Securities and Exchange Commission
Washington, DC 20549
Form 8-K
Current Report
Pursuant to Section 13 to 15(d) of the
Securities Exchange Act 1934
Date of Report: August 21, 1996
(Date of earliest event reported)
CalEnergy Company, Inc.
(Exact name of registrant as specified in its charter)
Delaware 1-9874 94-2213782
(State of other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
302 South 36th Street, Suite 400, Omaha, NE 68131
(Address of principal executive offices) Zip Code
Registrant's Telephone Number, including area code:(402) 341-4500
N/A
Item 5. Other Events
In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 (the "Reform
Act"), CalEnergy Company, Inc. (the "Company") is hereby filing
cautionary statements identifying important factors that could
cause the Company's actual results to differ materially from
those projected in forward-looking statements of the Company made
by or on behalf of the Company, whether oral or written. The
Company wishes to ensure that any forward-looking statements are
accompanied by meaningful cautionary statements in order to
maximize to the fullest extent possible the protections of the
safe harbor established in the Reform Act. Accordingly, any such
statements are qualified in their entirety by reference to, and
are accompanied by, the following important factors, among
others, that could cause the Company's actual results to differ
materially from those projected in forward-looking statements of
the Company made by or on behalf of the Company.
The Company cautions that the following important factors,
among others (including but not limited to factors mentioned from
time to time in the Company's reports filed with the Securities
and Exchange Commission), could affect the Company's actual
results and could cause the Company's actual consolidated results
to differ materially from those expressed in any forward-looking
statements of the Company made by or on behalf of the Company.
The factors included here are not exhaustive. Further, any
forward-looking statement speaks only as of the date on which
such statement is made, and the Company undertakes no obligation
to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is
made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the
impact of each such factor on the business or the extent to which
any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking
statements. Therefore, forward-looking statements should not be
relied upon as a prediction of actual future results.
1. Development Uncertainty. 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. The Company has in development or under
construction projects representing several times the generating
capacity of those currently in operation. Development can
require the Company to expend significant sums for preliminary
engineering, permitting, fuel supply, resource exploration, 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 and construction is contingent
upon, among other things, negotiation on terms satisfactory to
the Company of engineering, construction, fuel supply and power
sales contracts with other project participants, receipt of
required governmental permits and consents and timely
implementation of construction. Further, there can be no
assurance that the Company, which is substantially leveraged,
will obtain access to the substantial debt and equity capital
required to continue to develop and construct electric power
projects or to refinance projects. The future growth of the
Company is dependent, in large part, upon the demand for
significant amounts of additional electrical generating capacity
and its ability to obtain contracts to supply portions of this
capacity. There can be no assurance that development efforts on
any particular project, or the Company's efforts generally, will
be successful.
2. Development Uncertainty Outside the United States. The
Company has various projects under construction outside the
United States and a number of projects under award outside the
United States. The financing and development of projects outside
the United States entail significant political and financial
risks (including without limitation uncertainties associated with
privatization efforts in the countries involved, currency
exchange rate fluctuations, currency repatriation restrictions,
changes in law, political instability, civil unrest and
expropriation) and other structuring issues that have the
potential to cause substantial delays in respect of or material
impairment of the value of the project being developed, which the
Company may not be capable of fully insuring against. The
uncertainty of the legal environment in certain foreign countries
in which the Company is developing and 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
the applicable foreign governments.
3. Exploration, Development and Operation Uncertainties of
Geothermal Resources. Geothermal exploration, development and
operations are subject to uncertainties similar to those
typically associated with oil and gas exploration and
development, including dry holes and uncontrolled releases.
Because of the geological complexities of geothermal reservoirs,
the geographic area and sustainable output of geothermal
reservoirs can only be estimated and cannot be definitively
established. There is, accordingly, a risk of an unexpected
decline in the capacity of geothermal wells and a risk of
geothermal reservoirs not being sufficient for sustained
generation of the electrical power capacity desired. In
addition, geothermal power production poses unusual risks of
seismic activity. Accordingly, there can be no assurance that
earthquake, property damage or business interruption insurance
will be adequate to cover all potential losses sustained in the
event of serious seismic disturbances or that such insurance will
be available on commercially reasonable terms. The success of a
geothermal project depends on the quality of the geothermal
resource and operational factors relating to the extraction of
the geothermal fluids involved in such project. The quality of a
geothermal resource is affected by a number of factors, including
the size of the reservoir, the temperature and pressure of the
geothermal fluids in such reservoir, the depth and capacity of
the production and injection wells, the amount of dissolved
solids and noncondensible gases contained in such geothermal
fluids, and the permeability of the subsurface rock formations
containing such geothermal resource, including the presence,
extent and location of fractures in such rocks. The quality of a
geothermal resource may decline as a result of a number of
factors, including the intrusion of lower-temperature fluid into
the producing zone. An incorrect estimate by the Company of the
quality of a geothermal resource, or a decline in such quality,
could have a material adverse effect on the Company's results of
operations. In addition, both the cost of operations and the
operating performance of geothermal power plants may be adversely
affected by a variety of resource operating factors. Production
and injection wells can require frequent maintenance or
replacement. Corrosion caused by high-temperature and high-
salinity geothermal fluids may compel the replacement or repair
of certain equipment, vessels or pipelines. New production and
injection wells may be required for the maintenance of operating
levels, thereby requiring substantial capital expenditures.
4. General Operating Risks. The operation of a power
plant involves many risks, including the breakdown or failure of
power generation equipment, pipelines, transmission lines or
other equipment or processes, fuel interruption, and performance
below expected levels of output or efficiency. Each Facility may
depend on a single or limited number of entities to purchase
electricity or thermal energy, to supply water, to supply gas, to
transport gas, to dispose of wastes or to wheel electricity. The
failure of any such purchasing utility, steam host, water or gas
supplier, gas transporter, wheeling utility or other relevant
project participant to fulfill its contractual obligations could
have material adverse impact on the Company.
5. Present Dependence on Large Customer. The Company
currently relies on long-term power purchase "Interim Standard
Offer No. 4" contracts (each, an "SO4 Agreement") with a large
customer, Southern California Edison Company ("Edison") to
generate a substantial portion of its operating revenues. Any
material failure by Edison to fulfill its contractual obligations
under any of such contracts is likely to have a material adverse
effect on the Company's results of operations. Each of the
Company's SO4 Agreements provides for both capacity payments and
energy payments for a term of between 20 and 30 years. During
the first ten years of the term of each SO4 Agreement, energy
payments are based on a pre-set schedule. Thereafter, while the
basis for the capacity payment remains the same, the required
energy payment is Edison's then-current published avoided cost of
energy ("Avoided Cost of Energy"), as determined by the
California Public Utility Commission ("CPUC").
Estimates of Edison's future Avoided Cost of Energy
vary substantially in any given year. The Company cannot predict
the likely level of Avoided Cost of Energy prices under its SO4
Agreements with Edison at the expiration of the fixed-price
periods. Edison's Avoided Cost of Energy as determined by the
CPUC is currently substantially below the current scheduled
energy prices under the Company's respective SO4 Agreements and
is currently expected to remain so. Thus, the revenues generated
by each of the Company's facilities operating under SO4
Agreements are likely to decline significantly after the
expiration of the applicable fixed price period.
6. Competition and Domestic Deregulation. The
international power production market is characterized by
numerous strong and capable competitors, many of which have more
extensive and more diversified developmental or operating
experience (including international experience) and greater
financial resources than the Company. Many of these competitors
also compete in the domestic market. Further, in recent years,
the domestic power production industry has been characterized by
strong and increasing competition with respect to the industry's
efforts to obtain new power sales agreements, which has
contributed to a reduction in prices offered by utilities. In
that regard, many utilities often engage in "competitive bid"
solicitations to satisfy new capacity demands. In the domestic
market, competition is expected to increase as the electric
utility industry becomes deregulated. In addition, deregulation
activity may cause certain utilities or other project
participants to attempt to renegotiate contracts or otherwise
fail to perform their contractual obligations, which in turn
could adversely affect the Company's results of operations.
7. Natural Gas Supply/Minimum Take Risks. The primary
fuel source for certain of the Company's projects is natural gas
and a substantial portion of the operating expenses of such
facilities consists of the costs of obtaining natural gas through
gas supply agreements and transporting that gas to the projects
under gas transportation agreements. The Company believes it has
contracted for natural gas supplies and transportation covering
sufficient volumes to satisfy the long term fuel requirements of
the applicable projects. The obligations of gas suppliers are
corporate undertakings that are not supported by dedicated
reserves in all cases. Unless the gas projects were able to
obtain substitute volumes of natural gas, including the requisite
transportation services for such volumes at a price not
materially higher than the sum of the contract price under the
existing gas supply agreements and any damages paid by the
supplier for failure to deliver, the sustained failure of a
supplier to comply with its obligation to deliver natural gas in
accordance with its gas supply agreement, including as a result
of its failure to maintain the necessary federal, state and
provincial permits, could have a material adverse effect on the
cash flows to the Company.
Under certain gas supply agreements, if a project fails
to purchase a minimum annual quality of natural gas, the project
is obligated to pay an amount equal to the product of the
deficiency amount and the applicable contract price. In certain
circumstances, utilities may curtail or schedule the projects for
dispatch off-line. Curtailment or low dispatch levels in
combination with other events could result in the project's
inability to satisfy minimum take provisions through the
projects' fuel requirements. The Company intends to manage its
requirements for contract volumes under the gas supply agreements
so as to meet the minimum take requirements through a combination
of utilization of nominated volumes in operations and resales of
the remainder of the volumes to third-party customers, if
necessary.
The transportation arrangements, including pipeline
facilities and the rates charged for transportation services, are
subject to various Federal, provincial, state and local
authorities and, in the case of the Company's Saranac project,
the Natural Energy Board of Canada. In exercising such
jurisdiction, these regulatory authorities maintain or may
maintain authority to modify aspects of the rates, terms and
conditions that govern the transportation services provided. It
is possible that such a modification could materially increase
the fuel transportation costs of the projects. In addition,
certain of the natural gas transportation agreements, and the
approved tariffs of the transporters, contain provisions that
allow the transporter to terminate, or suspend performance under,
or reduce the amount of gas transported for the projects under
the agreement upon certain conditions, such as the taking of an
adverse action by a regulatory authority or if the transporter,
in its judgment, deems it necessary to make modifications or
repairs to its pipeline facilities or upon the occurrence of an
event of force majeure. The sustained failure of any transporter
to provide gas transportation services under its natural gas
transportation agreement could have a material adverse effect on
a power plant's operations.
8. Impact of Environmental and Other Regulations. The
Company is subject to a number of environmental and other laws
and regulations affecting many aspects of its present and future
operations, including the disposal of various forms of waste, the
construction or permitting of new facilities, and the drilling
and operation of new and existing wells. Such laws and
regulations generally require the Company to obtain and comply
with a wide variety of licenses, permits and other approvals.
The Company also remains subject to a number of complex and
stringent laws and regulations that both public officials and
private individuals may seek to enforce. There can be no
assurance that existing regulations will not be revised or that
new regulations will not be adopted or become applicable to the
Company which could have an adverse impact on its operations.
The implementation of regulatory changes imposing more
comprehensive or stringent requirements on the Company, which
would result in increased compliance costs, could have a material
adverse effect on the Company's results of operations. In
addition, regulatory compliance for the construction of new
facilities is a costly and time-consuming process, and intricate
and rapidly changing environmental regulations may require major
expenditures for permitting and create the risk of expensive
delays or material impairment of project value if projects cannot
function as planned due to changing regulatory requirements or
local opposition.
The Public Utility Regulatory Policies Act of 1978, as
amended ("PURPA") and the Public Utility Holding Company Act of
1935, as amended ("PUHCA") are two of the laws (including the
regulations thereunder) which affect the Company's operations.
PURPA provides to qualifying facilities ("QFs") certain
exemptions from federal and state laws and regulations, including
organizational, rate and financial regulation. PUHCA regulates
public utility holding companies and their subsidiaries. The
Company is not and will not be subject to regulation as a holding
company under PUHCA as long as the power plants it owns are QFs
under PURPA. QF status is conditioned on meeting certain
criteria, and would be jeopardized, for example, by the loss of a
steam customer or reduction of steam purchases below the amount
required by PURPA. The Company's four cogeneration facilities
have steam sales agreements with existing industrial hosts which
agreements must be maintained in effect in order to maintain QF
status. In the event the Company were unable to avoid the loss
of such status for one of its facilities, such an event could
result in termination of a given project's power sales agreement
and a default under the project subsidiary's project financing
agreements.
9. Leverage. The Company is substantially leveraged. The
Company's substantial level of debt presents the risk that the
Company may not generate sufficient cash to service the Company's
indebtedness or that its leveraged capital structure could limit
its ability to finance the acquisition and development of
additional projects, to compete effectively or to operate
successfully under adverse economic conditions.
10. Holding Company Structure. The Company is a holding
company which derives substantially all of its operating income
from its subsidiaries' and joint ventures' ownership interests in
the projects owned and operated by such entities. The Company
expects that its future development efforts will be similarly
structured to involve operating subsidiaries, joint ventures and
partnerships. The Company must rely upon dividends and other
payments from its subsidiaries, partnerships and joint ventures
to generate the funds necessary to meet its obligations,
including the payment of principal, interest and premium, if any,
on its debt securities. Distributions from such entities are
restricted under various covenants and conditions contained in
the financing documents by which they are bound and pursuant to
which the shares of stock or assets which are owned by the
Company in such entities is directly or indirectly pledged to
secure such financings. The availability of distributions from
the Company's projects are also subject to the satisfaction of
various covenants and conditions contained in the applicable
project documents and applicable shareholder, joint ventures,
operating and partnership agreements relating to certain
projects. Furthermore, the Company is currently structuring
project documents and project financing arrangements containing,
and anticipates that future project level financings will
contain, certain conditions and similar restrictions on the
distribution of cash flow to the Company. Any right of the
Company to receive any assets of any of its subsidiaries or other
affiliates upon any liquidation or reorganization of the Company
will be effectively subordinated to the claims of any such
subsidiary's or other affiliates' creditors (including trade
creditors and holders of debt issued by such subsidiary or other
affiliate).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
CalEnergy Company, Inc.
By: \s\ Douglas L. Anderson
Douglas L. Anderson
Assistant Secretary
Dated: August 21, 1996
