C> <C> <C> <C> <C> <C>
Navy 1 80 37 China Lake, CA 8/1987 8/2011 SO4 SCE
BLM 80 38 China Lake, CA 3/1989 3/2019 SO4 SCE
Navy II 80 40 China Lake, CA 1/1990 1/2010 SO4 SCE
Vulcan 34 17 Imperial Valley, 2/1986 2/2016 SO4 SCE
CA
Hoch (Del Ranch) 38 19 Imperial Valley, 1/1989 12/2018 SO4 SCE
CA
Elmore 38 19 Imperial Valley, 1/1989 12/2018 SO4 SCE
CA
Leathers 38 19 Imperial Valley, 1/1990 12/2019 SO4 SCE
CA
Salton Sea I 10 10 Imperial Valley, 7/1987 6/2017 Negotiated SCE
CA
Salton Sea II 20 20 Imperial Valley, 4/1990 4/2020 SO4 SCE
CA
Salton Sea III 50 50 Imperial Valley, 2/1989 2/2019 SO4 SCE
CA
Yuma Cogen 50 50 Yuma, AZ 5/1994 5/2024 Negotiated SDG&E
Roosevelt Hot 25 18 Milford, UT 5/1984 1/2021 Gathered UP&L
Springs Steam
Desert Peak 10 10 Desert Peak, NV 12/1985 12/1995 Negotiated SPCC Power
-- --
Total in Operation 553 341
=== ===
<CAPTION>
PROJECTS WITH SIGNED POWER SALES CONTRACTS/AWARDED DEVELOPMENT RIGHTS
Facility Net Projected
Net Ownership Commercial
Capacity Interest Operation Contract Contract Power
Project (in MW) (in MW) Location Date Expiration Type Purchaser(8)
<S> <C> <C> <C> <C> <C> <C> <C>
BRPU(2) 163 163 Imperial Valley, CA TBD TBD FSO4 SCE(9)
Fish Lake(10) 36 36 Imperial Valley, CA est. 1996 2015 Negotiated SCE
Newberry 30 30 Bend, OR est. 1998 2047 Negotiated BPA/EWEB
-- --
Total Contracted/Awarded 229 229
--- ---
Total Domestic Projects 782 576
--- ---
Total Projects 2,642 1,691
===== =====
</TABLE>
- ---------------
(8) Southern California Edison Company (SCE); San Diego Gas & Electric
Company (SDG&E); Utah Power & Light Company (UP&L); Sierra Pacific
Power Company (SPCC); Bonneville Power Authority (BPA); and Eugene
Water and Electric Board (EWEB).
(9) SCE is contesting the BRPU award; accordingly, no power sales contract
is currently signed.
(10) Combined Fish Lake and Salton Sea Expansion option.
<PAGE>
<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 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. The following is a summary description of certain information concerning
these and other projects.
Upper Mahiao. The Company has closed the financing and commenced
construction of the Upper Mahiao Project, a 119 gross MW geothermal project to
be located in the Greater Tongonan area of the island of Leyte in the
Philippines. The Upper Mahiao Project will be built, owned and operated by CE
Cebu Geothermal Power Company, Inc. ("CE Cebu"), a Philippine corporation that
is approximately 100% indirectly owned by 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. 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 guaranty of Ormat Industries, Ltd., an Israeli corporation and the
parent of Ormat, in each case for the benefit of the project lenders.
Under the terms of an energy conversion agreement, executed on
September 6, 1993 (the "Upper Mahiao ECA"), CE Cebu will build, own and operate
the Upper Mahiao Project during the approximately two-year construction period
and the ten-year cooperation period, after which ownership will be transferred
to PNOC-EDC at no cost.
The Upper Mahiao Project will be located on land provided by PNOC-EDC
<PAGE>
at no cost. It will take geothermal steam and fluid, also provided by PNOC-EDC
at no cost, and convert its thermal energy into electrical energy to be sold to
PNOC-EDC on a "take-or-pay" basis. Specifically, PNOC-EDC will be obligated to
pay for the electric capacity that is nominated each year by CE Cebu,
irrespective of whether PNOC-EDC is willing or able to accept delivery of such
capacity. PNOC-EDC will pay to CE Cebu a fee (the "Capacity Fee") based on the
plant capacity nominated to PNOC-EDC in any year (which, at the plant's design
capacity, is approximately 95% of total contract revenues) and a fee (the
"Energy Fee") based on the electricity actually delivered to PNOC-EDC
(approximately 5% of total contract revenues). The Capacity Fee serves to
recover the capital costs of the project, to recover fixed operating costs and
to cover return on investment. The Energy Fee is designed to cover all variable
operating and maintenance costs of the power plant. Payments under the Upper
Mahiao ECA will be denominated in U.S. dollars, or computed in dollars and paid
in Philippine pesos at the then-current exchange rate, except for the Energy
Fee, which will be used to pay 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. 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 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. 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 Contract"). The obligations of the EPC
Consortium under the Mahanagdong EPC Contract are supported by a guaranty of KCG
at an aggregate amount equal to approximately 50% of the Mahanagdong EPC
Contract's price. KCG, a wholly owned subsidiary of PKS, is the lead member of
the EPC Consortium, with an 80% interest. KCG performs construction services for
a wide range of public and private customers in the U.S. and internationally.
The Mahanagdong EPC Contract provides for maximum liability for liquidated
damages of up to $100.5 million and total liability of up to $201 million.
Construction projects undertaken by KCG during 1993 included transportation
projects, including highways, bridges, airports and railroads, power facilities,
buildings and sewer and waste disposal systems; and water supply systems,
utility facilities, dams and reservoirs. KCG accounts for 80% of PKS's revenues,
contributing $1.7 billion in revenues in 1993. KCG has an extensive background
in power plant construction.
BHCO will provide design and engineering services for the EPC
Consortium, holding a 20% interest. The Company has provided a guaranty of
BHCO's obligations under the Mahanagdong EPC Contract.
<PAGE>
The terms of an energy conversion agreement (the "Mahanagdong ECA"),
executed on September 18, 1993, are substantially similar to those of the Upper
Mahiao ECA. The Mahanagdong ECA provides for an approximately three-year
construction period and a ten-year cooperation period. All of PNOC-EDC's
obligations under the Mahanagdong ECA are supported by the Philippines through a
performance undertaking. The Capacity Fees are expected to be approximately 97%
of total revenues at the design capacity levels and the Energy Fees are expected
to be approximately 3% of such total revenues.
Malitbog. In December 1994 Magma closed the financing and commenced
construction of the Malitbog Project, a 231 gross MW geothermal project, which
will also be located on the island of Leyte. The Malitbog Project will be built,
owned and operated by Visayas Geothermal Power Company ("VGPC"), a Philippine
general partnership that is wholly owned, indirectly, by Magma. VGPC will sell
100% of its capacity on substantially the same basis as described above for the
Upper Mahiao Project to PNOC-EDC, which will in turn sell the power to NAPOCOR.
The Malitbog Project has a total project cost of $280 million,
including interest during construction and project contingency costs. A
consortium of international banks and OPIC have provided a total of $210 million
of construction and term loan facilities, the $135 million international bank
portion of which is supported by political risk insurance from OPIC. Magma's
equity contribution to VGPC is approximately $70 million. Magma's equity
participation is covered by political risk insurance from OPIC.
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 the
schedule, including the payment of any liquidated damages or penalties required
to be paid by the Partnership 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 its ability to operate at a net generating
capacity of at least 222.3 MW. The liquidated damages are capped at 13 1/3% of
the total Malitbog EPC price for each generating unit. Pursuant to a
reimbursement undertaking, Magma has agreed to reimburse Sumitomo for draws, if
any, by PNOC-EDC on the construction bond provided by Sumitomo on behalf of
Magma in excess of the liquidated damage amounts provided in the Malitbog EPC.
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
Investor's 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 on or about June 1, 1996, and commercial operation
of unit 2 and unit 3 scheduled to commence on or about June 1, 1997.
The terms of 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
units with the first phase (unit 1) scheduled to start up by July 1996 and the
second phase (units 2 and 3) scheduled to start up by July 1997. The cooperation
period is ten years from the completion of unit 3. All of PNOC-EDC's obligations
under the Malitbog ECA are 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 (Cagoyan) watershed in Northern Luzon to the
Pampanga watershed and the Pantabangan Reservoir for irrigation use in the
Central Luzon Valley. The Casecnan Multipurpose Project will also provide 140 MW
of net electric generation capacity to the Luzon grid.
The Project Agreement is structured as a build, operate and transfer
agreement under which NIA will supply the water for the Casecnan Multipurpose
Project. The Project Agreement provides for a 20-year cooperation period with
significant "take-or-pay" obligations for water and electricity. At the end of
the 20-year cooperation period, the Project will be transferred to NIA at no
cost. The Company anticipates commencing construction in 1995.
Completion of such Project remains subject to a number of significant
uncertainties, including arranging financing and obtaining certain required
permits and licenses, none of which can be assured.
Alto Peak. Alto Peak is a smaller geothermal project in the same
general area of Leyte as Upper Mahiao, Mahanagdong and Malitbog. Magma and
PNOC-EDC have executed a 70 MW net Energy Conversion Agreement, dated May 7,
1994. The general terms and conditions are similar to the Malitbog ECA. However,
the plant design has not been initiated as PNOC-EDC has not finalized the steam
conditions (pressure, composition and ph), as PNOC-EDC is still drilling and
testing the geothermal wells that will supply steam to the project.
Consequently, Magma has not commenced financing arrangements for the project.
Indonesia. Indonesia, which has the world's fourth largest population,
has experienced rapid growth in electricity demand. The Company believes that
load growth averaged in excess of 13% from 1980 through 1990, and has exceeded
<PAGE>
17% over the past two years. 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 LNG, the government has announced
that it wishes to maintain sufficient amounts of oil for export, which will
require a shift to coal fired generation and the use of other energy sources,
such as geothermal.
It is estimated that Indonesia has sufficient geothermal steam
potential to generate 16,000 MW, centered in the Java and Sumatra areas (the two
most populous of the 13,000 islands in Indonesia). To date, less than 150 MW of
geothermal facilities have been commissioned, as the Government of Indonesia was
not encouraging the development of geothermal energy, but these measures have
been repealed.
The Indonesian state-owned utility has recently been converted to a
limited liability company, P.T. PLN (Persero) ("PLN"), as a first step towards
the privatization of its two largest generating subsidiaries. The main objective
of Indonesia's electric energy policy has been to secure a continuity of supply
at reasonable rates for households (40% of which have no power) and to minimize
the utilization of hydrocarbons. Rural electrification will remain an important
component of the energy policy as PLN is targeting the addition of 2 million
customers a year.
Indonesia is rated Baa3/BBB- by Moody's Investors Service, Inc. and
Standard & Poor's Corporation. The Company believes that Indonesia represents an
attractive development opportunity as it combines growing power needs with ample
geothermal resources and creditworthy contract parties.
The following is a summary description of certain information
concerning 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 completion of well testing and (ii) 30 years following the
date of commencement of commercial generation of the final unit completed. Upon
the expiration of the proposed Dieng JOC, all facilities will be transferred to
Pertamina at no cost. The Dieng Joint Venture is required to pay Pertamina a
production allowance equal to three percent of the Dieng Joint Venture's net
operating income from the Dieng Project, plus a further amount based upon the
negotiated value of existing Pertamina geothermal production facilities that 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
<PAGE>
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 "Joint Venture
Project") for Patuha with P.T. Enerindo Supra Abadi ("P.T. ESA"), an Indonesian
company. P.T. ESA is an affiliate of the Bukaka Group, which has extensive
experience in general construction, fabrication and electrical transmission
construction in Indonesia. In exchange for project development services, P.T.
ESA will receive a 10% equity interest in the Patuha Project with an option to
acquire an additional 20% interest for cash upon the satisfaction of certain
conditions. Subject to the exercise of that option, subsidiaries of 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 (the "Patuha JOC") and an energy sales contract (the "Patuha
ESC"), each of which currently contains terms substantially similar to those
described above for the Dieng Project. The Patuha Joint Venture intends to
proceed on a modular basis similar to the Dieng Project, with an aggregate
capacity of up to 400 MW. 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 Panutau Group, an Indonesian consortium of
energy, oil, gas and mining companies, have formed a joint venture to pursue the
development of geothermal resources in Bali and to obtain a power sales contract
from PLN.
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.
DOMESTIC PROJECTS - DISCUSSION
PROJECTS IN OPERATION
The Coso Projects. 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 Projects").
The Coso Joint Ventures are as follows: (i) Coso Finance Partners,
which owns the Navy I Project (the "Navy I Partnership"), (ii) Coso Energy
Developers, which owns the BLM Project (the "BLM Partnership"), and (iii) Coso
Power Developers, which owns the Navy II Project (the "Navy II Partnership" and,
together with the Navy I Partnership and the BLM Partnership, the "Coso
Partnerships"). 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. 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 Projects, for which it receives fees
from the Coso Partnerships.
The Coso Projects sell all electricity generated by the respective
plants pursuant to three long-term SO4 Agreements between the Navy I
Partnership, the BLM Partnership, and the Navy II Partnership, respectively, and
SCE. These SO4 Agreements provide for capacity payments, capacity bonus 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
<PAGE>
at SCE's Avoided Cost of Energy. The fixed price periods of the SO4 Agreements
extend until August 1997, March 1999 and January 2000 for each of the Navy I,
BLM and Navy II Partnerships, respectively, at rates ranging from 11.0(cent) per
kWh in 1994 to 14.6(cent) 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 Coso Projects.
The Navy I Project. The geothermal resource for the Navy I Project
currently is produced from approximately 32 wells. The Navy I Project consists
of three turbine generators, each with approximately 32 MW of electrical
generating capacity. The Navy I Project has an aggregate gross electrical
generating capacity of approximately 96 MW, and operated at an average operating
capacity factor of 99.8% in 1992, 111.2% in 1993 and 114.6% in the first nine
months of 1994, based on a net capacity of 80 MW.
The BLM Project. The BLM Project's geothermal resource currently is
produced from approximately 20 wells. The BLM Project consists of three turbine
generators. Two of these turbine generators are located at the BLM East site in
a dual flash system, each with a nameplate capacity of 29 MW; and one is located
at the BLM West site in a single flash system, with a nameplate capacity of 29
MW. The BLM Project has an aggregate gross electrical generating capacity of
approximately 96 MW, and operated at an average operating capacity factor of
87.2% in 1992, 98.1% in 1993, and 98.5% in the first nine months of 1994, based
on a net capacity of 80 MW.
The Navy II Project. The geothermal resource for the Navy II Project
currently is produced from approximately 25 wells. The Navy II Project consists
of three individual turbine generators, each with approximately 32 MW of
electrical generating capacity. The Navy II Project has an aggregate gross
electrical capacity of approximately 96 MW, and operated at an average operating
capacity factor of 98.1% in 1992, 102.6% in 1993, and 103.5% in the first nine
months of 1994, based on a net capacity of 80 MW.
In December 1992, the Coso Joint Ventures refinanced the existing bank
debt on the Coso Projects with the proceeds of the sale of approximately $560
million in non-recourse senior secured notes (the "Notes") in a private
placement pursuant to Rule 144A under the Securities Act. The Notes were issued
by Coso Funding Corp. ("Coso Funding"), a corporation owned by the Coso Joint
Ventures and formed exclusively for the purpose of issuing the Notes. Coso
Funding lent the Coso Joint Ventures substantially all of the net proceeds of
the sale of the Notes. At the time of their issuance, the Notes were rated
"BBB-" by Standard & Poor's Corporation, "Baa3" by Moody's Investors Service,
Inc., and "BBB" by Duff & Phelps Credit Rating Co., all investment grade
ratings. The outstanding balance of the Notes on September 30, 1994 was $483.5
million with a remaining average life of 3.5 years, and the average interest
rate on the Notes for the nine months ending on the same date was 8.07%. The
obligations of each Coso Partnership under the loans from Coso Funding are
non-recourse to 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 Project Loans are cross-collateralized by certain support loans
only to the extent of the other Coso Joint Ventures' available cash flow and,
under certain circumstances, the debt service reserve funds, and not as to other
assets.
Salton Sea Known Geothermal Resource Area Projects. Magma acquired
three geothermal power plants which comprise the Salton Sea I project (the
"Salton Sea I Project"), the Salton Sea II project (the "Salton Sea II Project")
and the Salton Sea III project (the "Salton Sea III Project") (collectively, the
"Salton Sea Projects") and all related wellfield, land and other related assets
in March 1993 from Union Oil Company of California. Each of Vulcan, Hoch (Del
Ranch), Elmore and Leathers projects (the "Vulcan Project," the "Hoch (Del
Ranch) Project," the "Elmore Project" and the "Leathers Project," respectively,
and collectively, the "Partnership Projects") is owned by an equal partnership
(the "Vulcan Partnership," the "Del Ranch Partnership," the "Elmore Partnership"
and the "Leathers Partnership," respectively, and collectively, the
"Partnerships") between Magma and a subsidiary of Mission Energy, a wholly owned
subsidiary of SCE. In the case of the Vulcan Project, the Vulcan Partnership
owns certain geothermal resources supplying the Vulcan Plant. In the case of the
other three Partnership Plants, Magma owns the geothermal resources and receives
royalty payments from the Hoch, Elmore and Leathers Partnerships. In the first
nine months of 1994, such royalties totaled $15.96 million. Magma's share of the
aggregate revenues received by the Salton Sea Projects and the Partnerships for
the first nine months of 1994 was $124.1 million. In each case, a subsidiary of
Magma is the managing general partner, and Magma consolidates one-half of the
operating results of each Partnership Plant into its financial statements. A
subsidiary of Magma operates each of the Salton Sea Plants and the Partnership
Plants.
The Salton Sea Projects operated at a combined nameplate capacity
factor (excluding scheduled maintenance hours) of 94.1% in the nine months ended
December 31, 1993 and 90.8% in the first nine months of 1994. The Partnership
Projects operated at a combined nameplate capacity factor of 100.7% in 1993 and
105.0% in the first nine months in 1994.
Vulcan. The Vulcan Project sells electricity to SCE under a 30-year SO4
Agreement that commenced on February 10, 1986. The Vulcan Project has a contract
capacity and contract nameplate of 29.5 MW and 34 MW of electric generating
capacity, respectively. Under the contract, SCE is obligated to pay the Vulcan
Project a capacity payment, a capacity bonus payment, and an energy 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
<PAGE>
each year for the first ten years, which period expires on February 9, 1996.
Thereafter, the energy payments will be based on SCE's published Avoided Cost of
Energy. The energy payment per kWh is 10.9(cent) for 1994, 11.8(cent) for 1995
and 12.6(cent) for 1996. The Vulcan Project is unleveraged.
Hoch (Del Ranch). The Hoch (Del Ranch) Project sells electricity to SCE
under a 30-year SO4 Agreement that commenced on January 1, 1989. The Hoch (Del
Ranch) Project has a contract nameplate of 38 MW of electric generating
capacity. The contract capacity and contract nameplate are 34 MW and 38 MW,
respectively. The provisions of such SO4 Agreement are substantially the same as
for the SO4 Agreement with respect to the Vulcan Project.
The price for contract capacity payment is fixed for the life of the
SO4 Agreement. The energy payment per kWh for the first ten-year period, which
expires on December 31, 1998, is fixed at rates ranging from 10.9(cent) for 1994
to 14.6(cent) for 1998. Thereafter, the energy payments will be based on SCE's
published Avoided Cost of Energy.
The Del Ranch Partnership entered into a $66 million secured credit
facility with commercial banks in March 1988. The final maturity date of the
term loans is September 15, 2001. The secured credit agreement was amended to
allow for the issuance of commercial paper and medium-term notes supported by a
letter of credit as an alternative to borrowing directly from the banks.
Elmore. The Elmore Project sells electricity to SCE under a 30-year SO4
Agreement that commenced on January 1, 1989. The Elmore Project sells
electricity to SCE under a 30-year SO4 Agreement that commenced on January 1,
1989. The contract capacity and contract nameplate are 34 MW and 38 MW,
respectively. The provisions of such SO4 Agreement are substantially the same as
for the SO4 Agreement with respect to the Vulcan Project.
The price for contract capacity payments is fixed for the life of the
SO4 Agreement. The fixed energy payments for the first ten-year period, which
expires on December 31, 1998, are fixed at rates ranging from 10.9(cent) in 1994
to 14.6(cent) in 1998. Thereafter, the energy payments will be based on SCE's
published Avoided Cost of Energy.
The Elmore Partnership entered into a $66 million secured credit
facility with commercial banks in March 1988. The final maturity date of the
term loans is September 15, 2001. The secured credit agreement was amended and
restated on April 18, 1990 (the "Credit Agreement") to allow for the issuance of
commercial paper and medium-term notes supported by a letter of credit as an
alternative to borrowing directly from the banks.
Leathers. The Leathers Project sells electricity to SCE pursuant to a
30-year SO4 Agreement that commenced on January 1, 1990. The contract capacity
and contract nameplate are 34 MW and 38 MW, respectively. The provisions of such
SO4 Agreement are substantially the same as for the SO4 Agreement with respect
to the Vulcan Project.
The price for contract capacity payments is fixed for the life of the
SO4 Agreement. The monthly energy payments per kWh for the first ten-year
period, which expires on December 31, 1999, are fixed at rates ranging from
10.9(cent) in 1994 to 15.6(cent) in 1999. Thereafter, the monthly energy
payments are based on SCE's published Avoided Cost.
The Leathers Partnership entered into an $82 million secured credit
facility with commercial banks in March 1988. The final maturity date of the
term loans is September 15, 2002. The secured credit agreement was amended to
allow for the issuance of commercial paper and medium-term notes supported by a
letter of credit as an alternative to borrowing directly from the banks.
Salton Sea I Project. The Salton Sea I Project sells electricity to SCE
pursuant to a 30-year negotiated power purchase agreement, as amended (the
"Salton Sea I PPA"), which provides for capacity and energy payments.
The initial (Phase I) contract capacity and nameplate is 10 MW. The
Project may add subsequent increments of contract capacity (subject to
notification requirements) the sum of which may not exceed 20 MW (the "Project
Expansion"). See "-- Projects in Development - Fish Lake/Salton Sea I
Expansion."
The capacity payment is based on the firm capacity price which is
currently $123.61/kW-year. The contract capacity payment adjusts quarterly based
on a basket of energy indices for the term of the power purchase agreement. The
energy payment is calculated using a Base Price (defined as the initial value of
the energy payment (4.701(cent) 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 4.8(cent) per kWh during
1993. As the Salton Sea I Contract is not an SO4 Agreement, the energy payments
do not revert to SCE's Avoided Cost of Energy.
Salton Sea II Project. The Salton Sea II Project sells electricity to
SCE pursuant to a 30-year modified SO4 Agreement that commenced on April 15,
1990. The contract capacity is 15 MW and the nameplate capacity is 20 MW. The
contract requires SCE to make capacity payments, capacity bonus payments and
energy payments. The price for contract capacity and contract capacity bonus
payments is fixed for the life of the modified SO4 Agreement. The energy
payments for the first ten-year period, which period expires on April 4, 2000,
are levelized at a time period weighted average of 10.6(cent) per kWh. 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.
Thereafter, the monthly energy payment will be SCE's Avoided Cost of Energy.
Salton Sea III Project. The Salton Sea III Project sells electricity to
SCE pursuant to a 30-year modified SO4 Agreement. The contract capacity is 47.5
<PAGE>
MW and the nameplate capacity is 50 MW. The SO4 Agreement requires SCE to make
capacity payments, capacity bonus payments and energy payments for the life of
the Agreement. The price for contract capacity payments is fixed. The energy
payments for the first ten-year period, which period expires on February 13,
1999, are levelized at a time period weighted average of 9.8(cent) per kWh.
Thereafter, the monthly energy payment will be SCE's Avoided Cost of Energy.
The partnerships that own the Salton Sea Projects (the "Salton Sea
Partnerships") are parties to a secured credit facility with commercial banks.
The agreement provides for a $130 million term loan broken into two tranches,
(i) tranche A (covers Units 1 and 2) in the original principal amount of $37
million with a final maturity date of March 15, 2000 and (ii) tranche B (covers
Unit 3) in the original principal amount of $93 million with a final maturity
date of January 31, 1999. In addition, the agreement provides for a renewable
working capital loan in the aggregate principal amount of $5,000,000 with an
initial maturity date of February 27, 1995.
Desert Peak. 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 6.3(cent) per kWh,
comprising an energy payment of 1.8(cent) per kWh (which is adjustable pursuant
to an inflation-based index) and a capacity payment of 4.5(cent) per kWh. The
Company is currently negotiating the terms of an extension to this contract.
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. 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. The Yuma Project is unleveraged
other than intercompany debt.
Mammoth Plants. Magma receives royalty revenues from a 10 MW and a 12
MW nameplate capacity geothermal power plant (the "First Mammoth Plant" and the
"Second Mammoth Plant", respectively, and referred to herein, collectively, as
the "Mammoth Plants") at Mammoth Lakes, California. Electricity from the Mammoth
Plants is sold to SCE under two long-term power purchase agreements. The First
Mammoth Plant and the Second Mammoth Plant began commercial operation in 1985
and 1991, respectively. Magma leases both property and geothermal resources to
support the Mammoth Plants in return for certain base royalty and bonus royalty
payments. For the First Mammoth Plant and the Second Mammoth Plant, the base
royalty is 12.5% and 12%, respectively, of gross electricity sales revenues. The
bonus royalty for each Mammoth Plant is 50% of the excess of annual gross
electricity sales revenues over an annual revenue standard based on the plants
operating at 85% of contract capacity.
The East Mesa Plant. Magma also receives royalty revenues from a 37 MW
nameplate capacity geothermal power plant (with two units) at East Mesa in
Imperial Valley, California. Electricity from the plant is sold to SCE pursuant
to two SO4 Agreements formerly held by Magma, and Magma is entitled to receive a
senior payment of 4% of gross electricity sales revenues and a junior payment of
10% of gross electricity sales revenues. To date, such junior payment has not
been received. Since 1992, Magma recognized the accrued junior SO4 payments as
royalty income.
Roosevelt Hot Springs. 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.
PROJECTS IN DEVELOPMENT
The BRPU Process. Magma is seeking new long-term Final Standard Offer
No. 4 power purchase agreements ("FSO4s") in southern California through the
bidding process adopted by the CPUC under its 1992 Biennial Resource Plan Update
("BRPU"). In its 1992 BRPU, the CPUC cited the need for an additional 9,600 MW
of power production through 1999 among California's three investor-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.
<PAGE>
However, the IOUs may continue to challenge the order and there can be no
assurance that power sales contracts will be executed or that any such projects
will be completed.
Fish Lake/Salton Sea I Expansion. The Salton Sea I Project has an
option to supply an additional 20 MW of power to SCE under the Salton Sea I PPA.
Magma, through its wholly-owned subsidiary, Fish Lake Power Company ("FLPC"),
acquired in 1992 a modified ISO4 power purchase agreement (the "Fish Lake ISO4")
to supply electric power to SCE from a 16 MW geothermal power plant proposed to
be built at Fish Lake in Esmeralda County, Nevada (the "Fish Lake Project").
The Fish Lake ISO4 was a 30-year contract providing for a contract
capacity of 14 MW and a nameplate rating of 16 MW. The contract capacity payment
under the Fish Lake ISO4 is levelized in the contract for the full 30-year term
of the contract at $180 per kilowatt year. The capacity portion (plus bonus
capacity) of such revenues is levelized at approximately 2.5(cent) per kWh for
30 years (assuming a 90% nameplate capacity factor). The energy payment
thereunder is fixed for the first ten years starting at 10.2(cent) per kWh in
1996 and escalates at an average annual rate of 3.9%. For years 11 through 15,
such energy payment is set at SCE's Avoided Cost of Energy, plus an additional
specified amount which decreases each year. For the last 15 years of the Fish
Lake ISO4, the energy payment is at SCE's Avoided Cost of Energy.
On November 29, 1994, SCE filed an application with the CPUC seeking
approval for the proposed restructuring of (i) the Salton Sea I PPA and (ii) the
Fish Lake, whereby the Fish Lake Project would not be developed at its present
site in Nevada's Fish Lake Valley and instead would be developed under an
amended and restated power purchase agreement (the "Amended PPA") in conjunction
with the current power purchase agreement for unit 1.
If approved, the Amended PPA will consolidate the Project Expansion
with the Fish Lake Project. The Amended PPA also would reduce the price for
contract capacity payments to $158/kW-year and would alter the energy payment
schedule to commence in 1996 at 8.8(cent) per kWh.
Newberry. Under a Bonneville Power Administration ("BPA") geothermal
pilot program, the Company is developing a 30 MW net geothermal project at
Newberry, Oregon (the "Newberry Project"). Pursuant to two power sales contracts
executed in September, 1994, after the final environmental impact statement for
the Newberry Project was issued, the Company has agreed to sell 20 MW net to BPA
and 10 MW net to Eugene Water and Electric Board ("EWEB") from the Newberry
Project. In addition, BPA and EWEB together have an option to purchase up to an
additional 100 MW of production from the Project under certain circumstances. In
a public-private development effort, 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
tocommence commercial operation in 1997. The power sales contracts provide that
under certain circumstances the contracts may be utilized at an alternative
location. Completion of the Newberry Project is subject to a number of
significant uncertainties and cannot be assured.
REGULATORY AND ENVIRONMENTAL MATTERS
Environmental Regulation. The projects of 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
<PAGE>
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, 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.
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
<PAGE>
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.
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------- -------------------
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Overall installed
capacity factor 109.5% 109.1% 105.5% 102.4%
kWh produced 580,400,000 578,200,000 1,659,400,000 1,610,400,000
Installed capacity 240 240 240 240
NMW (average)
</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
<PAGE>
output benefitted from gathering system improvements completed in June of 1993.
The BLM plant installed capacity factor was 99.8% in the third quarter of 1994
compared to 106.0% in the third quarter of 1993. For the nine months ended
September 30, the BLM plant installed capacity factor was 98.5% in 1994
compared to 97.8% for the same period in 1993.
As a result of the successful performance of the BLM H2S abatement
system, which was installed in 1992, the Navy I and Navy II Joint Ventures
obtained authority to construct ("ATC") permits for the installation of similar
H2S abatement systems in an effort to enhance operational efficiency and
improve long term reservoir management. Such abatement systems are expected to
have an aggregate Coso Project capital cost of approximately $11,948, $10,845
of which has been incurred through September 30, 1994. Completion of
construction and testing of the Navy I and Navy II abatement systems is
currently expected to occur by year end of 1994. In conjunction with the ATC,
the Great Basin Unified Air Pollution Control District agreed to provide an
eighteen month variance to Navy I which allows venting of a portion of Navy I's
non-condensable gas while the abatement system is constructed and tested.
The Coso Project's average electricity prices per kWh in 1994, 1993,
and 1992, were comprised of (in cents):
<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*
</TABLE>
* Represents annualized price per kWh. Typically, the capacity price is
significantly higher in the months June through September.
The Yuma plant commenced commercial operation in late May pursuant to
its power purchase agreement and operated at 99.6% of its 50 net MW plant
capacity in the third quarter of 1994.
Roosevelt Hot Springs steam field supplied 100% of customer power
plant steam requirements in the third quarter and for the nine months ended
September 30, 1994. 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 Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Plant operations 17.5% 11.5% 17.3% 15.4%
(net of the Company's
operator fees)
General and admini- 6.5% 5.7% 8.1% 8.5%
stration
Royalties 7.1% 7.3% 6.7% 6.5%
Depreciation and 11.4% 10.5% 13.2% 12.9%
amortization
Interest (less 31.4% 15.7% 31.5% 17.0%
amounts capita-
lized)
73.9% 50.7% 76.8% 60.3%
</TABLE>
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
<PAGE>
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
months ended September 30, depreciation and amortization increased to $15,439
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, 1994, and 1991
Sales of electricity and steam increased to $132,059 in the year ended
December 31, 1993 from $117,342 in the year ended December 31, 1992, a 12.5%
increase. This improvement was primarily due to a 9.1% increase in the Coso
Project's electric kWh sales to 2,186.7 million kWh from 2,004.0 million kWh,
and an increased price per kWh in accordance with the SO4 Agreements. The
increase in Coso Project kWh sales was primarily due to the completion of new
production wells. The increase in sales of electricity and steam in 1992 to
$117,342 from $106,184 in 1991 was primarily due to increasing kWh sales by
6.0% to 2,004.0 million kWh from 1,890.4 million kWh, largely as a result of
the drilling of additional production wells, and the aforementioned increase in
price per kWh pursuant to the SO4 Agreements.
The following operating data includes the full capacity and
electricity production of the Coso Project only:
<TABLE>
<CAPTION>
<S> 1993 1992 1991
<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.
<PAGE>
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>
<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
==== ==== ====
</TABLE>
- ---------------
* 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.
The Company's expenses* as a percentage of sales of electricity and
steam were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
<C> <C> <C>
<S>
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%
</TABLE> ==== ==== ====
- ---------------
* 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.
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.
<PAGE>
<PAGE>
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
an increase of 40.1%, due to higher electrical sales and a contractually
scheduled increase in the 1992 royalty rate for the second and third turbines
of the Navy I Plant. Overall, the royalty cost per kWh increased to 0.65 cents
in 1993 from 0.61 cents in 1992 and 0.49 cents in 1991.
Depreciation and amortization expense increased to $17,812 in 1993
from $16,754 and $14,752 in 1992 and 1991, respectively, a 6.3% increase from
1992 to 1993, and a 13.6% increase from 1991 to 1992. Depreciation and
amortization expense for 1993 was 1.39 cents per kWh compared to 1.33 cents in
1992 and 1.31 cents per kWh in 1991. The increase in 1993 was due to additional
capitalized costs associated with the settlement of litigation involving
Mission Power Engineering Company ("MPE") and the Mission Power Group, as well
as additional 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 $6,582, 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 Upper Mahiao and Mahanagdong projects and of its
proportionate share of Coso Project cash reserves 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,
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,
<PAGE>
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.
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 3,514 shares of
Common Stock at a cost of $61,259. This repurchase provides shares for issuance
under the Company's employee stock option and share purchase plans and other
outstanding convertible securities. The shares may also be used for any future
convertible securities or employee benefit plans.
The Company is actively seeking to develop, construct, own and operate
new power projects utilizing geothermal and other technologies, both
domestically and internationally, the completion of any of which is subject to
substantial risk. Development can require the Company to expend significant
sums for preliminary engineering, field development, permitting, legal and
other expenses in preparation for competitive bids which the Company may not
win or before it can be determined whether a project is feasible, economically
attractive or capable of being financed. Successful development is contingent
upon, among other things, negotiation of construction, fuel supply and power
sales contracts with other project participants on terms satisfactory to the
Company, and receipt of required governmental permits and consents. Further,
there can be no assurance that the Company will obtain access to the
substantial debt and equity capital required to develop and construct electric
power projects or to refinance projects for which the Company has provided
initial construction financing. The Company's future growth is dependent, in
large part, upon the demand for significant amounts of additional electrical
generating capacity and the Company's ability to obtain contracts to supply
portions of this capacity. There can be no assurance that development efforts
on any particular project, or the Company's efforts generally, will be
successful.
The Company believes that the international independent power market
holds the majority of new opportunities for financially attractive private
power development in the next several years. The financing and development of
projects outside the United States entail significant political and financial
risks (including, without limitation, uncertainties associated with first time
privatization efforts in the countries involved, currency exchange rate
fluctuations, currency repatriation restrictions, political instability, civil
unrest and expropriation) and other structuring issues that have the potential
to cause substantial delays or material impairment of value to the project
being developed, which the Company may not be fully capable of insuring
against. The uncertainty of the legal environment in certain foreign countries
in which the Company may develop or acquire projects could make it more
difficult for the Company to enforce its rights under agreements relating to
such projects. In addition, the laws and regulations of certain countries may
limit the ability of the Company to hold a majority interest in some of the
projects that it may develop or acquire. The Company's international projects
may, in certain cases, be terminated by a government.
In April 1994, the Company closed the financing for the 128 GMW Upper
Mahiao geothermal power project located in the Philippines. The total project
<PAGE>
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 o the construction loan and will provide the preponderance of project
term financing upon satisfaction of conditions associated with commercial
operation. As of September 30, 1994, draws on the construction loan totalled
$20,636, equity investments made by a subsidiary of 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.
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
<PAGE>
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.
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 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
<PAGE>
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, 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.
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
<PAGE>
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(l) 121.4% 120.3%
Nameplate Capacity Factor(l) 107.9% 106.9%
</TABLE>
<PAGE>
<PAGE>
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
<C> <C>
<S>
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%
</TABLE>
- -----------------------
(1) Does not exclude scheduled maintenance hours. Calculation is based on
a 92-day (2,208 hours) third quarter.
Interest and Other Income. Interest and other income increased
$494,000, a 55% increase compared to interest and other income for the same
period of the prior year, reflecting the higher cash balances available for
investment and the higher short-term interest rate environment. Cash available
for investment during the same period of the prior year was lower due to the
use of cash in connection with the acquisition of the Salton Sea Plants from
Unocal.
Costs and Expenses. In the third quarter of 1994, total costs and
expenses were $25,744,000 compared to costs and expenses for the same period in
1993 of $26,532,000. This 3% decrease in total costs and expenses was composed
primarily of decreases in plant operating costs and depreciation of $1,681,000
and $499,000, respectively, and increases of $818,000 in general and
administrative expense and $577,000 in interest expense.
The decrease in plant operating costs reflects the realization of
certain efficiencies by integrating the operations of the Magma Partnership and
Salton Sea Plants and the favorable results of Magma's ongoing efforts to
reduce operating costs.
The $818,000 increase in general and administrative costs reflects
Magma's continued devotion of more of its resources towards expansion of
business development activities by increasing staff and support services to
facilitate the planned growth of Magma.
The $577,000 increase in interest expense reflects the effect of
higher borrowing costs due to higher market interest rates. Currently,
approximately 84% of Magma's consolidated debt is floating rate debt.
Net Income. Net income was 12% higher at $22,849,000 in the third
quarter of 1994 as compared to $20,453,000 in the corresponding period of the
prior year. The increase in net income reflects the increase in electricity
revenues and interest income and the decrease in total costs and expenses.
NINE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1993
Revenues. Total revenues for the first nine months of 1994 were up
$21,323,000 or 17% to $146,104,000 as compared to $124,781,000 for the same
period of the prior year. This increase was made up primarily of an increase 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%
<PAGE>
Nameplate Capacity Factor(1) 105.0% 99.9% 100.7%
</TABLE>
- ---------------
(1) Does not exclude scheduled maintenance hours. Calculation is based on
a 273 day (6,552 hour) nine month period in 1994 and 1993.
The combined "contract" and "nameplate" capacity factors of the three
Salton Sea Plants during the period are shown in the table below:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
December 31, December 31,
1994 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%
</TABLE>
- ---------------
(1) Does not exclude scheduled maintenance hours. Calculation is based on
a 273-day (6,552 hours) nine month period in 1994 and a nine month
period (6,600 hours) ended December 31, 1993.
Interest and Other Income. Interest and other income increased
$231,000, a 6% increase compared to interest income for the same period of the
prior year, primarily due to higher investment earnings, reflecting the higher
cash balances available for investment and the higher short-term interest rate
environment.
Costs and Expenses. In the first nine months of 1994, total costs and
expenses increased $11,365,000, a 17% increase, compared to costs for the same
period in 1993. This increase was composed primarily of a $4,586,000 increase
in plant operating costs, a $2,288,000 increase in depreciation, a $2,131,000
increase in general and administrative expense, and a $2,381,000 increase in
interest expense. The increase in plant operating costs and depreciation
primarily reflects the cost of operating the Salton Sea Plants for nine months
in 1994 compared to six months in 1993.
The $2,131,000 increase in general and administrative costs reflects
Magma's continued devotion of more of its resources towards expansion of
business development activities by increasing staff and support services to
facilitate the planned growth of Magma.
The $2,381,000 increase in interest expense over the corresponding
period of 1994 reflects the increased cost of borrowings to finance the
acquisition of the Salton Sea Plants. Interest expense related to the Magma
Partnership Plants declined as a result of lower partnership weighted-average
borrowings during the first nine months of 1994 as compared to the same period
of the prior year.
Provision for Income Taxes. Magma's effective tax rate in the first
nine months of 1994 was 31 percent which was comparable to the rate in the same
period of the prior year.
Net Income. Net income was 19% higher at $46,843,000 for the first
nine months of 1994 as compared to $39,469,000 in the corresponding period of
the prior year. The increase in net income reflects the addition of the
earnings of the Salton Sea Plants for nine months in 1994 compared to six
months in 1993 as well as the higher ISO4 electricity revenues received by the
Partnership Plants.
RESULTS OF OPERATIONS: 1993 COMPARED TO 1992
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 10.1(cent) 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
<PAGE>
first ten years pursuant to schedules attached to the ISO4s and then convert to
SCE's then published avoided cost of energy, the capacity payments are fixed
for the full 30-year term of the ISO4s. The contract capacities specified in
the ISO4s for the Vulcan, Hoch, Elmore and Leathers plants are 29,500, 34,000,
34,000 and 34,000 kilowatts, respectively.
The ISO4s for the Vulcan, Hoch, Elmore and Leathers plants also
specify a nameplate rating. The specified nameplate ratings for these plants
are 34,000, 38,000, 38,000 and 38,000 kilowatts, respectively.
The Partnership Plants are 50% owned by Magma and the newly acquired
Salton Sea Plants are 100% owned by Magma. Two of the Salton Sea Plants have an
ISO4 with SCE and the third has a non-standard offer long-term power purchase
contract (a "Negotiated Contract") with SCE. Each of the Salton Sea Plants
earns an energy payment. For the 10 MW, Salton Sea Plant I, the energy payment
under its Negotiated Contract averaged 4.8(cent) 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 10.6(cent) and 9.8(cent) 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 basis, have decreased
in 1993 to 4.3(cent) per kWh from 4.4(cent) per kWh in 1992. Magma has
established a goal of significantly reducing controllable operating costs over
the next five years for its plants at the Salton Sea by applying newly
developed material and process technologies and the further realization of the
efficiencies gained through its acquisition of the Salton Sea Plants from
Unocal. The goal is to reduce these costs to less than 3.0(cent) per kWh over
the next five years.
<PAGE>
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 OPERTIONS: 1992 COMPARED TO 1991
Revenues. Magma's operating revenues increased $16,178,000 in 1992 to
$100,313,000 from $84,135,000 in 1991. This increase was made up of an increase
in the sales of electricity, an increase in royalties received from the
Partnership Plants and third-party owned and operated geothermal power plants
and an increase in management services fees earned for providing services to
the Partnership Plants.
Sales of Electricity. Revenues from the sale of electricity increased
$6,221,000 in 1992 to $72,236,000 due primarily to an increase in the price for
energy under the ISO4s and a 4.4% increase in kilowatts delivered to SCE. The
average price for energy under the ISO4s increased 8.1% in 1992 to 9.3(cent)
per kWh.
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
<PAGE>
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 carry
forwards. 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 restaed to reflect SFAS 109.
Magma's tax provision, as a percentage of earnings before tax, was
higher in 1992 as a result of the adoption of SFAS 109. The effect of applying
SFAS 109 in 1992 was to decrease net income before the cumulative effect of
adopting SFAS 109 by approximately $2,821,000 or $.12 per share. Magma's 1992
effective tax rate was 26.8% following the adoption of SFAS 109 rather than
21.1% under the previous accounting treatment. Magma's effective tax rate will
continue to be significantly higher in the future, since the tax benefit of
operating loss and tax credit carryforwards, which could have been expected to
reduce future tax provisions, has been recognized in 1992 in the cumulative
effect adjustment.
Net Income. Net income increased $20,250,000 in 1992 to $54,191,000.
Of this increase $17,833,000 is attributable to the cumulative effect of
adopting SFAS No. 109. In addition, higher net income reflects higher revenues
from the sale of electricity, Magma's core business, higher royalty income from
third-party owned and operated royalty plants including the recognition of
$7,900,000 in accrued Jr. SO4 payments from the GEO East Mesa geothermal power
plants and lower interest expense incurred on partnership non-recourse debt.
The higher revenues and lower interest expense were offset, in part, by lower
interest and other income, higher plant operating costs and a higher tax
provision than would have been recorded under the previous accounting standard.
The lower interest income and interest expense reflects the generally lower
market rates of interest.
Acquisition and New Project Costs. Magma purchased, on March 31, 1993,
all of Unocal's geothermal interests in the Imperial Valley of California,
including three operating geothermal power plants, 40,600 acres of geothermal
leases and an option to develop and sell an additional 20MWs of geothermal
power to SCE. The total cost of the acquisition was $248,200,000 (subject to
certain post-closing adjustments) which included $6,686,000 for certain current
assets and liabilities assumed by Magma, $3,489,000 of interest incurred on the
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.
<PAGE>
Magma has geothermal projects in the development stage, both domestic
and international, which it intends to finance with a combination of
Magma-supplied equity and non-recourse project debt. These development stage
projects will require significant equity contributions from Magma during the
next five years. Magma believes that its cash reserves, augmented by cash flow
from its current operations, will be sufficient to fund these equity
contributions.
Magma financed the Unocal acquisition with its own cash and with the
proceeds from the $140,000,000 Bridge Loan. On February 28, 1994 the Bridge
Loan was repaid, utilizing both Magma cash and the proceeds from a non-recourse
project level six-year term loan of $130,000,000 collateralized by
substantially all of the assets and power purchase contracts of the three
Salton Sea Plants acquired from Unocal (the "$130,000,000 Term Loan"). In
addition, a $5,000,000 working capital line of credit has been provided to the
subsidiaries owning the plants by two of the banks participating in the
$130,000,000 Term Loan. No loans against the working capital line of credit
have been made.
Magma's cash and marketable securities at December 31, 1993 totalled
$73,022,000 of which $50,103,000 was available for general corporate uses. The
remainder of $22,919,000 is Magma's share of cash and marketable securities of
the four partnerships which own the four Partnership Plans operated by Magma.
These funds are earmarked for the working capital needs of each of the
partnerships. Restrictions in the secured credit agreements for the Hoch,
Elmore and Leathers plants and the $130,000,000 Term Loan for the Salton Sea
Plants place limits on distributions of cash by the partnerships to Magma.
In addition, at December 31, 1993, Magma had non-current investments
totalling $47,642,000 consisting of $32,302,000 in securities with maturities
greater than one year, which are liquid, and $15,340,000 of other investments,
which are not liquid.
At December 31, 1993, long-term obligations were $189,209,000, a
$103,375,000 increase over year-end 1992. The increase reflects the replacement
on February 28, 1994 of the $140,000,000 one-year Bridge Loan, with the six-
year $130,000,000 Term Loan. The increase in long-term obligations was
partially offset by a reduction of $9,028,000 in Magma's pro-rata share of
partnership debt for the Hoch, Elmore and Leathers plants.
Partnership debt is non-recourse to Magma.
Magma has an unused and available line of credit with Morgan Guaranty
Trust Company of New York of $25,000,000.
Cash and marketable securities at September 30, 1994 totaled
$74,198,000 of which $48,720,000 was available for general corporate use. The
remainder of $25,478,000 is Magma's share of the cash and marketable securities
of the "Magma Partnerships," the four separate partnerships which are jointly
owned by Magma and Mission Energy Company and which own the Partnership Plants,
and the cash and marketable securities of the Salton Sea Partnerships, the 100%
owned Magma partnerships which own the three Salton Sea plants acquired from
Unocal (the "Salton Sea Plants"). Certain portions of these funds are earmarked
for the working capital needs of the plants. In addition, the secured credit
agreements for the Hoch, Elmore and Leathers Partnership Plants and the Term
Loan for the Salton Sea Plants place limits on distributions of cash.
Non-current investments at September 30, 1994, totaled $41,245,000
consisting of $29,676,000 in marketable securities with maturities greater than
one year which are liquid and $11,569,000 of other investments, which are not
liquid.
At September 30, 1994, loans payable (including amounts currently due)
were $188,969,000, a $37,039,000 decrease over year end 1993. The decrease
reflects the $10,000,000 debt reduction that occurred on February 28, 1994 when
the $140,000,000 Bridge Loan was replaced with the $130,000,000 Term Loan and a
$9,992,000 reduction in Magma's pro-rata share of Magma Partnership debt, a
$15,692,000 reduction in Salton Sea Partnership debt, and a $1,355,000
reduction in other debt. The Magma Partnerships debt and the $130,000,000 Term
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
<PAGE>
kWh in the third quarter of 1994. The capacity payment was approximately 1.7
cents per kWh in the third quarter of 1994. Both the energy and capacity
payments adjust quarterly based on a basket of indices for the 30-year term of
the Negotiated Contract.
Magma's strategy is to mitigate the adverse impact of potentially
lower revenues in the future from its six plants with ISO4 contracts by
aggressively seeking out and developing new power generation projects in both
the United States and abroad, seeking out additional strategic acquisitions,
and continuing to find new ways to significantly reduce plant operating costs
for its existing as well as any new plants. The competition for new power
purchase contracts is intense, however, and any contracts Magma is able to
secure in the future, whether in the United States or abroad, are likely to be
on terms and conditions that are substantially less favorable than those
provided in Magma's current ISO4 contracts.
Other than as described herein and as subject to the ISO4 contract
terms regarding payments for energy after its initial ten-year term (see "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(cent) 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(cent) per kWh, which
along with the fixed capacity payments results in a total time period weighted
average price for electricity of approximately 13.4(cent) 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(cent) 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 9.8(cent) per kWh for the 49.8MW Salton Sea Plant 3 and
10.6(cent) 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(cent) and 13(cent) per kWh, respectively.
Starting in 1996 for the Vulcan plant, 1999 for the Hoch, Elmore and
Salton Sea Plant 3 and 2000 for the Leathers and the Salton Sea Plant 2, the
price for energy under the ISO4 contracts for these plants will automatically
convert to the SCE's then-current published avoided cost of energy. As a
result, the price paid by SCE for a kWh of electricity under these ISO4s will
be composed of the capacity payments per kWh described above and an energy
payment based on SCE's avoided cost of energy. In 1993, SCE's time period
weighted average avoided energy cost was 3.2(cent) 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(cent) per kWh,
which along with the capacity payment of approximately 1.7(cent) per kWh
(assuming a 90% nameplate capacity factor) results in a total payment of
approximately 6.5(cent) per kWh.
PRO FORMA UNAUSITED 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
<PAGE>
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>
<PAGE>
PRO FORMA UNAUDITED CONDENSED COMBINED STATEMEMTS 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 Nine Months
December 31, Ended
1993 September 30,
1994
Company Magma Pro Forma Pro Company Magma Pro Forma Pro Forma
Adjustment Forma Adjustment Combined
(4D) Combined (4D)
<S> <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>
<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:
A. The adjustments reflect the elimination of Magma's equity accounts and the
issuace 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 bo 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....................... $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:
Reduce cash on hand ......................... $ 210,944
Increase long-term debt ..................... 500,000
---------
$ 710,944
=========
Represents:
Payments to Magma common stockholders $ 677,444
Payments to Magma stock option holders 8,500
Other direct acquisition costs ....... 12,500
Finance costs ........................ 12,500
---------
$ 710,944
=========
D. The pro forma adjustments to the pro forma combined statements
of earnings include the following:
i.Record amortization of the excess of purchase price over net assets
<PAGE>
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>
<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>
<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 Pro Forma
Adjustment 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 stock-
holders $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>
<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>
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>
Reduce cash on hand...................................................... $190,699
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:
<PAGE>
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 sold.
<PAGE>
<PAGE>
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.
Quarter High Low
1995:
First (through January 16) $ 17.25 $ 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
On January 16, 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 $17.25. 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.
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.
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.
Quarter High Low
1995:
First (through January 16) $ 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
On January 16, 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 $38.00. 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.
<PAGE>
As of October 10, 1994, there were approximately 2,238 holders of
record of the Magma Shares.
Holders of Common Stock are entitled to receive dividends from funds
legally available therefor when, as and if declared by the Board of Directors of
the Purchaser. The Board of Directors of the Purchaser presently intends to
continue the policy of not paying quarterly cash dividends. Future dividends of
the Purchaser will depend upon the earnings of the Purchaser and its
subsidiaries, their financial condition and other factors including applicable
government regulations and policies.
<PAGE>
<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) BENEFICIALLY PERCENTAGE
OF 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%
</TABLE>
<PAGE>
<PAGE>
(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.
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.
<PAGE>
By order of the Board of Directors
DAVID L. SOKOL
Chairman of the Board, President and
Chief Executive Officer
January 18, 1995
Omaha, Nebraska
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO ............. F-2
Financial Statements for Period Ending December 31, 1993 .............. F-2
INDEPENDENT AUDITORS' REPORT ................................ F-2
CONSOLIDATED BALANCE SHEETS ................................. F-3
CONSOLIDATED STATEMENTS OF OPERATIONS ....................... F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ............. F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS ....................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
Summarized Company (Parent Only) Financial Statements ................. F-25
COMPANY (PARENT ONLY) BALANCE SHEETS ......................... F-25
COMPANY (PARENT ONLY) STATEMENTS OF OPERATIONS ............... F-26
COMPANY (PARENT ONLY) STATEMENTS OF OPERATIONS ............... F-27
COMPANY (PARENT ONLY) SUPPLEMENTAL NOTES TO
FINANCIAL STATEMENTS ....................................... F-28
Financial Statements for Period Ending September 30, 1994
INDEPENDENT ACCOUNTANTS' REPORT ............................. F-29
CONSOLIDATED BALANCE SHEETS ................................. F-30
CONSOLIDATED STATEMENTS OF OPERATIONS ....................... F-31
CONSOLIDATED STATEMENTS OF CASH FLOWS ....................... F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-34
MAGMA'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO ................... F-40
Financial Statements for Period Ending December 31, 1993 F-40
REPORT OF INDEPENDENT ACCOUNTANTS F-40
CONSOLIDATED BALANCE SHEETS F-41
CONSOLIDATED STATEMENTS OF OPERATIONS F-42
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-43
CONSOLIDATED STATEMENTS OF CASH FLOWS F-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-45
Financial Statements for Period Ending September 30, 1994 ............. F-55
CONSOLIDATED BALANCE SHEETS ................................. F-55
CONSOLIDATED STATEMENTS OF OPERATIONS ....................... F-57
CONSOLIDATED STATEMENTS OF CASH FLOWS ....................... F-58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .................. F-59
IMPERIAL VALLEY GEOTHERMAL INTERESTS (ACQUIRED BY MAGMA)
FINANCIAL STATEMENTS ........................................ F-61
REPORT OF INDEPENDENT ACCOUNTANTS ........................... F-61
STATEMENT OF NET ASSETS ACQUIRED ............................ F-62
HISTORICAL SUMMARIES OF GROSS REVENUES AND DIRECT
OPERATING EXPENSES .......................................... F-63
NOTES TO THE STATEMENT OF NET ASSETS ACQUIRED AND
HISTORICAL SUMMARIES OF GROSS REVENUES AND
DIRECT OPERATING EXPENSES .................................. F-64
ADDITIONAL INFORMATION ........................................................ F-66
</TABLE>
<PAGE>
<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
<PAGE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
(As of December 31, 1993 and December 31,
1992) (Dollars and shares in thousands, except per
share amounts)
<TABLE>
<CAPTION>
Assets 1993 1992
<S> <C> <C>
Cash and investments $127,756 $ 54,671
Joint venture cash and investments (Note 5) 14,943 8,848
Restricted cash (Notes 4 and 5) 48,105 62,514
Accounts receivable 21,658 16,172
Transmission line deposit (Note 13) - 7,684
Due from Joint Ventures 1,394 -
Geothermal power plant and development costs, net
Notes 4 and 5) 458,974 389,646
Equipment, net of accumulated depreciation of $4,773
and $3,996 4,540 4,312
Notes receivable-Joint Ventures (Note 13) 11,280 9,997
Deferred charges and other assets 27,334 26,706
---------- ----------
Total assets $715,984 $580,550
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable $ 607 $ 3,146
Other accrued liabilities 19,866 18,111
Income taxes payable (Note 8) 4,000 -
Project finance loans (Note 5) 246,880 263,604
Due to Joint Ventures - 469
Senior notes (Note 6) 35,730 35,730
Convertible subordinated debentures (Note 7) 100,000 -
Deferred income taxes 18,310 15,212
---------- ----------
Total liabilities 425,393 336,272
---------- ----------
Deferred income (Note 4) 20,288 21,164
---------- ----------
Commitments and contingencies (Notes 3, 6, 9, 13 and 16)
Redeemable preferred stock (Note 10) 58,800 54,350
Stockholders' equity (Notes 11 and 12):
Preferred stock-authorized 2,000 shares,
no par value (Note 10) - -
Common stock-authorized 60,000 shares,
par value $0.0675 per share, issued and outstanding
35,446 and 35,258 shares 2,404 2,380
Additional paid in capital 100,965 97,977
Retained earnings 111,031 68,407
Treasury stock-157 common shares at cost (2,897) -
---------- ----------
Total stockholders' equity 211,503 168,764
---------- ----------
Total liabilities and stockholders' equity $715,984 $580,550
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(For the three years ended December 31, 1993)
(Dollars and shares in thousands, except per share
amounts)
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Revenue:
Sales of electricity and steam ............ $ 132,059 $ 117,342 $ 106,184
Interest and other income ................. 17,194 10,187 9,379
---------- ---------- ----------
Total revenues .................... 149,253 127,529 115,563
---------- ---------- ----------
Cost and expenses:
Plant operations .......................... 25,362 24,440 23,525
General and administration ................ 13,158 13,033 12,476
Royalties ................................. 8,274 7,710 5,505
Depreciation and amortization ............. 17,812 16,754 14,752
Interest .................................. 30,205 20,459 29,814
Less interest capitalized ................. (6,816) (5,599) (5,375)
---------- ---------- ----------
Total expenses .................... 87,995 76,797 80,697
---------- ---------- ----------
Income before provision for income taxes ........... 61,258 50,732 34,866
Provision for income taxes (Note 8) ................ 18,184 11,922 8,284
---------- ---------- ----------
Income before change in accounting principle
and extraordinary item .................... 43,074 38,810 26,582
Cumulative effect of change in accounting
principle (Note 8) ........................ 4,100 -- --
Extraordinary item (Note 15) ....................... -- (4,991) --
---------- ---------- ----------
Net income ......................................... 47,174 33,819 26,582
Preferred dividends ................................ 4,630 4,275 --
---------- ---------- ----------
Net income available to common stockholders ........ $ 42,544 $ 29,544 $ 26,582
=========== ========== ==========
Income per share before change in
accounting principle and extraordinary item $ 1.00 $ 0.92 $ 0.75
Cumulative effect of change in accounting
principle (Note 8) ........................ 0.11 -- --
Extraordinary item (Note 15) ....................... -- (0.13) --
----------- ---------- ----------
Net income per share ............................... $ 1.11 $ 0.79 $ 0.75
=========== ========== ==========
Average number of shares outstanding ............... 38,485 37,495 35,471
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(For the three years ended December 31, 1993)
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Outstanding Additional
Common Common Paid-in Retained Treasury
Shares Stock Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1991 ..... 23,218 $ 1,567 $ 39,353 $ 14,168 $ -- $ 55,088
Exercise of stock options ... 2,329 157 14,959 -- -- 15,116
Sale and private
placement of
common stock
(Note 12) ................. 6,505 439 43,237 -- -- 43,676
Exercise of warrants ........ 660 45 2,897 -- -- 2,942
Issue costs of sale
of preferred stock ........ -- -- (276) -- -- (276)
Net income .................. -- -- -- 26,582 -- 26,582
-------- --------- ---------- ---------- ---------- ----------
Balance December 31, 1991 ... 32,712 2,208 100,170 40,750 -- 143,128
Exercise of stock options ... 1,544 67 2,764 -- -- 2,831
Exercise of warrants 612 41 1,206 -- -- 1,247
Issue costs on stock -- -- (96) -- -- (96)
Purchases/issuances
of treasury stock for
exercise of options
and warrants, net of
proceeds of $797 .......... (565) -- (4,090) -- -- (4,090)
Preferred stock dividends,
series B & C, including
cash distributions of
$134 -- -- -- (6,162) -- (6,162)
Retirement of warrants ...... -- -- (11,716) -- -- (11,716)
Tax benefit from stock
plan ...................... -- -- 3,420 -- -- 3,420
Net income before
preferred dividends ....... -- -- -- 33,819 -- 33,819
Conversion of preferred
stock to common stock ..... 955 64 6,319 -- -- 6,383
-------- --------- ---------- ---------- ---------- ----------
Balance December 31, 1992 ... 35,258 2,380 97,977 68,407 -- 168,764
Exercise of stock
options ................... 258 18 937 -- -- 955
Issuance of stock for
purchase of The Ben
Holt Co. .................. 87 6 1,551 -- -- 1,557
Purchase of treasury
stock ..................... (157) -- -- -- (2,897) (2,897)
Preferred stock
dividends, Series C,
including cash
distributions of $100 ..... -- -- -- (4,550) -- (4,550)
Tax benefit from stock
plan ...................... -- -- 500 -- -- 500
Net income before
preferred dividends ....... -- -- -- 47,174 -- 47,174
-------- --------- ---------- ---------- ---------- ----------
Balance December 31, 1993 ... 35,446 $ 2,404 $ 100,965 $ 111,031 $ (2,897) $ 211,503
======== ========= ========== ========== ========== ==========
</TABLE>
The accompanying notes are an
integral part of these financial
statements.
<PAGE>
<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 ............ 2,912 8,065 111,458
stocks and exercise of warrants and options
Repayment of project finance loans .............................. -- (17,098) (10,100)
Repayment of project loans ...................................... (16,724) (6,277) --
Retirement of project finance loans ............................. -- (204,210) --
Payment of other senior notes ................................... -- -- (6,000)
Proceeds from refinancing ....................................... -- 269,881 2,400
Proceeds from issue of convertible subordinated
debentures .................................................... 100,000 -- --
Increase in restricted cash related to the refinancing .......... -- (65,670) --
Net change in short-term bank loan .............................. -- -- (15,000)
Deferred charges relating to debt financing ..................... (2,582) (2,937) (58)
Decrease (increase) in amounts due from Joint Ventures .......... (3,146) 6,198 (6,180)
Purchase of warrants ............................................ -- (11,716) --
Proceeds from pre-sale of steam ................................. -- -- 20,317
Purchase of treasury stock ...................................... (2,897) (4,887) --
--------- ---------- ----------
Net cash flows from financing activities ........................ 77,563 (28,651) 96,837
--------- ---------- ----------
Net increase (decrease) in cash and investments ................. 79,180 (13,798) 55,853
--------- ---------- ----------
Cash and investments at beginning of period ..................... 63,519 77,317 21,464
--------- ---------- ----------
Cash and investments at end of period ........................... $ 142,699 $ 63,519 $ 77,317
======== ========== ==========
Interest paid (net of amounts capitalized) ...................... $ 20,136 $ 19,237 $ 24,435
======== ========== ==========
Income taxes paid ............................................... $ 6,819 $ 4,129 $ 1,682
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<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.
A. INVESTMENTS AND RESTRICTED CASH. Investments other than restricted
cash are primarily commercial paper and money market securities. The restricted
cash balance includes such securities and mortgage backed securities, and is
mainly composed of the Coso Joint Ventures' debt service reserve funds. The debt
service reserve funds are legally restricted to their use and require the
maintenance of specific minimum balances. The carrying amount of the investments
approximates the fair value based on quoted market prices as provided by the
financial institution which holds the investments.
B. WELL, RESOURCE DEVELOPMENT AND EXPLORATION COSTS. 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.
C. DEFERRED WELL AND REWORK COSTS. Well rework costs are deferred and
amortized over the estimated period between reworks. These deferred costs of
$1,305 and $1,592 at December 31, 1993 and 1992, respectively, are included in
other assets. Currently, both production and injection well reworks are
amortized over twelve months.
D. FIXED ASSETS AND DEPRECIATION. The cost of major additions and
betterments are capitalized, while replacements, maintenance, and repairs that
do not improve or extend the lives of the respective assets are expensed.
Depreciation of the operating power plants is computed on the
straight-line method over the estimated useful lives resulting in a composite
rate of depreciation of approximately 2.67% per annum. Depreciation of
furniture, fixtures and equipment, which are recorded at cost, is computed on
the straight-line method over the estimated useful lives of the related assets,
which range from three to ten years.
E. CAPITALIZATION OF INTEREST AND DEFERRED FINANCING COSTS. Prior to the
commencement of operations, interest is capitalized on the costs of the plants
and geothermal resource development to the extent incurred. Capitalized interest
and other deferred charges are amortized over the lives of the related assets.
Deferred financing costs are amortized over the term of the related
financing. Loan fees are amortized using the implicit interest method; other
deferred financing costs are amortized using the straight-line method.
Accumulated amortization at December 31, 1993 and 1992 was approximately $1,954
and $950, respectively.
F. REVENUE RECOGNITION. Revenues are recorded based upon service rendered
and electricity and steam delivered to the end of the month.
G. MANAGEMENT FEE AND INTEREST REVENUE RECOGNITION. The Company charges
<PAGE>
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.
H. 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.
I. NET INCOME PER COMMON SHARE. Earnings per common share are based on the
weighted average number of common and dilutive common equivalent shares
outstanding during the period computed using the treasury stock method.
J. CASH FLOWS. The statement of cash flows classifies changes in cash
according to operating, investing, or financing activities. Investing activities
include capital expenditures incurred in connection with the power plants,
wells, resource development and exploration costs. 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.
K. RECLASSIFICATION. Certain amounts in the fiscal 1992 and 1991 financial
statements and supporting footnote disclosures have been reclassified to conform
to the fiscal 1993 presentation. Such reclassification did not impact previously
reported net income or retained earnings.
3. INTEREST RATE SWAP AGREEMENTS
In January 1993, the Coso Joint Ventures entered into five year deposit
interest rate swap agreements which effectively convert a notional deposit, 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.
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>
A. 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
<PAGE>
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.
III. NAVY II PLANT. The Navy II plant consists of three
turbines, of which two units commenced delivery of firm power in
January 1990, and the third in February 1990, respectively. The 80 NMW
power plant is on the southern portion of the Navy lands. Under terms
of the Joint Venture, all profits, losses and capital contributions
for Navy II are divided equally by the two partners.
B. SIGNIFICANT CUSTOMER. All of 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.
C. ROYALTIES. Royalties comprise the following for the years ended:
1993 1992 1991
------- ------- -------
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
======= ======= =======
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.
D. 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
<PAGE>
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.
E. 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.
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
<PAGE>
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 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
<PAGE>
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.
<PAGE>
<PAGE>
Provision for income tax was comprised of the following at December 31:
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Currently payable:
State .................................. $ 3,300 $ 2,300 $ 2,134
Federal ................................ 7,686 4,444 261
10,986 6,744 2,395
Deferred:
State .................................. 385 1,607 929
Federal ................................ 6,813 2,038 4,960
7,198 3,645 5,889
------- ------- -------
Total after benefit of extraordinary item 18,184 10,389 8,284
Tax benefit attributable to
extraordinary item .................... -- 1,533 --
------- ------- -------
Total before benefit of
extraordinary item ............... $18,184 $11,922 $ 8,284
======= ======= =======
</TABLE>
The deferred expense is primarily temporary differences associated with
depreciation and amortization of certain assets.
A reconciliation of the federal statutory tax rate to the effective tax rate
applicable to income before provision for income taxes follows:
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Federal statutory rate ............... 35.00% 34.00% 34.00%
Percentage depletion in excess of cost (6.70) (6.81) (6.89)
depletion
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.
<PAGE>
<PAGE>
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
A. 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.
B. 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.
C. 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%, 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
<PAGE>
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.
A. TRANSACTIONS IN STOCK OPTIONS.
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------
Shares Available for
Grant Under 1986 Option Price
Option Plan Shares Per Share Total
----------------- ---------- ------------------ ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1991 72 3,361 $3.00 - $13.096 $12,658
Options granted (368) 8,268 * $8.063 - $14.875 89,193
Options terminated 304 (331) $3.00 - $9.708 (3,065)
Options exercised - (2,328)* $3.00 - $9.00 (15,116)
Additional shares reserved under
1986 Option Plan 1,230 - - -
----------- ---------- ------------------ ----------
Balance, December 31, 1991 1,238 8,970 * $3.00 - $14.875 83,670
Options granted (551) 751 $11.90 - $15.938 11,262
Options terminated 129 (780) $3.00 - $11.625 (7,839)
Options exercised - (1,544) $3.00 - $11.625 (7,072)
----------- ---------- ------------------ ----------
Balance, December 31, 1992 816 7,397 * $3.00 - $15.938 80,021
Options granted (1,396) 1,396 $17.75 - $19.00 26,209
Options terminated 19 (20) $3.00 - $14.875 (114)
Options exercised - (259) $3.00 - $14.875 (1,185)
Additional shares reserved under
1986 Option Plan 1,000 - - -
----------- ---------- ------------------ ----------
Balance, December 31, 1993 439 8,514 * $3.00 - $19.00 $104,931
=========== ========== ================== ==========
Options which became exercisable during:
Year ended December 31, 1993 592 $3.00 - $19.00 $10,180
Year ended December 31, 1992 333 $3.00 - $15.938 $3,693
Year ended December 31, 1991 7,767 * $3.00 - $14.88 $79,890
Options exercisable at:
December 31, 1993 7,026 * $3.00 - $19.00 $78,644
December 31, 1992 6,708 * $3.00 - $15.9375 $69,739
December 31, 1991 8,070 * $3.00 - $14.88 $73,481
</TABLE>
* Includes Kiewit Energy options. See Note 12.
<PAGE>
<PAGE>
B. 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
Shares Per Share Total
---------- -------------- ----------
<S> <C> <C> <C>
Balance, January 1, 1991 2,549 $2.04-$6.67 $6,804
Warrants exercised (660) $2.04-$6.67 (2,951)
---------- -------------- ----------
Balance, December 31, 1991 1,889 $2.04 3,853
Warrants exercised (612) $2.04 (1,247)
Warrants repurchased (1,277) $2.04 (2,606)
---------- -------------- ----------
Balance, December 31, 1992 - $ - $ -
========== ============== ==========
</TABLE>
On October 13, 1992, 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 $9,389 in aggregate. Separately,
Kiewit Energy simultaneously purchased and exercised other warrants to purchase
600 shares of unregistered common stock at $2.04 per share, providing 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
A. SETTLEMENT OF CONTRACTOR CLAIMS. In June 1990, Mission Power
Engineering Company (MPE), a subsidiary of SCECorp. and the general contractor
for eight of the nine facilities at the Coso Project recorded mechanics' liens
(the Liens) against two of the Coso Projects and filed suit to pursue claims for
amounts allegedly due from the Coso Joint Ventures in connection with the
turnkey contracts for the design and construction on eight of the units. In July
1990, MPE, the Joint Venture Partners and 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
<PAGE>
approximately $70,900 in contract claims. The Coso Joint Ventures counterclaimed
on January 10, 1991, for performance and equipment related and other damages
arising under the turnkey contracts.
On June 9, 1993, MPE and the Mission Power Group, subsidiaries of
SCECorp, and the Coso Joint Ventures and 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.
B. SETTLEMENT OF TRANSMISSION LINE DISPUTES. In September 1990, the
California Public Utilities Commission (CPUC) issued a decision which would fix
at approximately $10,500 the Coso Joint Ventures' maximum exposure for the cost
of the construction of a new 220 kV electric transmission line (Line) on the SCE
transmission system. The Coso Joint Ventures appealed the decision of the CPUC
to the Federal district court and intended to petition the CPUC to reconsider
its decision on the grounds that such line is not necessary. In a related
proceeding involving the cost allocation for existing and ancillary
interconnection facilities, the CPUC ruled that the Coso Joint Ventures' share
would be approximately $7,000. The Coso Joint Ventures appeal of such decision
to the California Supreme Court was denied in February 1993. In addition, SCE
alleged certain line losses that SCE deemed applicable to the existing 115 kV
line utilized by two of the Coso Joint Ventures and deducted amounts from
revenues payable under the power purchase contracts. The Coso Joint Ventures
dispute SCE's allegations, methodology and alleged ability to deduct amounts
under the interconnection contracts and filed a complaint alleging breach of
contract in the California State Court.
On May 3, 1993, SCE and the Coso Joint Ventures agreed to settle the
transmission line loss contract dispute and certain related interconnection
disputes involving the Coso Project under a separate agreement whereby, among
other things, the parties made certain cash payments to each other and agreed to
certain interconnection cost and historical line loss allocations and to the
release to the Coso Joint Ventures of certain funds previously deducted from
project revenues and held in escrow. The parties also agreed to jointly pursue
appropriate rate treatment by the CPUC of certain SCE financed interconnection
costs, including the one remaining cost allocation issue between them in the
amount of $5,900. As a result of the various payments, allocations and releases
involved in such partial settlement, SCE released $15,500 of Coso Project funds
(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.
C. 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.
D. 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 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
<PAGE>
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.
<PAGE>
<PAGE>
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 .. 10,847 14,089 24,170 12,152
and change in accounting principle
Provision for income taxes ................ 3,363 3,439 7,493 3,889
-------- ------- ------- -------
Net income before change in 7,484 10,650 16,677 8,263
accounting principle
Cumulative effect of change in 4,100 -- -- --
accounting principle
-------- ------- ------- -------
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
======== ======= ======= =======
<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 .. 7,601 12,003 20,554 10,574
and extraordinary item
Provision for income taxes ................ 1,806 2,852 4,884 2,380
-------- -------- -------- --------
Net income before extraordinary ........... 5,795 9,151 15,670 8,194
item
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 ............... $ .13 $ .22 $ .39 $ .19
extraordinary item
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.
<PAGE>
<PAGE>
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>
Assets 1993 1992
----------- ------------
<S> <C> <C>
Cash and Investments $126,824 $ 53,321
Restricted cash 13,535 634
Development projects in progress 44,272 21,428
Investment in and advances to subsidiaries and joint 215,660 168,949
ventures
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 2,404 2,380
shares par value $0.0675
per share; issued and
outstanding 35,446 and
35,258 shares
Additional paid-in capital 100,965 97,977
Retained earnings 111,031 68,407
Treasury stock, 157 common (2,897) -
shares at cost
----------- -----------
Total stockholders' equity 211,503 168,764
----------- -----------
Total liabilities and stockholders equity $440,894 $282,219
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
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.
<PAGE>
<PAGE>
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 (36,812) 12,155 (41,162)
subsidiaries and joint ventures
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 2,912 8,065 111,458
stocks, and exercise of warrants and stock options
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 $126,824 $ 53,321 $ 47,036
period ================== ================== ====================
Interest paid (net of amounts capitalized) $ (897) $ 464 $ 3,342
======= ======= =======
Income taxes paid $ 6,819 $ 4,129 $ 1,682
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
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.
<PAGE>
<PAGE>
FINANCIAL STATEMENTS FOR PERIOD ENDING
SEPTEMBER 30, 1994
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
California Energy Company, Inc.
Omaha, Nebraska
We have reviewed the accompanying consolidated balance sheet of California
Energy Company, Inc. and subsidiaries as of September 30, 1994, and the related
consolidated statements of operations for the three-month and nine-month periods
ended September 30, 1994 and 1993, and the related consolidated statements of
cash flows for the nine-month periods ended September 30, 1994 and 1993. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of California Energy Company, Inc. and
subsidiaries as of December 31, 1993, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 24, 1994, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1993 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
October 19, 1994
<PAGE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
-------------- --------------
(Unaudited)
<S> <C> <C>
Assets
Cash and short-term investments .............................. $ 316,349 $ 127,756
Joint venture cash and short-term investments ................ 27,088 14,943
Restricted cash and short-term investments ................... 127,380 48,105
Accounts receivable .......................................... 33,901 21,658
Due from joint ventures ...................................... 1,639 1,394
Properties and plants, net (Note 3) .......................... 522,268 458,974
Equipment, net of depreciation ............................... 4,699 4,540
Notes receivable - joint ventures ............................ 12,255 11,280
Other investments ............................................ 11,517 10,445
Deferred charges and other assets ............................ 29,968 16,889
-------------- --------------
Total assets ............................................ $ 1,087,064 $ 715,984
============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable ...................................................... $ 1,021 $ 607
Other accrued liabilities ............................................. 23,357 19,866
Income taxes payable .................................................. 587 4,000
Construction loans .................................................... 21,079 --
Project loans ......................................................... 233,080 246,880
Senior Notes (Note 8) ................................................. -- 35,730
Senior Discount Notes (Note 4) ........................................ 421,375 --
Convertible Subordinated Debentures ................................... 100,000 100,000
Deferred income taxes ................................................. 24,774 18,310
-------------- --------------
Total liabilities ....................................... 825,273 425,393
-------------- --------------
Deferred income ....................................................... 19,781 20,288
Redeemable preferred stock ............................................ 62,350 58,800
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock - authorized 2,000
shares, no par value
Common stock - authorized 60,000
shares, par value $0.0675 per share, issued and outstanding 32,230
and 35,446 shares at September 30, 1994 and December 31, 1993,
respectively ...................................................... 2,407 2,404
Additional paid in capital ............................................ 100,000 100,965
Retained earnings ..................................................... 136,769 111,031
Treasury stock - 3,420 and 157 common
shares, at September 30, 1994 and December 31, 1993, respectively, at
cost ................................................................ (59,516) (2,897)
-------------- --------------
Total stockholders' equity ............................ 179,660 211,503
-------------- --------------
Total liabilities and stockholders' equity ............ $ 1,087,064 $ 715,984
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30 September 30
1994 1993 1994 1993
------------------------------- -------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Sales of electricity and steam $49,498 $41,433 $117,208 $101,046
Interest and other income 9,026 4,824 21,980 12,294
---------- ----------- ---------- ----------
Total revenues 58,524 46,257 139,188 113,340
---------- ----------- ---------- ----------
Cost and expenses:
Plant operations 9,846 5,878 23,887 18,898
General and administration 3,216 2,359 9,536 8,596
Royalties 3,504 3,004 7,898 6,525
Depreciation and amortization 5,639 4,344 15,439 13,044
Interest expense 17,653 8,184 44,480 20,993
Less interest capitalized (2,087) (1,682) (7,518) (3,822)
---------- ----------- ---------- ----------
Total costs and expenses 37,771 22,087 93,722 64,234
---------- ----------- ---------- ----------
Income before income taxes 20,753 24,170 45,466 49,106
Provision for income taxes 6,340 7,493 14,067 14,295
---------- ----------- ---------- ----------
Income before extraordinary item 14,413 16,677 31,399 34,811
and change in accounting principle
Extraordinary item (less applicable - - (2,007) -
income taxes of $945) (Note 8)
Cumulative effect of change in - - - 4,100
accounting principle
---------- ----------- ---------- ----------
Net income 14,413 16,677 29,392 38,911
Preferred dividends (paid in kind)* 1,275 1,179 3,711 3,429
Net income attributable to common
stockholders $13,138 $15,498 $ 25,681 $ 35,482
========== ========== ========== ==========
Income per share before extraordinary
item and change in accounting principle $ 0.38 $ 0.41 $ 0.77 $ 0.81
Extraordinary item (Note 8) - - (0.06) -
Cumulative effect of change in
accounting principle - - - 0.11
---------- ----------- ---------- ----------
Net income per share assuming no dilution $ 0.38 $ 0.41 $ 0.71 $ 0.92
========== =========== ========== ==========
Net income per share assuming full
dilution (Note 7) $ 0.36 $ 0.41 $ 0.70 $ 0.92
========== =========== ========== ==========
Average number of common and
common equivalent shares
outstanding assuming no dilution 34,831 38,180 36,174 38,436
========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
* Reflects dividends on the Company's Series C Redeemable Convertible
Preferred Stock, which are payable in kind.
<PAGE>
<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 (10,739) (9,401)
power plants
Well and resource development (8,508) (13,270)
expenditures for existing projects
Acquisition of equipment (411) (1,116)
Yuma plant (5,611) (25,530)
Foreign projects - construction in (46,841) -
progress and development
Pacific Northwest, Nevada and Utah (6,782) (14,933)
developments
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 677 2,303
common, treasury, and preferred stock
and exercise of options
Deferred financing costs - Senior (11,201) -
Discount Notes
Proceeds from issue of Senior Discount 400,000 -
Notes
Defeasance of Senior Notes (35,730) -
Repayment of project loans (13,800) (8,362)
Deferred financing costs - Convertible - (2,500)
Subordinated Debentures
Proceeds from issue of Convertible - 100,000
Subordinated Debentures
Proceeds from construction loan 21,079 -
Increase in amounts due from joint (1,220) (2,139)
ventures
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 142,699 63,519
period
---------- ----------
Cash and cash equivalents at end of period $343,437 $144,577
========== ==========
Supplemental disclosures:
Interest paid, net of amounts capitalized $ 14,494 $ 14,881
---------- ----------
Income taxes paid $ 5,070 $ 1,410
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<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 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
<PAGE>
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).
In August 1994, the Company completed the financing on the Mahanagdong
project with a total project cost of approximately $320 million. The capital
structure consists of a term loan of $240 million and approximately $80 million
in equity contributions. The construction debt financing facility will be
provided by OPIC and a consortium of commercial lenders led by Bank of America
NT&SA. The debt provided by the commercial lenders will be insured against
political risks by the Ex-Im Bank. Ten-year term debt financing will be provided
by Ex-Im Bank (which will replace the construction debt) and by OPIC. 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
<PAGE>
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.
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.
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
<PAGE>
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.
<PAGE>
<PAGE>
7. EARNINGS PER SHARE
Fully diluted earnings per share assumes the conversion of the
Convertible Subordinated Debentures into common shares at a conversion price of
$22.50/share. The conversion has become dilutive because of the significant
repurchase by the Company of the Company's common stock which has materially
reduced the number of shares outstanding and thereby increased the relative
effect of the conversion.
8. EXTRAORDINARY ITEM
In conjunction with the Company's Senior Discount Note offering (See
Note 4), the 12% Senior Notes were defeased. This resulted in an extraordinary
item in the amount of $2,007, after the income tax effect of $945. The
extraordinary item represents the amount necessary to defease the interest
payments and the unamortized portion of the deferred financing costs on the
$35,730 Senior Notes. The 1994 contingent interest component of these Senior
Notes, calculated by reference to the Company's share of available cash flow
from the Coso Project, remains undefeased and outstanding through the end of the
calculation period, December 31, 1994.
<PAGE>
<PAGE>
MAGMA'S CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO
FINANCIAL STATEMENTS FOR PERIOD ENDING
DECEMBER 31, 1993
Report of Independent Accountants
To the Shareholders and Board of Directors of Magma Power Company
We have audited the accompanying consolidated balance sheets of Magma Power
Company and Subsidiaries (the "Company") at December 31, 1993 and 1992, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1993. The financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Magma Power
Company and Subsidiaries at December 31, 1993 and 1992, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993 in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand
Coopers & Lybrand
San Diego, California
March 18, 1994
<PAGE>
<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 265,215 113,922
depreciation of $53,166 and $36,932, respectively
Exploration and development costs, net of accumulated 107,069 52,001
amortization of $13,682 and $10,445, respectively
Acquisition and new project costs 13,721 26,291
Other investments 47,642 79,469
Power purchase contracts, net of accumulated amortization of 22,185 853
$946 and $88, respectively.
Other assets and deferred charges 22,762 16,083
Goodwill, net of accumulated amortization of $2,122 and 9,276 9,129
$1,757, respectively
---------- ----------
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 2,399 2,298
outstanding 23,989,763 and 22,980,647 shares respectively
Additional paid-in capital 144,996 128,154
Unrealized gains from marketable securities 583 -
Retained earnings 203,940 151,808
---------- ----------
Total Shareholders' Equity 351,918 282,260
---------- ----------
$611,311 $396,650
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<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
- 17,833 -
Cumulative effect to January 1, 1992 of change in
accounting for income taxes
--------- ---------- -----------
Net income $52,135 $54,191 $33,941
========= ========== ===========
Income before cumulative effect of accounting change per Common Share
Assuming no dilution $2.17 $1.59 $1.44
--------- ---------- -----------
Assuming full dilution $2.17 $1.52 $1.44
--------- ---------- -----------
Cumulative effect of accounting change per Common Share
Assuming no dilution $ - $.77 $ -
--------- ---------- -----------
Assuming full dilution $ - $.75 $ -
--------- ---------- -----------
Income per Common Share
Assuming no dilution $2.17 $2.36 $1.44
--------- ---------- -----------
Assuming full dilution $2.17 $2.27 $1.44
--------- ---------- -----------
Average Common Shares Outstanding
Assuming no dilution 24,063 22,936 23,611
--------- ---------- -----------
Assuming full dilution 24,072 23,847 23,611
--------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(For the Three Years Ended December 31, 1993, 1992 and 1991)
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional Unrealized Total
Common Stock Paid-In Gains From Shareholders'
----------------------- Capital Marketable Retained Equity
Shares Amount Securities Earnings
--------- --------- ---------- ---------- ----------- -------------
<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 857 86 (86) - - -
through issuance of shares
Tax effect of Dow option - - 13,581 - - 13,581
purchase
Unrealized gains from - - - 583 - 583
marketable securities
Other equity transactions, 152 15 3,347 - (3) 3,359
net
Net income, 1993 - - - - 52,135 52,135
--------- --------- ---------- ---------- ----------- -------------
Balance, December 31, 1993 23,990 $2,399 $144,996 $583 $203,940 $351,918
========= ========= ========== ========== ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<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 129,943 (6,616) (5,850)
activities
--------- ---------- ------------
Net (decrease) in cash 15,911 (10,595) 10,436
Cash at beginning of year 2,106 12,701 2,265
--------- ---------- ------------
Cash at end of year $18,017 $2,106 $12,701
========= ========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands, except per share amount)
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
A. BASIS OF CONSOLIDATION. The consolidated financial statements
present the assets, liabilities, revenues, costs and expenses of Magma Power
Company (the "Company") and its 100% owned subsidiaries and partnerships,
Imperial Magma, Vulcan Power Company ("Vulcan"), Magma Operating Company
("MOC"), Desert Valley Company ("Desert Valley"), Fish Lake Power Company
("FLPC"), Magma Land I ("MLI"), Salton Sea Power Company, Salton Sea Brine
Processing, L.P., Salton Sea Power Generation, L.P., Peak Power Corporation
("Peak Power") and its pro-rata 50% share of the accounts of Del Ranch, L.P.,
Elmore, L.P., Leathers, L.P., Vulcan/BN Geothermal Power Company and Magma/GEO
'83 Joint Venture.
All significant intercompany transactions and accounts have been
eliminated.
B. REVENUE RECOGNITION. Sales of electricity represents Magma's
pro-rata 50% share of the revenue accrued by Del Ranch, L.P., Elmore, L.P.,
Leathers, L.P., and Vulcan/BN Geothermal Power Company (the "Partnerships") and
its 100% owned interest in Salton Sea Power Generation, L.P., from sales to
Southern California Edison Company ("SCE"). SCE is a subsidiary of SCEcorp.
SCEcorp is the parent corporation of Mission Energy Company which, through its
subsidiaries, owns 50% of the Partnerships. Royalties, management service fees
and rental income contractually payable to Magma by the Partnerships are
recorded on an accrual basis, net of Magma's pro-rata 50% share of the
corresponding partnership expense. Royalties earned from providing geothermal
resources to power plants operated by other geothermal power producers are
recorded on an accrual basis.
C. PROPERTY, PLANT AND EQUIPMENT. Land is carried at cost. Buildings
and equipment are carried at cost less accumulated depreciation. Exploration and
development costs are carried at cost less accumulated amortization. Such
capitalized costs include all costs of acquiring geothermal leases, recurring
lease rents, geological and geophysical studies and drilling and equipping
wells. These costs are not amortized until they can be directly associated with
energy production. Exploration and development costs associated with abandoned
wells and properties are amortized over the estimated remaining life of the
resource.
Depreciation and amortization are computed using the straight-line method over
the asset's useful life.
Useful lives are as follows:
Plant, plant equipment and buildings 20 years
Office furniture and equipment 5-10 years
Maintenance and other equipment 7-10 years
Exploration and development costs 20 years*
* Life of related plant facility.
When property, plant and equipment is sold or abandoned, the cost and
related accumulated depreciation/amortization are removed from the accounts and
the resulting gain or loss is recognized currently.
D. DEFERRED WELL REWORK COSTS. Magma defers all rework costs and
amortizes them over the estimated period between reworks. Production wells are
amortized using a units of production method while injection wells are amortized
on a straight-line basis over 18 months. Deferred well rework costs of
$5,181,000 in 1993 and $3,010,000 in 1992 are included in prepaid expenses and
other current assets.
E. POWER PURCHASE CONTRACTS. Power purchase contracts are carried at
cost less accumulated amortization. Contract costs are amortized on a
straight-line basis over the shorter of the remaining contract life or
20 years. The amortization begins at the date of acquisition, for contracts in
service, or the date of firm operations. Amortization expense amounted to
$858,000 in 1993 and $25,000 in 1992 and 1991.
F. GOODWILL. In a merger which was effective March 11, 1988, Magma
Power Company became successor in interest to all of the assets and obligations
of Magma Energy. The excess of the value of stock issued over the fair market
value of the assets acquired was recorded as goodwill and is being amortized on
the straight-line method over a period of thirty years. Amortization expense
amounted to $365,000 in 1993, 1992 and 1991.
G. MARKETABLE SECURITIES, INTEREST-BEARING DEPOSITS AND OTHER
INVESTMENTS. Marketable securities and interest-bearing deposits are classified
as "available-for-sale" and are carried at their fair value. Realized gains and
losses are determined using the specific identification method and are included
in other income. Gross unrealized holding gains or losses are excluded from
earnings and reported, net of related tax effect, as a separate component of
Shareholders' Equity. Other investments are carried at cost which approximates
market value.
H. RETIREMENT PLANS. Magma maintains two defined contribution
plans covering all eligible employees. Contributions to the plans are funded
annually.
I. INCOME PER COMMON SHARE. The calculation of primary earnings per
<PAGE>
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.
J. CONSOLIDATED STATEMENT OF CASH FLOWS. For purposes of the Statements
of Cash Flows, Magma considers bank and money market deposits as cash.
Partnership cash and marketable securities are not considered cash equivalents
as these assets are segregated for exclusive use of the Partnerships and
restrictions in the Partnership Secured Credit Agreements place limits on
distributions of partnership cash to the partners.
Interest paid was $8,407,000 in 1993, $5,514,000 during 1992 and
$8,153,000 during 1991.
K. RECLASSIFICATION. Magma has reclassified the presentation of certain
prior year information to conform with the current presentation format.
2. GEOTHERMAL POWER PARTNERSHIPS
The Vulcan partnership was formed in 1985 with equal ownership between
Vulcan Power Company, a 100% owned subsidiary of Magma Power Company and BN
Geothermal, Inc., a wholly owned subsidiary of Mission Energy Company.
Similarly, the Del Ranch, Elmore and Leathers partnerships were formed
in 1988 with equal ownership between Magma Power Company and Mission Energy
Company.
In March 1993 Magma formed Salton Sea Brine Processing L.P. to hold
the well field and brine processing equipment acquired from Union Oil
Company of California ("Unocal"). Ownership of Salton Sea Brine Processing,
L.P. is 99% Salton Sea Power Company and 1% Magma Power Company. Magma also
formed Salton Sea Power Generation L.P. to hold the power generating assets
acquired from Desert Power Company and Earth Energy Inc., both wholly owned
subsidiaries of Unocal. Ownership of Salton Sea Power Generation, L.P. is 99%
Salton Sea Brine Processing, L.P. and 1% Magma Power Company.
3. MARKETABLE SECURITIES AND OTHER INVESTMENTS
Effective December 31, 1993, Magma adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). As of December 31, 1993 all debt and equity
securities have been classified as available-for-sale and are carried at fair
value. Gross unrealized holding gains of $836,000 were recorded, net of tax
effect, as of December 31, 1993.
As of December 31, marketable securities and other investments
consisted of the following:
<TABLE>
<CAPTION>
Marketable
Securities Maturities
(maturing of
within Other Other
one year) Investments Investments
----------- ----------- -----------
<S> <C> <C> <C>
1993
Debt and equity securities
Commercial paper $ 4,986 $ -
Auction rate preferred stock 23,100
U.S. treasuries and agencies 4,000 12,986 2-5 years
U.S. treasuries and agencies 5,084 6-10 years
Corporate medium-term notes 7,093 2-5 years
Corporate medium-term notes 4,139 6-10 years
Municipal tax exempts 3,000 2-5 years
Other investments
Low income housing limited partnerships 8,333
Other 7,007
----------- ------------
Total $32,086 $47,642
=========== ============
1992
Auction rate preferred stock $33,000 $ -
U.S. treasuries and agencies 17,572
Corporate medium-term notes 4,501 43,409
Low income housing limited partnerships 8,202
Municipal tax exempts 3,000
Other 7,286
----------- ------------
Total $37,501 $79,469
=========== ============
</TABLE>
<PAGE>
<PAGE>
In 1992, marketable securities and other investments are carried at
cost, which approximates market value.
<PAGE>
<PAGE>
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 plants (the "Salton Sea
Plants") and 40,600 acres of geothermal leases, its Long Valley geothermal
leases, consisting of approximately 12,000 acres near Mammoth, California and
its 58,300 acres of geothermal leases in Nevada. On March 31, 1993 Magma
consummated its acquisition of the Imperial Valley geothermal interest. Total
cost includes (i) payments to Unocal consisting of the purchase price of $224
million, working capital of $7.3 million and an interest charge of $3.5 million
and (ii) advisory fees and transaction costs totaling $3.4 million and a
provision for $10 million of capital improvements. The total cost of the
acquisition is allocated as follows:
Land ............................ $ 388
Property, plant and equipment ... 164,366
Exploration and development costs 53,676
Power purchase contracts ........ 22,217
Transmission line credits ....... 6,254
Other ........................... 1,278
--------
Total ......................... $248,179
========
In addition to the initial acquisition price, Magma will make payments
to Unocal contingent on future development of new power generating capacity. The
Salton Sea Plants consist of a 10 MW unit, which started firm operation in 1982,
a 20 MW unit, which started firm operation in 1990 and a 50 MW unit, which
started firm operation in 1989. All three plants deliver electricity to Southern
California Edison Company under 30 year power purchase contracts. The contract
for the 10 MW unit is a negotiated contract while the contracts for the 20 MW
and 50 MW units are ISO4's with levelized energy payments.
On March 11, 1992 Magma acquired a 30 year modified ISO4 contract to
supply SCE with 16 MWs of geothermal power from Fish Lake, Nevada. Magma is
currently engaged in exploratory and well field development activities, which
are preparatory to constructing a power plant.
Acquisition and new project costs as of December 31, 1993 and 1992 were
as follows (dollars in thousands):
1993 1992
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
======== =======
6. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities at December 31 consisted of
the following (dollars in thousands):
1993 1992
Payroll ................. $1,187 $1,554
Interest ................ 1,602 883
Other ................... 674 1,337
-------- -------
Total $3,463 $3,774
======== =======
7. LOANS PAYABLE
At December 31, loans payable consisted of the following
<PAGE>
(dollars in thousands):
1993 1992
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
======== ========
Loans payable at December 31, 1993 and 1992 included Magma's pro-rata
share of the debt of the Del Ranch, Elmore, and Leathers partnerships and is
non-recourse to Magma Power Company and subsidiaries, however, it is
collateralized by substantially all of the assets of these partnerships. A
Secured Credit Agreement with a group of international banks, with Morgan
Guaranty Trust Company ("Morgan") as the agent bank provides for direct bank
loans at specified premiums over a choice of either the bank's prime rate, the
London Interbank Offered Rate ("LIBOR") or the CD Base rate. As an alternative,
each partnership may elect to issue commercial paper and medium-term notes
supported by letters of credit issued by Fuji Bank, Limited, which are secured,
in turn, by the project debt facility with Magma.
The partnerships had no direct bank borrowings at December 31, 1993 and
1992. The weighted average interest rate of the commercial paper and medium-term
notes outstanding at December 31, was 5.5% in 1993 and 6.2% in 1992. During 1993
and 1992 Magma's pro-rata share of the partnership weighted average borrowings
was $77,616,000 and $85,926,000, with a weighted average interest rate of 5.6%
and 6.7% for the corresponding periods.
The loans of each partnership are reduced by 25 semi-annual principal
payments in March and September of each year. The last principal payment is
scheduled for September 15, 2001 for the Del Ranch and Elmore loans and
September 15, 2002 for the Leathers loan.
On March 19, 1993 Magma entered into a one-year $140,000,000 term loan
("Bridge Loan") with a group of commercial banks. Proceeds of the loan were used
to finance the acquisition of the Imperial Valley geothermal interests. Interest
on the loan accrues at LIBOR plus .675%.
On February 28, 1994 Magma replaced the Bridge Loan with a $130,000,000
non-recourse project level debt which is collateralized by substantially all of
the assets of the newly acquired Salton Sea Plants. A secured credit agreement
with a group of international banks, with Credit Suisse as the agent bank,
provides for direct loans at LIBOR plus 1.25%.
The loans are reduced by 12 semi-annual principal payments in March and
September of each year. The last principal payment is scheduled for March 15,
2000.
Other loans consist of a 10-year $4,000,000 tax exempt debt financing
guaranteed by Magma Power Company on behalf of Desert Valley, and installment
obligations representing scheduled capital contributions for investments in low
income housing limited partnerships. The tax exempt bonds issued in October,
1990 have a coupon interest rate of 7.625% and a sinking fund requirement in the
seventh through tenth years. The installment obligations are non-interest
bearing and are payable through the year 2000 in varying amounts totalling
$6,467,000.
Magma's pro rata portion of annual maturities of loans payable for the
five years beginning January 1, 1994 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Salton Sea Plants Pro Rata Other Total
Portion of
Partnership Debt
<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
<PAGE>
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:
1993 1992
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
======= =========
9. Incentive Stock Option Plan
On September 25, 1987, the shareholders of Magma approved
the Magma Power Company Stock Option Plan of 1987 (the "Plan").
Under the Plan, options to purchase an aggregate of 1,000,000
shares of common stock, $0.10 par value, of Magma may be granted
to salaried employees and consultants of Magma and its
subsidiaries, as selected by the Board of Directors or its
compensation committee (the "Committee"). The number of shares
available under the Plan is subject to adjustment in certain
circumstances, including reorganizations, recapitalizations,
stock splits, reverse stock splits, and stock dividends.
The option price granted under the Plan will be established
by the Board of Directors or the Committee, when the option is
granted. Such price may not be less than 90% of the fair market
value of the stock on the date the option is granted. The
options have a term of ten years and will become exercisable in
accordance with a vesting schedule starting one year from the
date of the grant.
Options outstanding have been granted to officers and
employees to purchase common stock at prices ranging from $9.25
to $32.50 per share. Option transactions for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1993 1992
----- -----
<S> <C> <C>
Options outstanding, beginning of year 475,034 302,561
Options granted 92,175 220,300
Options exercised (Exercise price $9.25
to $32.50) (141,059) (47,827)
Options outstanding, end of year of
which 215,849 were exercisable at
December 31, 1993 426,150 475,034
</TABLE>
At December 31, 1993 and 1992, respectively, 229,181 and
321,356 shares of common stock were available for future option
grants.
10. Provision for Income Taxes
Magma provides for taxes on income in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax
assets and liabilities are determined based on the difference
between the financial statement and the tax basis of the assets
and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. The cumulative
effect of the adoption of SFAS 109 as of January 1, 1992
increased net income by $17,833,000 or $.77 per share, and is
reported separately in the consolidated statement of operations.
Financial statements for 1991 were not restated to reflect SFAS
109.
The provision consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
Current Deferred Total
-------- -------- --------
<S> <C> <C> <C>
1993
Federal $ 10,787 $ 6,861 $ 17,648
State 3,913 1,217 5,130
-------- -------- --------
<PAGE>
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.
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):
<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991
--------- -------- ---------
<S> <C> <C> <C>
Taxes at federal statutory rate (35% in
1993 and 34% for 1992 and 1991) $ 26,220 $ 16,887 $ 14,009
State taxes 3,592 2,242 2,417
Amortization of goodwill 127 123 123
Percentage depletion (2,692) (1,321) (1,292)
Investment tax credit (520) (6,956)
Lease investments (4,268) (2,887)
Capital gains (1,815) (585)
Other 319 80 (453)
--------- -------- ---------
Provision for income taxes $ 22,778 $ 13,309 $ 7,263
--------- -------- ---------
--------- -------- ---------
Effective tax rate 30.4% 26.8% 17.6%
--------- -------- ---------
--------- -------- ---------
</TABLE>
11. Commitments and Contingencies
Magma and its subsidiary, Desert Valley Company, have issued
irrevocable letters of credit totalling $300,000 and $6,759,000,
respectively, which guarantee repayment of tax-exempt bond
financing, contingent environmental liabilities and obligations
for site clean-up upon cessation of operations.
12. Quarterly Statistics (Unaudited) (dollars in thousands,
except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth Year
------ ------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
1993
Total revenues $22,458 $45,008 $57,315 $42,357 $167,138
Income from operations 7,826 19,348 30,783 16,956 74,913
Net income 5,477 13,539 20,453 12,666 52,135
Income per common share:
Assuming no dilution $ .23 $ .56 $ .85 $ .53 $ 2.17
Assuming full dilution .23 .56 .85 .53 2.17
1992
Total revenues $21,545 $24,174 $31,580 $31,667 $108,966
Income from operations 7,424 9,312 16,344 16,587 49,667
Income before cumulative
effect of accounting
change(b) 5,434 6,816 11,966 12,142 36,358
Net income 23,267(a) 6,816 11,966 12,142 54,191
Income per common share:
Assuming no dilution $ 1.01(a) $ .30 $ .52 $ .53 $ 2.36
Assuming full dilution 1.01(a) .30 .52 .51 2.27
</TABLE>
(a) First quarter results were restated to include the
cumulative effect of change in accounting for income taxes
as of January 1, 1992 of $17,833,000 or $0.77 per common
share assuming no dilution and $0.75 per common share
assuming full dilution due to Magma's adoption of SFAS 109.
(b) Quarterly results have been restated to reflect adoption of
SFAS 109.
<PAGE>
Financial Statements for Period Ending
September 30, 1994
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.
<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
-------- --------
-------- --------
<CAPTION>
September 30, December 31,
1994 1993
---- -----
(Unaudited)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities
Trade accounts payable $ 7,832 $ 7,235
Accrued and other liabilities 3,605 3,463
Current portion of loans payable 37,010 36,799
-------- --------
Total Current Liabilities 48,447 47,497
-------- --------
Loans payable 151,959 189,209
Deferred income taxes 22,376 11,387
Other long-term liabilities 12,354 11,300
-------- --------
Total Non-Current Liabilities 186,689 211,896
-------- --------
Shareholders' Equity
Preferred stock, $.10 par value,
1,000,000 shares authorized,
none issued and outstanding 2,401 2,399
Common stock, $.10 par value, 30,000,000
shares authorized, issued and
outstanding 24,042,915 and 23,989,763
shares, respectively 142,765 144,996
Additional paid-in capital (677) 583
Unrealized gains (losses) from marketable
securities 250,797 203,940
-------- --------
Retained earnings 395,286 351,918
Total Shareholders' Equity $630,422 $611,311
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
1994 1993 1994 1993
------- ------- ------ --------
<S> <C> <C> <C> <C>
Revenues
Sales of electricity $50,592 $49,674 $124,086 $103,319
Royalties 5,628 5,569 15,062 14,885
Interest and other income 1,400 906 3,866 3,635
Management services 1,263 1,166 3,090 2,942
------- ------- ------- -------
Total 58,883 57,315 146,104 124,781
------- ------- ------- -------
Costs and Expenses
Plant operating costs 12,723 14,404 41,208 36,622
Depreciation and amortization 5,875 6,374 17,737 15,449
Other non-plant costs 115 118 380 401
General and administrative 3,730 2,912 9,602 7,471
Interest incurred 3,301 2,724 9,262 6,881
------- ------- ------- -------
25,744 26,532 78,189 66,824
------- ------- ------- -------
Income from operations 33,139 30,783 67,915 57,957
Provision for income taxes 10,290 10,330 21,072 18,488
------- ------- ------- -------
Net income $22,849 $20,453 $46,843 $39,469
------- ------- ------- -------
------- ------- ------- -------
Income per Common Share
Assuming no dilution $0.95 $0.85 $1.95 $1.64
------- ------- ------- -------
------- ------- ------- -------
Average Common Shares Outstanding
Assuming no dilution 24,029 24,096 24,017 24,037
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1994 1993
----- -----
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 46,843 $ 39,469
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 17,737 15,449
Transmission credits realized 2,209 1,803
Other, net 1,848 (809)
Changes in components of working capital:
Accounts receivable (21,931) (25,326)
Partnership cash and marketable securities (2,559) 6,373
Prepaid expenses and other assets 87 (2,246)
Accounts payable and accrued liabilities 4,776 6,688
Accrued interest payable (1,102) 167
Income taxes payable (2,934) 8,646
Deferred taxes from operations 12,645 2,920
-------- --------
Total adjustments 10,776 13,665
-------- --------
Net cash provided by operating activities 57,619 53,134
-------- --------
Cash Flows From Investing Activities
Proceeds from the sale of investments 205,686 195,545
Purchase of investments (216,060) (148,655)
Capital expenditures (8,854) (5,718)
Power plant acquisition costs (215,718)
New project development costs (11,909) (11,932)
Other, net (1,198) 1,166
-------- --------
Net cash used in investing activities (32,335) (185,312)
-------- --------
Cash Flows From Financing Activities
Repayment of loans payable (166,101) (10,070)
Borrowing from banks 130,000 140,000
Loan fees (3,225)
Proceeds from the issuance of common stock 816 2,519
Other, net 320 (278)
-------- --------
Net cash provided (used) by financing activities (38,190) 132,171
-------- --------
Net increase (decrease) in cash (12,906) (7)
Cash at beginning of period 18,017 2,106
-------- --------
Cash at end of period $ 5,111 $ 2,099
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Consolidation - The consolidated financial
statements present the assets, liabilities, revenues, costs and
expenses of Magma, its 100%-owned subsidiaries and its
proportionate share of partnerships in which Magma has invested.
All significant intercompany transactions and accounts have
been eliminated.
2. Loans Payable
Loans payable consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
<S> <C> <C>
Pro-rata share of partnership
non-recourse debt $ 65,157 $ 75,149
Bridge loan 140,000
Salton Sea debt 114,308
Other loans 9,504 10,859
-------- --------
188,969 226,008
Less amounts due within one year 37,010 36,799
-------- --------
Loans payable due after one year $ 151,959 $189,209
-------- --------
-------- --------
</TABLE>
Loans payable at September 30, 1994 and December 31, 1993
included Magma's pro-rata share of the debt of the Del Ranch,
L.P., Elmore, L.P., and Leathers, L.P. partnerships. The
partnership loans are non-recourse to Magma and subsidiaries,
however, it is collateralized by substantially all of the assets
of these partnerships.
On March 19, 1993, Magma entered into a $140 million
unsecured one-year term loan ("Bridge Loan") with a group of
commercial banks. Proceeds from the loan were used to finance
the acquisition of the Salton Sea Plants from Unocal. On
February 28, 1994, Magma replaced the Bridge Loan with a
$130,000,000 non-recourse project level loan which is
collateralized by substantially all of the assets and power
purchase contracts of the newly acquired Salton Sea Plants.
Under the secured credit agreement for this loan, a group of
international banks loaned to Salton Sea Power Generating, L.P.
and Salton Sea Brine Processing, L.P. (the "Salton Sea
Partnerships"), which own the Salton Sea Plants, $130,000,000 in
the form of a six (6) year loan at interest rates of 1.25% over
LIBOR, secured by substantially all of the assets of the Salton
Sea Partnerships. Restrictions in the secured credit agreement
place limits on distribution of cash from the Salton Sea Plants
to Magma.
3. Deferred Income Taxes
Deferred income taxes as of September 30, 1994 and December
31, 1993 represent estimated income taxes payable in the future
years as determined in accordance with SFAS 109 "Accounting for
Income Taxes."
4. Net Income per Common Share
The calculation of primary earnings per common share is
based on the weighted average number of outstanding common
shares. In computing primary earnings per common share,
adjustment has been made for common shares issuable for shares
under option.
<PAGE>
<PAGE>
IMPERIAL VALLEY GEOTHERMAL INTERESTS
(ACQUIRED BY MAGMA) FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Magma Power Company:
We have audited the accompanying Statement of Net Assets Acquired as of March
31, 1993 and Historical Summaries of Gross Revenues and Direct Operating
Expenses for each of the three years in the period ended December 31, 1992
(collectively, the "Statements") of the Imperial Valley Geothermal Interests
(acquired by Magma Power Company from Union Oil Company of California
["Unocal"]). The Statement of Net Assets Acquired is the responsibility of Magma
Power Company's management. The Historical Summaries of Gross Revenues and
Direct Operating Expenses are the responsibility of Unocal's management. Our
responsibility is to express an opinion on the Statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the Statements. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying Statements were prepared for inclusion in the Form 8-K of Magma
Power Company on the basis of presentation as described in Note 1, and are not
intended to be a complete presentation of the Imperial Valley Geothermal
Interests' assets, liabilities, revenues and expenses.
In our opinion, the Statements referred to above present fairly, in all material
respects, the net assets acquired as of March 31, 1993 and the gross revenues
and direct operating expenses for each of the three years in the period ended
December 31, 1992 of the Imperial Valley Geothermal Interests on the basis of
presentation as described in Note 1, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand
San Diego, California
May 6, 1993
<PAGE>
<PAGE>
IMPERIAL VALLEY GEOTHERMAL INTERESTS
(ACQUIRED BY MAGMA POWER COMPANY)
STATEMENT OF NET ASSETS ACQUIRED
MARCH 31, 1993
(IN THOUSANDS)
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
=========
The accompanying notes are an integral part of
these statements.
<PAGE>
<PAGE>
IMPERIAL VALLEY GEOTHERMAL INTERESTS
(ACQUIRED BY MAGMA POWER COMPANY)
HISTORICAL SUMMARIES OF GROSS REVENUES AND
DIRECT OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended
December 31
------------------------------
1990 1991 1992
-------- -------- --------
<S> <C> <C> <C>
Gross Revenues:
Sales of electricity ......................................................... $ 62,997 $ 73,442 $ 72,271
Other revenue ................................................................ 22 20 --
-------- -------- --------
Total gross revenues ........................................................... 63,019 73,462 72,271
-------- -------- --------
Direct operating expenses:
Plant operating costs ........................................................ 20,815 23,126 21,693
District office charges ...................................................... 4,123 4,389 3,868
Exploration operations ....................................................... 901 985 975
Rentals in lieu of drilling .................................................. 1,115 1,036 661
-------- -------- --------
26,954 29,536 27,197
-------- -------- --------
Excess of gross revenues over
direct operating expenses .................................................... $ 36,065 $ 43,926 $ 45,074
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these statements.
<PAGE>
<PAGE>
IMPERIAL VALLEY GEOTHERMAL INTERESTS
(ACQUIRED BY MAGMA POWER COMPANY)
NOTES TO THE STATEMENT OF NET ASSETS ACQUIRED AND
HISTORICAL SUMMARIES OF GROSS REVENUES AND
DIRECT OPERATING EXPENSES
(IN THOUSANDS)
1. BASIS OF PRESENTATION:
On March 31, 1993 ("Acquisition Date"), Magma Power Company ("Magma")
acquired certain geothermal and other related assets located in the
Imperial Valley of California (the "Imperial Valley Geothermal
Interests") from Union Oil Company of California ("Unocal"). Magma has
accounted for the acquisition under the purchase method, and,
accordingly, the purchase price allocation in the accompanying
Statement of Net Assets Acquired is based on the estimated fair values
of the assets purchased as of the Acquisition Date. Such allocation has
been based on certain estimates which may be revised at a later date.
The Statement of Net Assets Acquired is not intended to be a complete
presentation of the assets and liabilities of the Imperial Valley
Geothermal Interests.
The consideration to Unocal and related liabilities assumed in
determining Magma's total cost of acquisition includes $224,000,000
consisting of $22,400,000 paid on December 31, 1992 ("Initiation Date"
of the transaction) and a $201,600,000 note payable due to Unocal on
March 31, 1993 for geothermal and other related assets; certain current
assets and liabilities assumed by Magma as of the Initiation Date
("Adjusted Assets"), and an estimate of the net of revenues and certain
expenditures ("Adjustment Account") relating to the operations of the
Imperial Valley Geothermal Interests from the Initiation Date to the
Acquisition Date pursuant to the Sale and Purchase Agreement ("Purchase
Agreement") between Magma and Unocal; interest cost incurred during the
acquisition period from the Initiation Date to the Acquisition Date
paid to Unocal pursuant to the Purchase Agreement; an estimate of
acquisition costs; and an estimate of capital expenditures for
necessary improvements to the assets. These costs are summarized as
follows:
Acquisition cost of geothermal and
other related assets ................ $224,000,000
Adjusted Assets ....................... 6,686,000
Estimated Adjustment Account .......... 590,000
Interest cost during acquisition period 3,489,000
Estimated acquisition costs ........... 2,800,000
Estimated capital improvements ........ 10,000,000
------------
Total cost of acquisition ........... $247,565,000
============
Excluded from the Statement of Net Assets Acquired are certain
contingent payments of $100,000 per installed megawatt and revenue
interests of one percent on the gross revenues generated on the first
150 megawatts of new plant capacity should Magma construct new
geothermal electrical generating facilities, as defined in the Purchase
Agreement.
<PAGE>
<PAGE>
IMPERIAL VALLEY GEOTHERMAL INTERESTS
(ACQUIRED BY MAGMA POWER COMPANY)
NOTES TO THE STATEMENT OF NET ASSETS ACQUIRED AND
HISTORICAL SUMMARIES OF GROSS REVENUES AND
DIRECT OPERATING EXPENSES, CONTINUED
1. BASIS OF PRESENTATION, CONTINUED:
The accompanying Historical Summaries of Gross Revenues and Direct
Operating Expenses ("Historical Summaries") include only the gross
revenues and direct operating expenses attributable to the production
and sale of geothermal energy from the Imperial Valley Geothermal
Interests on Unocal's basis of accounting. Prior to the acquisition,
the Imperial Valley Geothermal Interests were included in the
consolidated financial statements of Unocal and were not accounted for
as a separate entity. Sales of electricity in the accompanying
Historical Summaries represent revenue accrued from Unocal's sales to
Southern California Edison Company. The Historical Summaries do not
include certain significant expenses that were incurred in connection
with the operations of the Imperial Valley Geothermal Interests and
that were recorded in the Unocal financial statements. Those expenses
were either not included because the information was not obtainable as
Unocal did not allocate such expenses to individual properties, or the
basis of such amounts may be significantly different as operated by
Magma. Items excluded are depreciation, depletion and amortization,
transmission charges offset by credits from the Imperial Irrigation
District, interest expense which may have been incurred for any debt
directly or indirectly associated with the assets, allocated income
taxes, accounting, legal, marketing and other general and
administrative costs. The Historical Summaries also exclude any
allocation of the total acquisition costs resulting from the purchase
of the Imperial Valley Geothermal Interest by Magma as reflected in the
accompanying Statement of Net Assets Acquired.
2. RELATED PARTIES:
Included in plant operating costs in the accompanying Historical
Summaries are certain technical support costs paid to a division of
Unocal. Technical support costs do not exceed $1,600,000 in any
respective year.
<PAGE>
ANNEX A
<PAGE>
<PAGE>
ANNEX A
[GLEACHER & CO. INC. LETTERHEAD]
December 6, 1994
Board of Directors
California Energy Company, Inc.
10831 Old Mill Road
Omaha, NE 68154
Dear Ladies and Gentlemen:
California Energy Company, Inc., a Delaware corporation (the "Company" or
"CECI"), CE Acquisition Company, Inc., a Delaware corporation and a wholly
owned subsidiary of CECI ("Merger Sub"), and Magma Power Company, a Nevada
corporation ("Magma"), propose to enter into an agreement (the "Agreement")
pursuant to which Merger Sub will make a tender offer (the "Offer") for at
least a majority of Magma's outstanding common stock, $0.10 par value per
share (the "Shares"), for $39.00 per share, net to the seller in cash (the
"Offer Consideration"). The Agreement also provides that, following
consummation of the Offer, Merger Sub will be merged with and into Magma in a
transaction (the "Merger") in which each remaining Share will be converted
into the right to receive, at the Company's option, either (i) $39.00 per
share in a combination of cash and a number of shares of CECI's common stock
to be determined in accordance with the Agreement, or (ii) $38.50 per Share
in cash (the "Merger Consideration" and together with the Offer
Consideration, the "Consideration").
You have asked for our opinion as to whether the Consideration to be paid by
the Company pursuant to the Offer and the Merger is fair to the Company from
a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(i) reviewed the audited and unaudited financial statements and public
Securities Exchange Commission filings for the three most recent fiscal
years and interim periods to date of Magma and the Company ("SEC
Reports");
(ii) on an operating and trading basis, compared financial information
relating to Magma's businesses with published financial information
concerning certain companies whose businesses we deemed to be reasonably
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.
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
<PAGE>
<PAGE>
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
<PAGE>
ANNEX B
<PAGE>
<PAGE>
ANNEX B
[GOLDMAN, SACHS & CO. LETTERHEAD]
December 9, 1994
The Board of Directors
Magma Power Company
4365 Executive Drive
Suite 900
San Diego, CA 92121
Gentlemen:
You have requested that we confirm our oral opinion as to the fairness to the
holders (other than California Energy Company, Inc. ("California Energy") and
its affiliates) of the outstanding shares of Common Stock, par value $0.10
per share (the "Shares"), of Magma Power Company (the "Company") of the Cash
Consideration and the Merger Consideration (as defined below) proposed to be
paid by CE Acquisition Company, Inc. ("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 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.
<PAGE>
<PAGE>
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.
<PAGE>
<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
<PAGE>
<PAGE>
Form of Proxy [Front]
PROXY SOLICITATION
CALIFORNIA ENERGY COMPANY, INC.
The undersigned hereby appoints David L. Sokol, Steven A. McArthur and
John G. Sylvia and each of them proxies for the undersigned with full power of
substitution, to vote all shares of common stock of California Energy Company,
Inc. (the "Company") which the undersigned is entitled to vote at the Special
Meeting of Stockholders of the Company to be held on February 10, 1995, and any
adjournments or postponements thereof, hereby revoking all prior proxies on the
matters set forth below as follows:
I. PROPOSAL TO AMEND THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK OF THE COMPANY
AUTHORIZED TO BE ISSUED BY THE COMPANY FROM 60,000,000 TO 80,000,000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
CALIFORNIA ENERGY COMPANY, INC. recommends a vote FOR the above proposal
II. PROPOSAL 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 BY THE COMPANY.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
CALIFORNIA ENERGY COMPANY, INC. recommends a vote FOR the above proposal
III. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER MATTERS AS MAY BE INCIDENTAL TO THE CONDUCT OF THE SPECIAL
MEETING OR ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF.
<PAGE>
<PAGE>
Form of Proxy [Back]
THE SUBMISSION OF THIS PROXY IF PROPERLY EXECUTED REVOKES ALL PRIOR
PROXIES.
IF THIS PROXY CARD IS EXECUTED AND RETURNED BUT NO INDICATION IS MADE
AS TO WHAT ACTION IS TO BE TAKEN, IT WILL BE DEEMED TO CONSTITUTE A VOTE IN
FAVOR OF EACH OF THE PROPOSALS SET FORTH ON THE FRONT OF THIS CARD.
Dated:
_________________________, 199__
Signature:
---------------------------
Signature
(if held jointly):
----------------------
Title:
-------------------------------
Please sign exactly as your
name appears hereon. When
shares are held by joint
tenants, both should sign.
When signing as an attorney,
executor, administrator,
trustee or guardian, give
full title as such. If a
corporation, sign in full
corporate name by president
or other authorized officer.
If a partnership, sign in
partnership name by
authorized person.
PLEASE MARK, DATE, SIGN, AND MAIL PROMPTLY IN THE POSTAGE-PAID ENVELOPE
ENCLOSED.
