<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration File No.: 333-15591
PROSPECTUS
[CALENERGY LOGO]
CALENERGY COMPANY, INC.
OFFER TO EXCHANGE $225,000,000 AGGREGATE PRINCIPAL AMOUNT OF 9 1/2% SENIOR
NOTES DUE 2006 FOR ANY AND ALL OF ITS OUTSTANDING $225,000,000 AGGREGATE
PRINCIPAL AMOUNT OF 9 1/2% SENIOR NOTES DUE 2006 THAT WERE ISSUED AND SOLD IN
A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON DECEMBER 13, 1996, UNLESS EXTENDED
CalEnergy Company, Inc. (the "Company") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
letter of transmittal (the "Letter of Transmittal" and together with this
Prospectus, the "Exchange Offer"), to exchange its 9 1/2% Senior Notes due
2006 ("Exchange Notes") which have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to a Registration
Statement of which this Prospectus is a part, for an equal principal amount
of its outstanding 9 1/2% Senior Notes Due 2006 that were issued and sold in
a transaction exempt from registration under the Securities Act ("Old
Notes"), of which $225,000,000 aggregate principal amount is outstanding. The
Exchange Notes and the Old Notes are collectively referred to herein as the
"Notes."
The Company will accept for exchange any and all Old Notes that are
validly tendered and not withdrawn on or prior to 5:00 p.m., New York City
time, on December 13, 1996 (the "Expiration Date"), unless the Exchange Offer
is extended, in which case the term "Expiration Date" means the latest date
and time to which the Exchange Offer is extended. Tenders of Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange. However, the
Exchange Offer is subject to certain customary conditions which may be waived
by the Company. The Company has agreed to pay the expenses of the Exchange
Offer. See "The Exchange Offer." There will be no cash proceeds to the
Company from the Exchange Offer. See "Use of Proceeds."
The Old Notes are, and the Exchange Notes will be, unsecured obligations
of the Company ranking pari passu in right of payment of principal and
interest with all other existing and future unsecured obligations of the
Company and will rank senior to all other existing and future subordinated
debt of the Company. The provisions of the indenture pursuant to which the
Old Notes are, and the Exchange Notes will be, issued will permit the
Company's subsidiaries, and certain joint ventures in which the Company will
own a significant interest, to incur substantial indebtedness which would be
effectively senior to the Notes. As of June 30, 1996, on a pro forma basis,
and after giving effect to (i) the acquisition of Falcon (hereinafter
defined), (ii) completion of the Initial Offering (hereinafter defined),
(iii) completion of the Conversions (hereinafter defined) of certain of the
Company's outstanding convertible debt and (iv) the use of a portion of the
proceeds of the Initial Offering to repay the $35.0 million outstanding
balance under the Company's revolving line of credit facility,
(continued on next page)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS
OF OLD NOTES IN CONNECTION WITH THE EXCHANGE OFFER, SEE "RISK FACTORS" ON
PAGE 14 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE
The date of this Prospectus is November 13, 1996.
<PAGE>
(continued from previous page)
there would have been approximately $1,175.6 million of indebtedness that
represented the Company's proportionate share of joint venture and subsidiary
debt which would be effectively senior to the Notes.
The Exchange Notes are being offered for exchange in order to satisfy
certain obligations of the Company under the Exchange and Registration Rights
Agreement, dated September 20, 1996 (the "Registration Rights Agreement"),
between the Company and the Initial Purchaser (as defined below). The
Exchange Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes and will be entitled to the benefits of the
same Indenture (as defined herein), which governs both the Old Notes and the
Exchange Notes. The form and terms (including principal amount, interest
rate, maturity and ranking) of the Exchange Notes are the same as the form
and applicable terms of the Old Notes, except that the Exchange Notes have
been registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Old Notes. In addition,
the Old Notes provide that under certain circumstances which will no longer
be applicable following consummation of the Exchange Offer, including in the
event that the Exchange Offer has not commenced or a shelf registration
statement (the "Shelf Registration Statement") has not been declared
effective within 270 days following September 20, 1996, the date of issuance
of the Old Notes (the "Issue Date"), the interest rate on the Old Notes shall
increase by one-half of one percent (50 basis points) per annum effective on
the 271st day following the Issue Date until the date on which the Exchange
Offer is commenced or such Shelf Registration Statement shall have become
effective. If a registration statement has not been declared effective within
two years after the Issue Date, such one-half of one percent increase in
interest rate will become permanent. Upon consummation of the Exchange Offer,
holders of Old Notes will not be entitled to any increase in the rate of
interest thereon. See "The Exchange Offer."
Prior to the Exchange Offer, there has been no established trading market
for the Old Notes or the Exchange Notes. The Company does not intend to apply
for listing or quotation of the Exchange Notes on any securities exchange or
stock market. Therefore, there can be no assurance as to the liquidity of any
trading market for the Exchange Notes or that an active public market for the
Exchange Notes will develop. Any Old Notes not tendered and accepted in the
Exchange Offer will remain outstanding. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untended, or tendered but unaccepted, Old Notes could be adversely affected.
Following consummation of the Exchange Offer, the holders of Old Notes will
continue to be subject to the existing restrictions on transfer thereof and
the Company will have no further obligations to such holders to provide for
the registration of the Old Notes under the Securities Act. See "The Exchange
Offer."
The Old Notes were originally issued and sold on September 20, 1996 to CS
First Boston Corporation (the "Initial Purchaser") in a transaction not
registered under the Securities Act in reliance upon the exemption provided
in Section 4(2) of the Securities Act (the "Initial Offering"). Accordingly,
the Old Notes may not be reoffered, resold or otherwise pledged, hypothecated
or transferred in the United States unless so registered or unless an
applicable exemption from the registration requirements of the Securities Act
is available. The Company is making the Exchange Offer in reliance on the
position of the staff (the "Staff") of the Division of Corporation Finance of
the Securities and Exchange Commission (the "Commission") as set forth in
certain interpretive letters addressed to third parties in other
transactions. However, the Company has not sought its own interpretive letter
and there can be no assurance that the Staff would make a similar
determination with respect to the Exchange Offer. Based on interpretations
issued by the Staff, the Company believes that Exchange Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold and otherwise transferred by a holder thereof (other than (i) an
"affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (ii) the Initial Purchaser to the extent it acquired Old
Notes directly from the Company solely in order to resell pursuant to Rule
144A under the Securities Act or any other available exemption under the
Securities Act or (iii) a broker-dealer (which may include the Initial
Purchaser) who acquired Old Notes as a result of market-making or other
trading activities) without further compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business
and that such holder is not participating, and has no arrangement or
understanding with any person to participate, in a distribution (within the
meaning of the Securities Act) of such Exchange Notes.
2
<PAGE>
Based on the position taken by the Staff, the Company believes that
broker-dealers who acquired Old Notes as a result of market-making activities
or other trading activities ("Participating Broker-Dealers") may fulfill
their prospectus delivery requirements with respect to the Exchange Notes
received upon exchange of such Old Notes with a prospectus prepared for an
exchange offer so long as it contains a description of the plan of
distribution with respect to the resale of such Exchange Notes. Accordingly,
this Prospectus, as it may be amended or supplemented from time to time, may
be used by a Participating Broker-Dealer in connection with resales of such
Exchange Notes. See "Plan Of Distribution." Any holder that cannot rely upon
such interpretations must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction unless such sale is made pursuant to an exemption from
such requirements.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement"), which term shall include
all amendments, exhibits, annexes and schedules thereto pursuant to the
Securities Act, and the rules and regulations promulgated thereunder,
covering the Exchange Notes being offered hereby. This Prospectus does not
contain all the information set forth in the Exchange Offer Registration
Statement, certain parts of which are omitted in accordance with the rules
and regulations of the Commission. For further information with respect to
the Company and the Exchange Notes, reference is hereby made to the Exchange
Offer Registration Statement. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to in the
Exchange Offer Registration Statement are not necessarily complete. With
respect to each such contract, agreement or other document filed as an
exhibit to the Exchange Offer Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
The Company is subject to the periodic and other informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
in accordance therewith files annual and quarterly reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information filed by the Company may be inspected at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at its regional offices located at
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, New York, New York 10048. The
Commission also maintains a Website (http://www.sec.gov.) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The Company's
Common Stock is quoted on the New York Stock Exchange, and copies of the
reports, proxy statements and other information filed by the Company with the
Commission may also be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
The Company is required by the terms of the indenture, dated as of
September 20, 1996 (the "Indenture"), between the Company and IBJ Schroder
Bank & Trust Company, as trustee (the "Trustee"), under which the Notes are
issued, to furnish the Trustee with annual reports containing condensed
financial statements audited by their independent certified public
accountants and with quarterly reports containing unaudited condensed
financial statements for each of the first three quarters of each fiscal
year.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (file No. 1-9874) are
incorporated by reference into this Prospectus:
(i) the Company's Annual Report on Form 10-K for the year ended December
31, 1995;
(ii) the Company's Quarterly Reports on Form 10-Q for the three months
ended March 31, 1996 and for the three and six months ended June 30, 1996;
(iii) the Company's Current Reports on Form 8-K or 8-K/A dated March 26,
1996, March 28, 1996, April 1, 1996, April 2, 1996, April 12, 1996, April 17,
1996, July 1, 1996, July 8, 1996, August 7, 1996, August 21, 1996, August 27,
1996, October 28, 1996 and November 12, 1996; and
3
<PAGE>
(iv) the information which appears under the captions "Executive Officer
and Director Compensation," "Security Ownership of Significant Stockholders
and Management" and "Certain Transactions and Relationships" in the Company's
Proxy Statement dated April 5, 1996.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the Exchange Offer shall be deemed to be incorporated
by reference into this Prospectus and to be a part hereof from the date of
filing of such documents.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus
to the extent that a statement contained in this Prospectus, or in any other
subsequently filed document which is also incorporated herein by reference,
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed to constitute a part of this Prospectus except
as so modified or superseded.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above which have been or may be incorporated into this Prospectus by
reference, other than exhibits to such documents. Requests for such copies
should be directed to Investor Relations, CalEnergy Company, Inc. 302 South
36th Street, Suite 400, Omaha, Nebraska 68131, telephone number (402)
341-4500. In order to ensure timely delivery of such documents, any requests
should be made by December 6, 1996.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
IN CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
FOR NEW HAMPSHIRE RESIDENTS ONLY
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED
STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER
RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT, NOR
THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A
TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON,
SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT
WITH THE PROVISIONS OF THIS PARAGRAPH.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
AVAILABLE INFORMATION 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 3
PROSPECTUS SUMMARY 6
RISK FACTORS 14
USE OF PROCEEDS 19
THE EXCHANGE OFFER 19
CAPITALIZATION 27
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
AND OPERATING DATA 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 31
THE BUSINESS OF THE COMPANY 43
DESCRIPTION OF THE NOTES 71
REGISTRATION RIGHTS AGREEMENT 102
UNITED STATES TAXATION 104
PLAN OF DISTRIBUTION 105
LEGAL MATTERS 105
EXPERTS 106
INDEX TO FINANCIAL STATEMENTS F-1
INDEX TO PRO FORMA FINANCIAL STATEMENTS P-1
</TABLE>
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus or
incorporated by reference herein. Certain capitalized terms used but not
defined in this summary are used herein as defined elsewhere in this
Prospectus. See also the "Risk Factors" included in this Prospectus which
prospective investors should consider before tendering their Old Notes in the
Exchange Offer.
THE COMPANY
CalEnergy Company, Inc., formerly known as California Energy Company, Inc.
(the "Company"), was founded in 1971 and is primarily engaged in the
development and operation of environmentally responsible independent power
production facilities worldwide utilizing geothermal resources, natural gas
and hydroelectric or other energy sources, such as oil and coal. The Company
is the largest independent geothermal power producer in the world (on the
basis of the Company's estimate of the aggregate megawatts ("MW") of electric
generating capacity in operation and under construction).
The Company has an aggregate net legal ownership interest of 916 MW of
electric generating capacity in power production facilities in operation in
the United States having an aggregate net capacity of 1135 MW (of which 570
MW constitute natural gas fired plants, consisting of the Yuma plant and the
Saranac, Power Resources and NorCon plants owned by the Company's recently
acquired subsidiary, Falcon Seaboard Resources, Inc. (described below)). All
of these facilities are managed and operated by the Company. The Company also
has an aggregate net legal ownership of 191 MW of electric generating
capacity in two power production facilities in operation in the Philippines
having an aggregate net capacity of 191 MW. Both of these facilities are
managed and operated by the Company.
With respect to projects which are financed and under construction, the
Company has an aggregate net ownership interest of 270 MW of electric
generating capacity in two geothermal power projects and one hydroelectric
project in the Philippines having an aggregate net capacity of 459 MW. The
Company is also currently constructing a 55 net MW geothermal project in
Indonesia, in which the Company has an aggregate net ownership interest of 26
MW of electric generating capacity, as the first phase of the Company's
planned Indonesian geothermal project development.
The Company is also currently developing seven additional projects with
executed or awarded power sales contracts in the Philippines, Indonesia and
the United States. The Company is expected to have an approximate net
ownership interest of 760 MW in these development projects (which represent
an aggregate net capacity of 1,423 MW of additional potential electric
generating capacity). Additionally, the Company is developing the Salton Sea
Minerals Extraction Project, in which it plans to recover minerals
(potentially including zinc, manganese, lithium carbide, boric acid and
hydrogen sulfide) in commercial quantities from the geothermal fluids at the
Company's Imperial Valley Projects (as defined herein). Substantial
contingencies exist with respect to development projects, including, without
limitation, the need to obtain financing, permits and licenses and the
satisfactory completion of construction and implementation of commercial
operation.
On April 17, 1996, the Company completed the acquisition from Edison
Mission Energy, a unit of Edison International, of the remaining 50%
partnership interests not previously owned by it in the four Partnership
Projects (as defined herein) located in Imperial Valley, California. The
purchase price for the acquisition (the "Partnership Project Acquisition") of
such interests in the four projects, Vulcan, Hoch (Del Ranch), Leathers and
Elmore, was $70.0 million. The Company operates these facilities and sells
power to Southern California Edison ("Edison") under long-term SO4 Agreements
(as hereinafter defined).
On August 7, 1996 the Company completed the acquisition of Falcon Seaboard
Resources, Inc. ("Falcon"), including its ownership interest in three
operating gas-fired cogeneration plants located in New York, Texas and
Pennsylvania and a related natural gas pipeline, also located in New York,
for a cash purchase price of $226 million. The three cogeneration facilities
total 520 MW in capacity and sell power under long-term power purchase
agreements.
6
<PAGE>
The Company believes that the Falcon acquisition provides it with the
following benefits:
o Long-term power sales and steam sales contracts that provide an
important financial contribution to cash flow and earnings;
o Highly efficient gas-fired operating facilities which, upon expiration
of their respective power sales contracts, will be strategically
located for future merchant plant sales in areas that have good access
to fuel supply and transportation and favorable transmission access
and proximity to electric load centers;
o Enhanced fuel diversification and creation of a gas-fired operating
business unit;
o Increased customer diversification;
o Enhanced ability to compete as a low-cost generator during industry
deregulation; and
o Increased size and economies of scale which will permit the Company to
compete more effectively as the electric industry restructures and
consolidates.
The Company's Common Stock is traded on the New York, Pacific and London
Stock Exchanges. As of October 15, 1996, Peter Kiewit Sons' Inc. ("PKS") was
an approximate 33% stockholder of the Company (on a fully diluted basis). PKS
is a large employee-owned construction, mining and telecommunications company
with approximately $3 billion in revenues in 1995. PKS is one of the largest
construction companies in North America and has been in the construction
business since 1884.
On October 28, 1996, the Company announced that CE Electric UK plc, which
is indirectly owned on a 70% basis by the Company and a 30% basis by PKS, has
offered to pay approximately $1.225 billion cash in an unsolicited offer to
acquire all of the ordinary shares and preference shares of Northern Electric
plc ("Northern"), a regional electricity distribution and supply company in
the United Kingdom. Northern is one of the twelve UK regional electricity
companies which came into existence as a result of the restructuring and
subsequent privatization of the UK electricity industry in 1990. Its main
business is the distribution and supply of electricity to approximately 1.5
million customers in the North East of England. For its fiscal year ended
March 31, 1996, Northern had a profit before tax of approximately $241
million on revenues of approximately $1.44 billion. The Northern offer is not
being made, directly or indirectly, in or into the United States or by use of
the mails or any means or instrumentality (including, without limitation,
facsimile transmission, telex and telephone) of interstate or foreign
commerce of, or any facilities of a national securities exchange of, the
United States and the Northern offer cannot be accepted by any such use,
means, instrumentality or facility or from within the United States. As of
November 8, 1996, CE Electric UK plc owned approximately 29.9 million
ordinary shares of Northern, representing approximately 29.5% of the issued
ordinary share capital of Northern.
STRATEGY
Overall, the Company's strategy is to continue to engage in new project
development as well as opportunistically engage in company and project
acquisitions which diversify the Company's power generation technologies and
facility geographic locations and enhance its competitive capabilities. The
Company believes that increased domestic deregulation and the resulting
industry consolidation will provide attractive investment and acquisition
opportunities. The Falcon acquisition was implemented in furtherance of this
strategy.
Domestically, the Company is focusing on market opportunities in which it
believes it has relative competitive advantages due to its geotechnical,
project management, project financing and operating expertise. In addition,
the Company expects to continue diversification into other environmentally
responsible sources of energy primarily through selected acquisitions,
including acquisitions of partially developed or existing power generating
projects and contracts. The Company is also evaluating the potential impacts
and opportunities of direct access and retail wheeling.
7
<PAGE>
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 financed and has under
construction three projects representing an aggregate of 270 MW of net
ownership of electric generating capacity in the Philippines and is
constructing a 55 net MW project in Indonesia in which the Company has a net
ownership interest of 26 MW of electric generating capacity and which
constitutes the first phase of a planned Indonesia geothermal development of
approximately 1,000 MW under contract. In addition, the Company is currently
pursuing a number of other electric power project opportunities in the
Philippines, Indonesia and other countries. The Company believes that these
countries are ideally suited for the Company to develop, finance and operate
power projects successfully because of their 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.
The principal executive offices of the Company are located at 302 South
36th Street, Suite 400, Omaha, Nebraska 68131 and its telephone number is
(402) 341-4500. The Company was incorporated in 1971 under the laws of the
State of Delaware.
THE EXCHANGE OFFER
Registration Rights
Agreement .............. The Old Notes were sold by the Company on
September 20, 1996 to the Initial Purchaser,
which placed the Old Notes with "qualified
institutional buyers" (as defined in Rule
144A under the Securities Act) and certain
"accredited investors" (as defined in Rule
501(a)(1), (2), (3) or (7) under the
Securities Act). In connection therewith,
the Company executed and delivered for the
benefit of the holders of Old Notes the
Registration Rights Agreement, providing
for, among other things, the Exchange Offer.
See "Registration Rights Agreement."
The Exchange Offer ..... The Company is offering to exchange
$225,000,000 aggregate principal amount of
Old Notes for an equal principal amount of
Exchange Notes. The Exchange Notes will be
obligations of the Company evidencing the
same indebtedness as the Old Notes and will
be entitled to the benefits of the
Indenture, which governs both the Old Notes
and the Exchange Notes. The form and terms
(including principal amount, interest rate,
maturity and ranking) of the Exchange Notes
are the same as the form and terms of the
Old Notes, except that the Exchange Notes
have been registered under the Securities
Act and therefore will not be subject to
certain restrictions on transfer applicable
to the Old Notes and will not be entitled to
registration rights. In addition, the
Registration Rights Agreement provides that
under certain circumstances, including in
the event that the Exchange Offer has not
commenced or a Shelf Registration
8
<PAGE>
Statement has not been declared effective
within 270 days following the Issue Date,
the interest rate on the Old Notes shall
increase by one-half of one percent (50
basis points) per annum effective on the
271st day following the date of the Issue
Date until the date on which the Exchange
Offer is commenced or such Shelf
Registration Statement shall have become
effective. If a registration statement has
not been declared effective within two years
after the Issue Date, such one-half of one
percent increase in interest rate will
become permanent. Upon consummation of the
Exchange Offer, holders of Old Notes will
not be entitled to any increase in the rate
of interest thereon or any further
registration rights under the Registration
Rights Agreement.
Resales of Exchange
Notes .................. Based on interpretations issued by the Staff
of the Commission, the Company believes that
the Exchange Notes issued pursuant to the
Exchange Offer in exchange for the Old Notes
may be offered for resale, resold and
otherwise transferred by holders thereof
(other than any holder which is (i) an
"affiliate" of the Company within the
meaning of Rule 405 under the Securities
Act, (ii) the Initial Purchaser to the
extent it acquired Old Notes directly from
the Company solely in order to resell
pursuant to Rule 144A of the Securities Act
or any other available exemption under the
Securities Act or (iii) a broker-dealer
(which may include the Initial Purchaser)
who acquired Old Notes as a result of
market-making or other trading activities),
without further compliance with the
registration and prospectus delivery
requirements of the Securities Act, provided
that such Exchange Notes are acquired in the
ordinary course of such holder's business
and that such holder is not participating,
and has no arrangement or understanding with
any person to participate, in a distribution
(within the meaning of the Securities Act)
of such Exchange Notes.
Each broker-dealer that receives Exchange
Notes for its own account as a result of
market-making or trading activities pursuant
to the Exchange Offer must acknowledge that
it acquired the Old Notes as the result of
such activities and must agree that it will
deliver a prospectus meeting the
requirements of the Securities Act in
connection with any resale of such Exchange
Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a
prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
Based on the position taken by the Staff,
the Company believes that Participating
Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the
Exchange Notes received upon exchange of
such Old Notes with a prospectus meeting the
requirements of the Securities Act, which
may be the prospectus prepared for an
exchange offer so long as it contains a
description of the plan of distribution with
respect to the resale of such Exchange
Notes. Accordingly, this Prospectus, as it
may be amended or supple-
9
<PAGE>
mented from time to time, may be used by a
Participating Broker-Dealer during the
period referred to below in connection with
resales of such Exchange Notes. Subject to
certain provisions set forth in the
Registration Rights Agreement, the Company
has agreed that this Prospectus, as it may
be amended or supplemented from time to
time, may be used by a Participating
Broker-Dealer in connection with resales of
such Exchange Notes for a period ending 120
days after the effectiveness of the
Registration Statement of which this
Prospectus is a part (subject to extension
under certain limited circumstances
described herein) or, if earlier, when all
such Exchange Notes have been disposed of by
the Participating Broker-Dealer. See "The
Exchange Offer" and "Plan of Distribution."
Minimum Condition ...... The Exchange Offer is not conditioned upon
any minimum aggregate principal amount of
Old Notes being tendered for exchange.
Expiration Date ........ The Exchange Offer will expire at 5:00 p.m.,
New York City time, on December 13, 1996
(the "Expiration Date"), unless the Exchange
Offer is extended, in which case the term
"Expiration Date" means the latest date and
time to which the Exchange Offer is
extended.
Withdrawal Rights ...... Tenders may be withdrawn at any time prior
to the Expiration Date. Any Old Notes which
have been tendered for exchange but which
are not exchanged for any reason will be
returned to the holder thereof (or credited
to the appropriate account) without cost to
such holder as soon as practicable after
withdrawal, rejection of tender or
termination of the Exchange Offer.
Interest on the Exchange
Notes .................. The Exchange Notes will bear interest at the
rate of 9 1/2% per annum from the most
recent date to which interest has been paid
on the Old Notes or, if no interest has been
paid on the Old Notes, from September 20,
1996. See "Description of the Notes."
Holders of Old Notes whose Old Notes are
accepted for exchange will not receive any
payment in respect of accrued and unpaid
interest on such Old Notes.
Conditions to the
Exchange Offer ......... The obligation of the Company to consummate
the Exchange Offer is subject to certain
conditions. See "The Exchange
Offer--Conditions to the Exchange Offer."
The Company may terminate, waive or amend
the Exchange Offer at any time prior to the
Expiration Date.
Procedures for
Tendering .............. Tendering holders of Old Notes must complete
and sign the Letter of Transmittal in
accordance with the instructions contained
therein and forward the same by mail,
facsimile or hand delivery, together with
any other required documents, to the
Exchange Agent, either with the Old Notes to
be tendered or in compliance with the
specified procedures for guaranteed deliv-
10
<PAGE>
ery of Old Notes. Certain brokers, dealers,
commercial banks, trust companies and other
nominees may also effect tenders by
book-entry transfer. Holders of Old Notes
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee are urged to contact such person
promptly if they wish to tender Old Notes
pursuant to the Exchange Offer. See "The
Exchange Offer--Procedures for Tendering."
Letters of Transmittal and certificates
representing Old Notes should not be sent to
the Company. Such documents should only be
sent to the Exchange Agent. Questions
regarding how to tender and requests for
information should be directed to the
Exchange Agent. See "The Exchange
Offer--Exchange Agent."
Acceptance of Old Notes
and Delivery of Exchange
Notes .................. Subject to certain conditions, the Company
will accept for exchange any and all Old
Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The
Exchange Notes issued pursuant to the
Exchange Offer will be delivered promptly
following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange
Offer."
Certain Federal Income
Tax Consequences ....... The exchange of Old Notes for Exchange Notes
by holders should not be a sale or exchange
or otherwise a taxable event for federal
income tax purposes, and holders should not
recognize any taxable gain or loss or any
interest income as a result of such
exchange. See "United States Taxation."
Exchange Agent ......... IBJ Schroder Bank & Trust Company is serving
as exchange agent (the "Exchange Agent") in
connection with the Exchange Offer.
Effect on Holders of
Old Notes .............. Holders of Old Notes who do not tender their
Old Notes in the Exchange Offer will
continue to hold such Old Notes and will be
entitled to all the rights and limitations
applicable thereto under the Indenture. All
untendered, and tendered but unaccepted, Old
Notes will continue to be subject to the
restrictions on transfer provided for in the
Old Notes and the Indenture. To the extent
that Old Notes are tendered and accepted in
the Exchange Offer, the trading market, if
any, for the Old Notes could be adversely
affected. See "Risk Factors--Consequences of
Exchange and Failure to Exchange."
11
<PAGE>
TERMS OF THE EXCHANGE NOTES AND THE OLD NOTES
The Exchange Offer applies to $225,000,000 aggregate principal amount of
the Old Notes. The Exchange Notes will be obligations of the Company
evidencing the same indebtedness as the Old Notes and will be entitled to the
benefits of the Indenture, which governs both the Old Notes and the Exchange
Notes. The form and terms (including principal amount, interest rate,
maturity and ranking) of the Exchange Notes are the same as the form and
applicable terms of the Old Notes, except that the Exchange Notes have been
registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Old Notes and will not be
entitled to registration rights. See "The Exchange Offer." The Old Notes and
the Exchange Notes are collectively referred to herein as the "Notes."
Notes Offered .......... $225,000,000 aggregate principal amount of 9
1/2% Senior Notes due 2006.
Maturity Date .......... September 15, 2006.
Interest Payment Dates . Interest on the Notes will be payable in
cash semi-annually on March 15 and September
15, commencing on March 15, 1997, to holders
of record on the immediately preceding March
1 or September 1, as the case may be. See
"Description of the Notes--General."
Sinking Fund ........... None.
Form and Registration .. The Notes may be represented by one or more
Global Notes (the "Global Notes") registered
in the name of The Depository Trust Company
("DTC") or its nominee. Beneficial interests
in the Global Notes will be shown on, and
transfers thereof will be effected only
through, records maintained by DTC and its
participants. Except as provided herein,
Notes in certificated form will not be
issued. See "Description of the
Notes--Book-Entry-Only Issuance; The
Depository Trust Company."
Optional Redemption .... The Notes are redeemable at the option of
the Company, in whole or in part, at any
time on or after September 15, 2001, at the
redemption prices set forth herein, plus
accrued and unpaid interest, if any, to the
date of redemption. See "Description of the
Notes--Optional Redemption."
Change in Control ...... Upon the occurrence of a Change of Control,
each Holder will have the right to require
the Company to repurchase all or any part of
such Holder's Notes at a purchase price in
cash equal to 101% of the principal thereof
on the date of repurchase in accordance with
the procedures set forth in the Indenture.
See "Description of the Notes--Certain
Covenants--Purchase of Notes Upon a Change
of Control."
Ranking ................ The Notes will be senior unsecured
obligations of the Company ranking pari
passu in right of payment of principal and
interest with all other existing and future
senior unsecured obligations of the Company.
The Company is a holding company that
derives substantially all of its income from
its operating subsidiaries and joint venture
projects. The Indenture does not limit
12
<PAGE>
the amount of Non-Recourse Debt (as defined)
which may be incurred by the Company or at
the subsidiary or project level.
Accordingly, the Notes will effectively be
subordinated to any secured Non-Recourse
Debt of the Company and to any debt at the
project or subsidiary level. The Notes will
rank senior to all other existing and future
subordinated indebtedness of the Company. As
of June 30, 1996, on a pro forma basis,
after giving effect to (i) the acquisition
of Falcon, (ii) the completion of the
Initial Offering, (iii) completion of the
Company's call of its 5.0% Convertible
Subordinated Debentures due 2000 (the "5%
Convertible Debentures") and the redemption
of its 9.5% Convertible Subordinated
Debenture due 2003 which was issued to
Kiewit Energy Company, a subsidiary of PKS
(the "9.5% Convertible Debenture") and the
conversion of each thereof into Common Stock
of the Company (collectively, the
"Conversions") and (iv) the use of a portion
of the proceeds of the Initial Offering to
repay the $35 million balance outstanding
under the Company's revolving line of credit
facility, the Company's total consolidated
indebtedness (excluding deferred income and
convertible preferred securities of a
subsidiary) would have been $2,102.4
million, its total consolidated assets would
have been $3,424.8 million and its
stockholders' equity would have been $755.8
million.
Certain Covenants ...... The Indenture contains certain covenants
which, among other things, will restrict the
ability of the Company, its Restricted
Subsidiaries (as defined) and its Eligible
Joint Ventures (as defined) to incur
additional Debt (as defined) (other than
Non-Recourse Debt), to pay dividends and
make certain other restricted payments, to
encumber or sell assets, to enter into
transactions with Affiliates (as defined),
to enter into new lines of business, to make
certain investments, to merge or consolidate
with any other person or to transfer or
lease assets. These covenants are described
in detail below under the caption
"Description of the Notes--Certain
Covenants."
Events of Default ...... Events of Default under the Indenture
include, among other things, (i) default in
the payment of any interest on the Notes
which continues for a period of 30 days,
(ii) default in the payment of principal, or
premium, if any, when due, including
pursuant to a required repurchase, (iii) the
failure by the Company to perform any
covenant contained in the Indenture, which
breach continues for 30 days after written
notice thereof, (iv) the failure of the
Company or any Significant Subsidiary (as
defined) to pay when due beyond any
applicable grace period, or the acceleration
of, Debt (other than Non-Recourse Debt of
Significant Subsidiaries) in excess of $25
million, (v) the entry by a court of one or
more judgments against the Company or any
Significant Subsidiary for an aggregate
amount in excess of $25 million, subject to
certain conditions, and (vi) the occurrence
of certain events of bankruptcy, insolvency
or reorganization. See "Description of the
Notes--Events of Default."
13
<PAGE>
RISK FACTORS
Holders of the Old Notes should carefully consider the following risk
factors in addition to the other information appearing in or incorporated by
reference in this Prospectus before tendering their Old Notes in the Exchange
Offer. The risk factors set forth below (other than "Consequences of Exchange
and Failure to Exchange" and "Absence of Public Market") are generally
applicable to the Old Notes as well as the Exchange Notes.
CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE. Holders of Old Notes
who do not exchange their Old Notes for Exchange Notes pursuant to the
Exchange Offer will continue to be subject to the restrictions on transfer of
such Old Notes as set forth in the legend thereon as a consequence of the
issuance of the Old Notes pursuant to exemptions from, or in transactions not
subject to, the registration requirements of the Securities Act and
applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act
and applicable state securities laws. The Company does not currently
anticipate that it will register the Old Notes under the Securities Act. In
addition, upon the consummation of the Exchange Offer holders of Old Notes
which remain outstanding will not be entitled to any rights to have such Old
Notes registered under the Securities Act or to any similar rights under the
Registration Rights Agreement. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered, or
tendered but unaccepted, Old Notes could be adversely affected.
Based on interpretations by the Staff of the Commission, the Company
believes that Exchange Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by a holder thereof (other than (i) an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act, (ii) the Initial
Purchaser to the extent it acquired Old Notes directly from the Company
solely in order to resell pursuant to Rule 144A of the Securities Act or any
other available exemption under the Securities Act or (iii) a broker-dealer
(which may include the Initial Purchaser) who acquired Old Notes as a result
of market-making or other trading activities) without further compliance with
the registration and prospectus delivery requirements of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
holder's business and that such holder is not participating, and has no
arrangement or understanding with any person to participate, in a
distribution (within the meaning of the Securities Act) of such Exchange
Notes. Each broker-dealer that receives Exchange Notes for its own account as
a result of market-making activities or other trading activities pursuant to
the Exchange Offer must acknowledge that it acquired the Old Notes as the
result of such activities and must agree that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale
of such Exchange Notes. Any holder that cannot rely upon such interpretations
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction unless such
sale is made pursuant to an exemption from such requirements.
ABSENCE OF PUBLIC MARKET. The Exchange Notes are being offered to the
holders of the Old Notes. There is no existing trading market for the
Exchange Notes and there can be no assurance regarding the future development
of such a market for the Exchange Notes or the ability of holders of the
Exchange Notes to sell their Exchange Notes or the price at which such
holders may be able to sell their Exchange Notes. If such a market were to
develop, future trading prices will depend on many factors, including, among
other things, prevailing interest rates, the operating results of the
Company, and the market for similar securities. The Company does not intend
to apply for listing or quotation of the Exchange Notes on any securities
exchange or stock market.
LEVERAGE. The Company is substantially leveraged. As of June 30, 1996, the
Company's total consolidated liabilities were $2,257.0 million (excluding
deferred income and convertible preferred securities of a subsidiary), its
total consolidated assets were $2,975.1 million and its total stockholders'
equity was $587.9 million. As of such date, on a pro forma basis, after
giving effect to (i) the acquisition of Falcon, (ii) completion of the
Initial Offering, (iii) completion of the Conversions and (iv) the use of a
portion of the proceeds of the Initial Offering to repay the $35 million
outstanding balance under the
14
<PAGE>
Company's revolving line of credit facility, the Company's total consolidated
liabilities would have been $2,538.9 million (excluding deferred income and
convertible preferred securities of a subsidiary), its total consolidated
assets would have been $3,424.8 million and its stockholders' equity would
have been $755.8 million. The Company's substantial level of debt presents
the risk that the Company might not generate sufficient cash to service the
Company's indebtedness, including the Notes, 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. See "Selected Historical Financial and
Operating Data" and "Capitalization." The Company is also a holding company
which derives substantially all of its operating income from its subsidiaries
and joint ventures. Distributions from such entities are restricted under
various covenants and conditions contained in financing documents by which
they are bound and the stock or assets of substantially all of such entities
is directly or indirectly pledged, to secure various of such financings. See
"Risk Factors--Holding Company Structure," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Notes to the
Consolidated Financial Statements."
HOLDING COMPANY STRUCTURE. As a holding company, the Company is dependent
on distributions from its subsidiaries' and joint ventures' ownership
interests in the projects owned and operated by such entities for
substantially all of its operating income. The Company expects that its
future development efforts will also be 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 the Notes. The
availability of distributions from the Company's subsidiaries and projects is
subject to the satisfaction of various covenants and conditions contained in
the applicable subsidiaries' and joint ventures' financing documents.
Furthermore, the Company is structuring Philippine and Indonesian project
financing arrangements containing, and anticipates that future project level
financings will contain, certain conditions and similar restrictions on the
distribution of cash to the Company.
The Company's subsidiaries, partnerships and joint ventures are separate
and distinct legal entities and have no obligation, contingent or otherwise,
to pay any amounts due pursuant to the Notes or to make any funds available
therefor, whether by dividends, loans or other payments, and do not guarantee
the payment of interest on, premium (if any) or principal of the Notes. 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 (and
the consequent right of the holders of the Notes to participate in the
distribution of, or to realize proceeds from, those assets) will be
effectively subordinated to the claims of any such subsidiary's or other
affiliate's creditors (including trade creditors and holders of debt issued
by such subsidiary or other affiliate). As of June 30, 1996, on a pro forma
basis, after giving effect to the acquisition of Falcon, completion of the
Initial Offering, consummation of the Conversions and repayment of the $35
million outstanding balance under the Company's line of credit facility,
there would have been approximately $2,102.4 million of total consolidated
indebtedness (excluding deferred income and convertible preferred securities
of a subsidiary) and approximately $1,175.6 million of indebtedness that
represented the Company's proportionate share of joint venture and subsidiary
debt which would be effectively senior to the Notes. Substantially all of
such latter amount would have been secured by the assets of such joint
ventures and subsidiaries. In addition, as of June 30, 1996, the Company's
subsidiary, CalEnergy Capital Trust, had outstanding approximately $103.9
million of its 6 1/4% Convertible Preferred Securities, Term Income
Deferrable Equity Securities ("TIDES") (Service Mark), which would
effectively be subordinate to the Notes. See "Description of Notes--Ranking."
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 an aggregate generating capacity in excess
of the generating capacity of those projects 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
15
<PAGE>
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.
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.
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.
GENERAL OPERATING UNCERTAINTIES. 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.
16
<PAGE>
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 a material adverse impact on
the Company.
PRESENT DEPENDENCE ON LARGE CUSTOMER; CONTRACT RISKS. The Company
currently relies on long-term power purchase "Standard Offer No. 4" contracts
(each, an "SO4 Agreement") with a large customer, 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"). The initial ten-year
period expires in August 1997 for the Company's Navy I Project, March 1999
for its BLM Project and January 2000 for its Navy II Project. Such ten-year
period expired in 1996 with respect to one of the Imperial Valley Projects
(as defined herein), and expires in 1999 for three of its Imperial Valley
Projects and in 2000 for the remaining two Imperial Valley Projects that
operate under SO4 Agreements.
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. For the year ended December 31, 1995, the time period-weighted
average of Edison's Avoided Cost of Energy was 2.1 cents per kWh, compared to
the time period-weighted average for the year ended December 31, 1995 selling
prices for energy of approximately 11.4 cents per kWh for the Company. 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.
COMPETITION AND DOMESTIC DEREGULATION; INDUSTRY RESTRUCTURING. 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 to
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, recent deregulation and industry restructuring
activity may cause certain utilities or other contract parties 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.
NATURAL GAS SUPPLY/MINIMUM TAKE CONTRACTS. 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.
17
<PAGE>
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 project's 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 pipelines 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 National 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.
IMPACT OF ENVIRONMENTAL, ENERGY 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.
18
<PAGE>
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange pursuant to the
Exchange Offer. The net proceeds to the Company from the sale of the Old
Notes (after deduction of certain transaction costs) in the Initial Offering
was approximately $218.8 million. The Company intends ultimately to use such
net proceeds to make equity investments in future domestic and international
energy projects, to fund possible project or company acquisitions (although
no specific acquisitions are currently contemplated by the Company other than
the contemplated acquisition of Northern described herein under "Business of
the Company--Recent Development"), for the repayment of debt (including the
outstanding $35.0 million balance under the Company's revolving line of
credit facility), and for other general corporate purposes. Pending such
uses, the net proceeds of the Initial Offering will be invested in, among
other things, deposits with banks, investment grade securities and short-term
and medium-term income producing investments, including government
obligations and other money market instruments.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the Old Notes to the Initial Purchaser on
September 20, 1996, the Company executed and delivered for the benefit of the
holders of the Old Notes the Registration Rights Agreement. The Exchange
Offer is being made by the Company to satisfy its obligations pursuant to the
Registration Rights Agreement, which requires the Company to use its
reasonable best efforts to (i) cause the Exchange Offer Registration
Statement to be declared effective by the Commission within 270 days of the
issuance of the Old Notes, (ii) keep the Exchange Offer open for a period of
not less than the shorter of (a) the period ending when the last of the
remaining Old Notes is tendered in the Exchange Offer and (b) 30 days from
the date notice is mailed to holders of the Old Notes, and (iii) maintain the
Exchange Offer Registration Statement continuously effective for a period of
not less than the longer of (a) the period until consummation of the Exchange
Offer and (b) 120 days after effectiveness of the Exchange Offer Registration
Statement (subject to extension under certain limited circumstances),
provided that in the event that all resales of Exchange Notes covered by the
Exchange Offer Registration Statement has been made, the Exchange Offer
Registration Statement need not remain continuously effective. In the event
that the Exchange Offer has not commenced or a Shelf Registration Statement
has not been declared effective within 270 days following the date of the
Issue Date (each, a "Registration Default"), the interest rate on the Old
Notes shall increase by one-half of one percent (50 basis points) per annum
effective on the 271st day following the date of the Issue Date until the
date on which the Exchange Offer is commenced or such Shelf Registration
Statement shall have become effective. If a registration statement has not
been declared effective within two years after the Issue Date, such one-half
of one percent increase in interest rate will become permanent. See
"Description of Notes--Registration Rights Agreement."
TERMS OF THE EXCHANGE
The Company hereby offers, upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal,
to exchange Exchange Notes for a like aggregate principal amount of Old
Notes, properly tendered on or prior to the Expiration Date and not properly
withdrawn in accordance with the procedures described below. The Company will
issue, promptly after the Expiration Date, the Exchange Notes in exchange for
a like principal amount of outstanding Old Notes tendered and accepted in
connection with the Exchange Offer. Holders may tender their Old Notes in
whole or in part in a principal amount of $1,000 and integral multiples
thereof, provided that if any Old Notes are tendered for exchange in part by
institutional accredited investors, the untendered principal amount thereof
must be $500,000 or any integral multiple of $1,000 in excess thereof.
The Exchange Offer is not conditioned upon any minimum number of Old Notes
being tendered. As of the date of this Prospectus, $225,000,000 aggregate
principal amount of the Old Notes is outstanding.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will
19
<PAGE>
be returned, without expense, to the tendering holder thereof, or in the case
of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at DTC pursuant to the procedures described below under "Procedures
for Tendering," such non-exchanged Old Notes will be credited to the
tendering holder's account maintained with DTC promptly after the Expiration
Date.
Holders who tender Old Notes in connection with the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Old Notes in connection with the Exchange Offer. The Company will
pay all charges and expenses, other than certain applicable taxes described
below, in connection with the Exchange Offer. See "--Solicitation of Tenders;
Fees and Expenses."
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN
FROM TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE
OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO
TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD
NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL
AND CONSULTING WITH THEIR ADVISERS, IF ANY, BASED ON THEIR OWN FINANCIAL
POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer expires on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., New York City time, on December 13, 1996, unless the
Company in its sole discretion extends the period during which the Exchange
Offer is open, in which case the term "Expiration Date" means the latest time
and date to which the Exchange Offer is extended. The Company may extend the
Exchange Offer at any time and from time to time by giving oral (immediately
confirmed in writing) or written notice to the Exchange Agent and by timely
public announcement. Without limiting the manner in which the Company may
choose to make any public announcement and subject to applicable law, the
Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement other than by issuing a release to
an appropriate news agency. During any extension of the Exchange Offer, all
Old Notes previously tendered pursuant to the Exchange Offer will remain
subject to the Exchange Offer.
The Company reserves the right (i) to delay accepting any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept
Old Notes not previously accepted for any reason, including if any of the
events set forth herein under "--Conditions to the Exchange Offer" shall have
occurred and shall not have been waived by the Company, or (ii) to amend the
terms of the Exchange Offer in any manner, whether prior to or after the
tender of any of the Old Notes. If any such delay, extension, termination or
amendment occurs, the Company will give oral (immediately confirmed in
writing) or written notice to the Exchange Agent and will either issue a
public announcement or give notice to the holders of the Old Notes as
promptly as practicable.
If the Company waives any material condition to the Exchange Offer, or
amends the Exchange Offer in any other material respect, and if at the time
that notice of such waiver or amendment is first published, sent or given to
holders of Old Notes in the manner specified above, the Exchange Offer is
scheduled to expire at any time earlier than the expiration of a period
ending on the fifth business day from, and including, the date that such
notice is first so published, sent or given, then the Exchange Offer will be
extended until the expiration of such period of five business days.
This Prospectus and the related Letter of Transmittal and other relevant
materials will be mailed by the Company to record holders of Old Notes and
will be furnished to brokers, banks and similar persons whose names, or the
names of whose nominees appear on the lists of record holders for subsequent
transmittal to beneficial owners of Old Notes.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to
20
<PAGE>
include a facsimile thereof), have the signatures thereon guaranteed if
required by the Letter of Transmittal and mail or otherwise deliver such
Letter of Transmittal or such facsimile, together with any other required
documents, or an Agent's Message in case of book-entry delivery as described
below, to the Exchange Agent prior to the Expiration Date. In addition,
either (i) certificates for such Old Notes must be received by the Exchange
Agent along with the Letter of Transmittal on or prior to the Expiration
Date, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at DTC (the "Book-Entry Transfer Facility") pursuant
to the procedure for book-entry transfer described below, along with the
Letter of Transmittal must be received by the Exchange Agent on or prior to
the Expiration Date or (iii) the holder must comply with the guaranteed
delivery procedures described below. THE METHOD OF DELIVERY OF CERTIFICATES,
THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION
AND SOLE RISK OF THE TENDERING HOLDER. IF DELIVERY IS BY MAIL, REGISTERED
MAIL (RETURN RECEIPT REQUESTED AND PROPERLY INSURED) OR AN OVERNIGHT DELIVERY
SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ENSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT
TO THE COMPANY. To be tendered effectively, the Old Notes, Letter of
Transmittal and all other required documents, or, in the case of a
participant in the Book-Entry Transfer Facility, an Agent's Message, must be
received by the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date. Except in the case of a participant in the Book-Entry
Transfer Facility who transfers Notes by an Agent's Message, delivery of all
documents must be made to the Exchange Agent at its address set forth on the
back of this Prospectus. Holders may also request their respective brokers,
dealers, commercial banks, trust companies or nominees to effect such tender
for such holders.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal. If less than
all of the Old Notes are tendered, a tendering holder should fill in the
amount of Old Notes being tendered in the appropriate box on the Letter of
Transmittal. The entire amount of Old Notes delivered to the Exchange Agent
will be deemed to have been tendered unless otherwise indicated.
Only a holder of Old Notes may tender such Old Notes in the Exchange
Offer. The term "holder" with respect to the Exchange Offer means any person
in whose name Old Notes are registered on the books of the Registrar or any
other person who has obtained a properly completed bond power from the
registered holder.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on his behalf. If such beneficial owner
wishes to tender on his own behalf, such beneficial owner must, prior to
completing and executing the Letter of Transmittal and delivering his Old
Notes, either make appropriate arrangements to register ownership of the Old
Notes in such owner's name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may take considerable
time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a firm (an "Eligible Institution") that is
a member of a recognized signature guarantee medallion program within the
meaning of Rule 17Ad-15 under the Exchange Act, unless the Old Notes tendered
pursuant thereto are tendered (i) by a registered holder who has not
completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account
of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be by an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by bond powers and a proxy which authorizes such
person to tender the Old Notes on behalf of the registered holder, in each
case as the name of the registered holder or holders appears on the Old
Notes. If the Letter of Transmittal or any Old
21
<PAGE>
Notes bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such person should so indicate when
signing, and unless waived by the Company, evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Old Notes will be determined by the
Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes which, if accepted by the
Company, would be unlawful. The Company also reserves the right to waive any
irregularities or conditions of tender as to particular Old Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. None of the Company, the Exchange Agent or any other
person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Old Notes, nor shall any of them
incur any liability for failure to give such notification. Tenders of Old
Notes will not be deemed to have been made until such irregularities have
been cured or waived. Any Old Notes received by the Exchange Agent that are
not properly tendered and as to which the defects or irregularities have not
been timely cured or waived will be returned without cost to such holder by
the Exchange Agent to the tendering holders of Old Notes, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
In addition, the Company reserves the right in its sole discretion (i) to
purchase or make offers for any Old Notes that remain outstanding subsequent
to the Expiration Date or, as set forth under "--Conditions to the Exchange
Offer," to terminate the Exchange Offer and (ii) to the extent permitted by
applicable law, to purchase Old Notes in the open market, in privately
negotiated transactions or otherwise. The Company has no present plan to
acquire any Old Notes which are not tendered in the Exchange Offer. The terms
of any such purchases or offers could differ from the terms of the Exchange
Offer.
BOOK-ENTRY TRANSFER. The Exchange Agent will make a request to establish
an account with respect to the Old Notes at the Book-Entry Transfer Facility
for purposes of the Exchange Offer within two business days after the date of
this Prospectus. Any financial institution that is a participant in the
Book-Entry Transfer Facility's systems may book-entry deliver Old Notes by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance
with such Book-Entry Transfer Facility's procedures for transfer on or prior
to the Expiration Date. A holder who is a participant in the Book-Entry
Transfer Facility and transfers the Notes by an Agent's Message need not
transmit the Letter of Transmittal to the Exchange Agent to consummate the
exchange.
The term "Agent's Message" means a message transmitted through electronic
means by a Book-Entry Transfer Facility to and received by the Exchange Agent
and forming a part of a book-entry confirmation, which states that such
Book-Entry Transfer Facility has received an express acknowledgment from the
participant in such Book-Entry Transfer Facility tendering the Notes that
such participant has received and agrees to be bound by the Letter of
Transmittal and/or the Notice of Guaranteed Delivery (as discussed below),
where applicable.
GUARANTEED DELIVERY PROCEDURES. If a registered holder of the Old Notes
desires to tender such Old Notes, and the Old Notes are not immediately
available, or time will not permit such holder's Old Notes or other required
documents to reach the Exchange Agent before the Expiration Date, or the
procedure for book-entry transfer cannot be completed on a timely basis, a
tender may be effected if (i) the tender is made through an Eligible
Institution, (ii) on or prior to the Expiration Date, the Exchange Agent
received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof, or in the case of a
participant in the Book-Entry Transfer Facility, an Agent's Message) and
Notice of Guaranteed Delivery, substantially in the form provided by the
Company (by facsimile transmission, mail or hand delivery, or, in the case of
a participant in the Book-Entry Transfer Facility, by
22
<PAGE>
an Agent's Message), setting forth the name and address of the holder of Old
Notes and the amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that within three New York Stock Exchange
("NYSE") trading days after the date of execution of the Notice of Guaranteed
Delivery, the certificates for all physically tendered Old Notes, in proper
form for transfer, or a Book-Entry Confirmation, as the case may be, and any
other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent and (iii) the certificates
for all physically tendered Old Notes, in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and any other documents required
by the Letter of Transmittal are received by the Exchange Agent within three
NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes is received by the Exchange Agent, or in the
case of a participant in the Book-Entry Transfer Facility, as of the date
when an Agent's Message from the participant has been received by the
Exchange Agent. Issuances of Exchange Notes in exchange for Old Notes
tendered pursuant to a Notice of Guaranteed Delivery or letter, telegram or
facsimile transmission to similar effect (as provided above) by an Eligible
Institution will be made only against deposit of the Letter of Transmittal
(and any other required documents) and the tendered Old Notes.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following
terms and conditions, which are part of the Exchange Offer.
The party tendering Old Notes for exchange (the "Transferor") exchanges,
assigns and transfers the Old Notes to the Company and irrevocably
constitutes and appoints the Exchange Agent as the Transferor's agent and
attorney-in-fact to cause the Old Notes to be assigned, transferred and
exchanged. The Transferor represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Old Notes and to
acquire Exchange Notes issuable upon the exchange of such tendered Old Notes,
and that, when the same are accepted for exchange, the Company will acquire
good and unencumbered title to the tendered Old Notes, free and clear of all
liens, restrictions, charges and encumbrances and not subject to any adverse
claim. The Transferor also warrants that it will, upon request, execute and
deliver any additional documents deemed by the Company to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Old
Notes. The Transferor further agrees that acceptance of any tendered Old
Notes by the Company and the issuance of Exchange Notes in exchange therefor
shall constitute performance in full by the Company of its obligations under
the Registration Rights Agreement and that the Company shall have no further
obligations or liabilities thereunder (except in certain limited
circumstances). All authority conferred by the Transferor will survive the
death or incapacity of the Transferor and every obligation of the Transferor
shall be binding upon the heirs, legal representatives, successors, assigns,
executors and administrators of such Transferor.
By tendering Old Notes, the Transferor certifies that (i) it is not an
"affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, that it is not a broker-dealer that owns Old Notes acquired
directly from the Company, that it is acquiring the Exchange Notes offered
hereby in the ordinary course of such Transferor's business and that such
Transferor has no arrangement with any person to participate in the
distribution of such Exchange Notes or (ii) it is an "affiliate" (as defined
above) of the Company or of the Initial Purchaser and that it will comply
with the registration and prospectus delivery requirements of the Securities
Act to the extent applicable to it. Each broker-dealer that receives Exchange
Notes as a result of market-making activities or other trading activities
must acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes. See "Plan Of Distribution."
WITHDRAWAL RIGHTS; NON-EXCHANGED OLD NOTES
Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date.
23
<PAGE>
For a withdrawal to be effective, a written, telegraphic or facsimile
transmission notice of withdrawal must be timely received by the Exchange
Agent at its address set forth on the back of this Prospectus. Any such
notice of withdrawal must specify the name of the person having tendered the
Old Notes to be withdrawn, identify the Old Notes to be withdrawn (including
the principal amount of such Old Notes), and (where certificates for Old
Notes have been transmitted) specify the name in which such Old Notes are
registered if different from that of the withdrawing holder, accompanied by
evidence satisfactory to the Company that the person withdrawing the tender
has succeeded to the beneficial ownership of the Old Notes being withdrawn.
If certificates for Old Notes have been delivered or otherwise identified to
the Exchange Agent, then, prior to the release of such certificates, the
withdrawing holder must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply
with the procedures of such facility. If any Old Notes are tendered for
exchange but are not exchanged for any reason, or if any Old Notes are
submitted for a greater principal amount than the holder desires to exchange,
such unaccepted or nonexchanged Old Notes will be returned to the holder
thereof without cost to such holder (or, in the case of Old Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the book-entry transfer procedures described
above, such Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility for the Old Notes) as soon as practicable after
withdrawal, rejection of tender, termination of the Exchange Offer or
submission of nonexchanged Old Notes. Withdrawals of tenders of Old Notes may
not be rescinded. Old Notes properly withdrawn will not be deemed validly
tendered for purposes of the Exchange Offer, but may be retendered at any
subsequent time on or prior to the Expiration Date by following any of the
procedures described above under "--Procedures for Tendering."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all
parties. Neither the Company, any affiliates or assigns of the Company, the
Exchange Agent nor any other person shall be under any duty to give any
notification of any irregularities in any notice of withdrawal or incur any
liability for failure to give any such notification.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at the rate of 9 1/2% per annum from
the most recent date to which interest has been paid on the Old Notes or, if
no interest has been paid on the Old Notes, from September 20, 1996. Interest
on the Notes will be payable in cash semi-annually on March 15 and September
15, commencing on March 15, 1997, to holders of record on the immediately
preceding March 1 and September 1. See "Description of the Notes--General."
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive any payment in respect of accrued and unpaid interest on such Old
Notes.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, Exchange Notes
for Old Notes validly tendered and not withdrawn promptly after the
Expiration Date. For the purposes of the Exchange Offer, the Company shall be
deemed to have accepted for exchange validly tendered Old Notes when and if
the Company has given oral (immediately confirmed in writing) or written
notice thereof to the Exchange Agent. The Exchange Agent will act as agent
for the tendering holders of Old Notes for the purposes of receiving Exchange
Notes from the Company and causing the Old Notes to be assigned, transferred
and exchanged. Upon the terms and subject to the conditions of the Exchange
Offer, delivery of Exchange Notes to be issued in exchange for accepted Old
Notes will be made by the Exchange Agent only after timely receipt by the
24
<PAGE>
Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter
of Transmittal and all other required documents, or, in the case of a
book-entry delivery, an Agent's Message.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Company will not be required to accept
for exchange, or to exchange, any Old Notes for any Exchange Notes, and, as
described below, may terminate the Exchange Offer (whether or not any Old
Notes have theretofore been accepted for exchange) or may waive any
conditions to or amend the Exchange Offer, if any of the following conditions
have occurred or exists or have not been satisfied: (a) the Exchange Offer,
or the making of any exchange by a holder, violates any applicable law or any
applicable interpretation of the Staff of the Commission; (b) in the
reasonable judgment of the Company, there shall be threatened, instituted or
pending any action or proceeding before, or any injunction, order or decree
shall have been issued by, any court or governmental agency or other
governmental regulatory or administrative agency or commission, (i) seeking
to restrain or prohibit the making or consummation of the Exchange Offer or
any other transaction contemplated by the Exchange Offer, (ii) assessing or
seeking any damages as a result thereof, or (iii) resulting in a material
delay in the ability of the Company to accept for exchange or exchange some
or all of the Old Notes pursuant to the Exchange Offer; (c) any statute,
rule, regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of the
transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the reasonable judgment of the
Company might directly or indirectly result in any of the consequences
referred to in clauses (b)(i), (ii) or (iii) above or, in the reasonable
judgment of the Company, might result in the holders of Exchange Notes having
obligations with respect to resales and transfers of Exchange Notes which are
greater than those described in the interpretations of the Staff referred to
in this Prospectus, or would otherwise make it inadvisable to proceed with
the Exchange Offer; (d) there shall have occurred (i) any general suspension
of trading in, or general limitation on prices for securities on the New York
Stock Exchange, (ii) a declaration of a banking moratorium or any suspension
of payments in respect of banks in the United States or any limitation by any
governmental agency or authority that adversely affects the extension of
credit to the Company, or (iii) a commencement of a war, armed hostilities or
other similar international calamity directly or indirectly involving the
United States; or, in the case any of the foregoing exists at the time of
commencement of the Exchange Offer, a material acceleration or worsening
thereof; or (e) a material adverse change shall have occurred or be
threatened in the business, condition (financial or otherwise), operations,
stock ownership or prospects of the Company.
The foregoing conditions are for the sole benefit of the Company and may
be asserted by it with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the
Company) giving rise to such condition or may be waived by the Company in
whole or in part at any time or from time to time in their sole discretion.
The failure by the Company at any time to exercise any of the foregoing
rights will not be deemed a waiver of any such right, and each right will be
deemed an ongoing right which may be asserted at any time or from time to
time. In addition, the Company has reserved the right, notwithstanding the
satisfaction of each of the foregoing conditions, to amend the Exchange
Offer.
Any determination by the Company concerning the fulfillment or
non-fulfillment of any conditions will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Old Notes
tendered and no Exchange Notes will be issued in exchange for any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to (i) the Registration Statement of which this Prospectus
constitutes a part or (ii) the qualification of the Indenture under the Trust
Indenture Act of 1939, as amended.
25
<PAGE>
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as the Exchange Agent
for the Exchange Offer. IBJ Schroder Bank & Trust Company also acts as
trustee under the Indenture.
Delivery of the Letters of Transmittal and any other required documents,
questions, requests for assistance, and requests for additional copies of
this Prospectus or of the Letter of Transmittal, should be directed to the
Exchange Agent at its address and numbers set forth on the back of this
Prospectus. Except in the case of a participant in the Book-Entry Transfer
Facility who transfers Securities by an Agent's Message, delivery to an
address other than as set forth herein, or transmissions of instructions via
a facsimile or telex number other than to the Exchange Agent as set forth
herein, will not constitute a valid delivery.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The
Company will, however, pay the Exchange Agent reasonable and customary fees
for its services and will reimburse it for reasonable out-of-pocket expenses
in connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus and related
documents to the beneficial owners of Old Notes, and in handling tenders for
their customers. The expenses to be incurred in connection with the Exchange
Offer, including the fees and expenses of the Exchange Agent and printing,
accounting, and legal fees, will be paid by the Company and are estimated at
approximately $100,000.
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith. If, however, Exchange Notes
are to be delivered to, or are to be issued in the name of, any person other
than a registered holder of the Old Notes tendered, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes in connection
with the Exchange Offer, then the amount of any such transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the
amount of such transfer taxes will be billed directly to such tendering
holder.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those
contained in this Prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made
hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the respective dates
as of which information is given herein. The Exchange Offer is not being made
to (nor will tenders be accepted from or on behalf of) holders of Old Notes
in any jurisdiction in which the making of the Exchange Offer or the
acceptance thereof would not be in compliance with the laws of such
jurisdiction. However, the Company may, at their discretion, take such action
as it may deem necessary to make the Exchange Offer in any such jurisdiction
and extend the Exchange Offer to holders of Old Notes in such jurisdiction.
In any jurisdiction the securities laws or blue sky laws of which require the
Exchange Offer to be made by a licensed broker or dealer, the Exchange Offer
is being made on behalf of the Company by one or more registered brokers or
dealers which are licensed under the laws of such jurisdiction.
APPRAISAL RIGHTS
HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS
IN CONNECTION WITH THE EXCHANGE OFFER.
FEDERAL INCOME TAX CONSEQUENCES
The exchange of Old Notes for Exchange Notes by holders will not be a
taxable exchange for federal income tax purposes, and holders should not
recognize any taxable gain or loss or any interest income as a result of such
exchange.
26
<PAGE>
CAPITALIZATION
(IN THOUSANDS)
The following table sets forth (i) the consolidated capitalization of the
Company at June 30, 1996, and (ii) the consolidated capitalization of the
Company as adjusted to reflect the acquisition of Falcon on August 7, 1996,
the issuance of the $225 million of Notes being offered hereby, completion of
the Conversions and use of $35 million of the Initial Offering proceeds to
repay the outstanding balance drawn on the Company's revolving line of credit
facility. The table should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere herein
or incorporated herein by reference.
<TABLE>
<CAPTION>
AT JUNE 30, 1996
---------------------------
ACTUAL AS ADJUSTED
------------ -------------
<S> <C> <C>
INDEBTEDNESS:
Revolving line of credit .............................................. $ -- $ --
Construction loans .................................................... 305,870 305,870
Project finance loans ................................................. 187,172 306,650
Salton Sea notes and bonds ............................................ 563,035 563,035
Senior discount notes ................................................. 501,798 501,798
9 1/2% Senior Notes ................................................... -- 225,000
Limited recourse senior secured notes ................................. 200,000 200,000
5% Convertible subordinated debentures ................................ 100,000 --
Convertible debt ...................................................... 64,850 --
------------ -------------
Total consolidated indebtedness ..................................... 1,922,725 2,102,353
------------ -------------
Deferred income ....................................................... 26,213 26,213
Convertible preferred securities of subsidiary ........................ 103,930 103,930
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 2,000 shares authorized .............. -- --
Common stock, $.0675 par value, 80,000 shares authorized,
52,179 shares issued, 52,176 outstanding (as adjusted 60,153 issued
and 60,150 outstanding) ............................................. 3,523 4,061
Additional paid-in capital ............................................ 351,976 519,288
Retained earnings ..................................................... 238,792 238,792
Treasury stock, 3 common shares at cost ............................... (61) (61)
Unearned compensation--restricted stock ............................... (6,294) (6,294)
------------ -------------
Total stockholders' equity .......................................... 587,936 755,786
------------ -------------
Total capitalization ................................................ $2,640,804 $2,988,282
============ =============
</TABLE>
27
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
(ALL DATA IN THOUSANDS EXCEPT PER SHARE DATA AND RATIOS)
The following tables set forth selected historical consolidated financial
and operating data, which should be read in conjunction with the Company's
consolidated financial statements and related notes included herein and
incorporated by reference herein and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus . The selected consolidated data as of and for each of the
five years in the period ended December 31, 1995 have been derived from the
audited historical consolidated financial statements of the Company. The
unaudited consolidated financial statements of the Company as of and for the
six months ended June 30, 1995 and 1996 reflect all adjustments necessary in
the opinion of the Company's management (consisting only of normal recurring
adjustments), for a fair presentation of such financial data. The June 30,
1995 information includes the financial and operating results of Magma
(hereinafter defined) for the 45 days it was 51% owned and the 126 days it
was 100% owned by the Company. The June 30, 1996 information includes
financial and operating results for the Imperial Valley Partnership Project
interests for the 91 days they were 50% owned and the 91 days they were 100%
owned by the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1991 1992 1993 1994 1995(1)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sales of electricity ..... $104,155 $115,087 $129,861 $152,047 $332,732
Sales of steam ............ 2,029 2,255 2,198 2,515 2,898
Royalties ................. -- -- -- -- 19,482
Other income .............. 9,379 10,187 17,194 31,292 43,611
Total revenue ............. $115,563 $127,529 $149,253 $185,854 $398,723
Plant operations, general
and administrative,
royalty and other
expenses ................. 41,506 45,183 46,794 55,915 127,340
Income before
depreciation,
amortization, interest,
income taxes,
extraordinary item and
cumulative effect of
change in accounting
principle ................ 74,057 82,346 102,459 129,939 271,383
Depreciation and
amortization ............. 14,752 16,754 17,812 21,197 72,249
Interest expense, net of
capitalized interest .... 24,439 14,860 23,389 52,906 102,083
Provision for income taxes 8,284 11,922 18,184 17,002 30,631
Income before
extraordinary item and
cumulative effect of
change in accounting
principle ................ 26,582 38,810 43,074 38,834 66,420
Minority Interest ......... N/A N/A N/A N/A 3,005
Extraordinary item(3)(4) . N/A (4,991) N/A (2,007) N/A
Cumulative effect of
change in accounting
principle(5) ............. N/A N/A 4,100 N/A N/A
Net income ................ 26,582 33,819 47,174 36,827 63,415
Preferred dividends ....... N/A 4,275 4,630 5,010 1,080
Net income available to
common stockholders ...... 26,582 29,544 42,544 31,817 62,335
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX
JUNE 30,(2) YEAR MONTHS
ENDED ENDED
---------------------- DECEMBER 31, JUNE 30,
1995 1996 1995 1996(2)
---------- ---------- ---- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sales of electricity ..... $153,280 $179,308 $502,464 $235,290
Sales of steam ............ 1,454 1,371 5,144 3,625
Royalties ................. 8,829 5,015 20,462 5,015
Other income .............. 20,218 20,456 36,961 18,006
Total revenue ............. $183,781 $206,150 $565,031 $261,936
Plant operations, general
and administrative,
royalty and other
expenses ................. 60,486 65,171 219,652 96,157
Income before
depreciation,
amortization, interest,
income taxes,
extraordinary item and
cumulative effect of
change in accounting
principle ................ 123,295 140,979 345,379 165,779
Depreciation and
amortization ............. 29,824 43,713 117,363 59,095
Interest expense, net of
capitalized interest .... 55,174 47,996 119,027 52,415
Provision for income taxes 11,788 15,537 34,887 18,928
Income before
extraordinary item and
cumulative effect of
change in accounting
principle ................ 26,509 33,733 78,267 39,604
Minority Interest ......... 3,005 N/A N/A N/A
Extraordinary item(3)(4) . N/A N/A N/A N/A
Cumulative effect of
change in accounting
principle(5) ............. N/A N/A N/A N/A
Net income ................ 23,504 33,733 78,267 39,604
Preferred dividends ....... 1,080 N/A 1,080 N/A
Net income available to
common stockholders ...... 22,424 33,733 77,187 39,604
</TABLE>
28
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1991 1992 1993 1994 1995(1)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income per share before
extraordinary item and
cumulative effect of
change in accounting
principle ................ $ 0.75 $ 0.92 $ 1.00 $ 0.95 $ 1.25
Extraordinary item per
share .................... N/A (0.13) N/A (0.06) N/A
Cumulative effect of
change in accounting
principle per share ...... N/A N/A 0.11 N/A N/A
Net income per share
--primary ................ 0.75 0.79 1.11 0.89 1.25
Net income per share
--fully diluted .......... 0.75 0.79 1.09 0.88 1.18
Weighted average shares
outstanding--primary .... 35,471 37,495 38,485 35,721 49,971
OTHER DATA (UNAUDITED):
Capital Expenditures ..... 68,377 32,446 87,191 119,013 398,623
EBITDA(6)(7) .............. 74,057 82,346 102,459 129,939 271,383
EBITDA/interest expense,
net of capitalized
interest(8) .............. 3.03 5.54 4.38 2.46 2.66
EBITDA/fixed
charges(6)(7)(9) ......... 2.47 3.98 3.36 2.06 2.01
Ratio of earnings to fixed
charges(9) ............... 2.00 3.20 2.81 1.74 1.49
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX
JUNE 30,(2) YEAR MONTHS
ENDED ENDED
---------------------- DECEMBER 31, JUNE 30,
1995 1996 1995 1996(2)
---------- ---------- ---- --------
<S> <C> <C> <C> <C>
Income per share before
extraordinary item and
cumulative effect of
change in accounting
principle ................ $ 0.48 $ 0.62 $ 1.29 $ 0.63
Extraordinary item per
share .................... N/A N/A N/A N/A
Cumulative effect of
change in accounting
principle per share ...... N/A N/A N/A N/A
Net income per share
--primary ................ 0.48 0.62 1.29 0.63
Net income per share
--fully diluted .......... 0.47 0.59 1.29 0.63
Weighted average shares
outstanding--primary .... 46,736 54,836 60,010 62,810
OTHER DATA (UNAUDITED):
Capital Expenditures ..... 146,519 218,704
EBITDA(6)(7) .............. 123,295 140,979 345,379 165,779
EBITDA/interest expense,
net of capitalized
interest(8) .............. 2.23 2.94 2.90 3.16
EBITDA/fixed
charges(6)(7)(9) ......... 1.89 1.93 2.20 2.08
Ratio of earnings to fixed
charges(9) ............... 1.44 1.40 1.45 1.38
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------
1991 1992 1993 1994 1995(1)
--------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments ............... $ 49,279 $ 54,671 $127,756 $ 254,004 $ 72,114
Properties, plants, contracts and
equipment, net .................... 378,266 393,958 463,514 561,643 1,781,255
Total assets ....................... 517,994 580,550 715,984 1,131,145 2,654,038
Revolving line of credit ........... N/A N/A N/A N/A N/A
Project finance loans .............. 221,308 263,604 246,880 233,080 257,933
Construction loans ................. N/A N/A N/A 31,503 211,198
Senior notes ....................... 35,730 35,730 35,730 N/A N/A
Senior discount notes .............. N/A N/A N/A 431,946 477,355
Salton Sea notes and bonds ......... N/A N/A N/A N/A 452,088
9 1/2% Senior Notes ................ N/A N/A N/A N/A N/A
Limited recourse senior secured
notes ............................. N/A N/A N/A N/A 200,000
5% Convertible subordinated
debentures ........................ N/A N/A 100,000 100,000 100,000
Convertible debt ................... N/A N/A N/A N/A 64,850
Total liabilities .................. 298,146 336,272 425,393 867,703 2,084,474
Redeemable preferred stock ......... 54,705 54,350 58,800 63,600 N/A
Convertible preferred securities of
subsidiary ........................ N/A N/A N/A N/A N/A
Total stockholders' equity ......... 143,128 168,764 211,503 179,991 543,532
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
AT JUNE 30, 1996
------------------------
PRO
ACTUAL FORMA(10)
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and investments ............... $ 253,661 $ 261,938
Properties, plants, contracts and
equipment, net .................... 2,028,624 2,196,531
Total assets ....................... 2,975,127 3,424,828
Revolving line of credit ........... N/A --
Project finance loans .............. 187,172 306,650
Construction loans ................. 305,870 305,870
Senior notes ....................... N/A N/A
Senior discount notes .............. 501,798 501,798
Salton Sea notes and bonds ......... 563,035 563,035
9 1/2% Senior Notes ................ N/A 225,000
Limited recourse senior secured
notes ............................. 200,000 200,000
5% Convertible subordinated
debentures ........................ 100,000 --
Convertible debt ................... 64,850 --
Total liabilities .................. 2,257,048 2,538,899
Redeemable preferred stock ......... N/A N/A
Convertible preferred securities of
subsidiary ........................ 103,930 103,930
Total stockholders' equity ......... 587,936 755,786
</TABLE>
- ------------
(1) Reflects the acquisition of Magma Power Company which was completed
on February 24, 1995.
29
<PAGE>
(2) The Company's operations are seasonal in nature, with a
disproportionate percentage of the income earned in the quarter
ending September 30; therefore, operating results and ratios for
interim periods are not indicative of the results for a full fiscal
year.
(3) The refinancing of the Coso Joint Ventures' project financing
resulted in an extraordinary loss in 1992 in the amount of $5.0
million.
(4) The Company's 12% senior notes due 1995 were defeased in the first
quarter of 1994 in connection with the issuance of the 10 1/4% senior
discount notes due 2004, resulting in an extraordinary loss in 1994
in the amount of $2.0 million.
(5) On January 1, 1993, the Company adopted Statement of Financial
Accounting Standard No. 109, Accounting for Income Taxes, resulting
in a cumulative effect adjustment increasing net income by $4.1
million in 1993.
(6) EBITDA means earnings before interest, taxes, depreciation and
amortization.
(7) The 1994 EBITDA balances are before the extraordinary item associated
with the defeasance of the Company's 12% senior notes due 1995.
Information concerning EBITDA is presented here not as a measure of
operating results, but rather as a measure of the Company's ability
to service debt. EBITDA should not be construed as an alternative to
either (i) operating income (determined in accordance with generally
accepted accounting principles) or (ii) cash flow from operating
activities (determined in accordance with generally accepted
accounting principles).
(8) For purposes of computing the ratio of EBITDA/interest expense, net
of capitalized interest, EBITDA, as defined above, is divided by
interest expense, net of capitalized interest.
(9) For purposes of computing historical ratios of earnings to fixed
charges, earnings are divided by fixed charges. "Earnings" represent
the aggregate of (a) the pre-tax income of the Company, including its
proportionate share of the pre-tax income of the Coso Project (as
defined herein) (and for the year ended December 31, 1995 and the
quarter ended March 31, 1996, the Partnership Projects (as defined
herein)), and (b) fixed charges, less capitalized interest. "Fixed
charges" represent interest (whether expensed or capitalized),
amortization of deferred financing and bank fees, and the portion of
rentals considered to be representative of the interest factor
(one-third of lease payments).
(10) The pro forma amounts reflect the April 17, 1996 Partnership Project
Acquisition and the August 7, 1996 acquisition of Falcon, together
with the related borrowing of $35 million on a revolving line of
credit utilized in connection therewith as if they had occurred at
the beginning of the periods presented, completion of the Conversions
and, in the case of the Balance Sheet Data, the issuance of $225
million of 9 1/2% Senior Notes in the Initial Offering and use of $35
million of the Initial Offering proceeds to repay the balance of the
Company's revolving line of credit facility. See "Pro Forma Condensed
Combined Unaudited Financial Data."
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars and shares in thousands except per share data)
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial condition and
results of operations during the periods included in the accompanying
statements of operations and should be read in conjunction with the Company's
consolidated financial statements. See "Financial Statements."
For purposes of consistent financial presentation, plant capacity factors
for Navy I, Navy II, and BLM (collectively the Coso Project) are based upon a
capacity amount of 80 net MW for each plant. Plant capacity factors for
Vulcan, Hoch (Del Ranch), Elmore and Leathers (collectively the Partnership
Project) are based on contract nameplate amounts of 34, 38, 38 and 38 net MW
respectively, and for Salton Sea I, Salton Sea II, Salton Sea III and Salton
Sea IV plants (collectively the Salton Sea Project) are based on contract
nameplate amounts of 10, 20, 49.8 and 39.6 net MW respectively (the
Partnership Project and the Salton Sea Project are collectively referred to
as the Imperial Valley Project). Each plant possesses an operating margin
which periodically allows for production in excess of the amount listed
above. Utilization of this operating margin is based upon a variety of
factors and can be expected to vary between calendar quarters, under normal
operating conditions.
The Coso Project and the Partnership Project sell all electricity
generated by the respective plants pursuant to seven long-term SO4 Agreements
between the projects and Edison. These SO4 Agreements provide for capacity
payments, capacity bonus payments and energy payments. Edison makes fixed
annual capacity payments to the projects, 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 and are significantly higher in the months of June
through September. Energy is sold at increasing fixed rates for the first ten
years of each contract and thereafter at Edison's Avoided Cost of Energy.
The fixed energy price periods of the Coso Project SO4 Agreements extend
until at least August 1997, March 1999 and January 2000 for each of the units
operated by the Navy I, BLM and Navy II Partnerships, respectively. The fixed
energy price periods of the Partnership Project SO4 Agreements extend until
February 1996, December 1998, December 1998, and December 1999 for each of
the Vulcan, Hoch (Del Ranch), Elmore and Leathers Partnerships, respectively.
The Company's SO4 Agreements provide for scheduled price period energy
rates ranging from 12.7 cents per kWh in 1996 to 15.6 cents per kWh in 1999.
The Salton Sea I Project sells electricity to Edison pursuant to a 30 year
negotiated power purchase agreement, as amended (the "Salton Sea I PPA"),
which provides for capacity and energy payments. The initial contract
capacity and contract nameplate are each 10 MW. The energy payment is
calculated using a Base Price which is subject to quarterly adjustments based
on a basket of indices. The time period weighted average energy payment for
Unit I was 4.99 cents per kWh during 1995. As the Salton Sea I PPA is not an
SO4 Agreement, the energy payments do not revert to Edison's Avoided Cost of
Energy.
The Salton Sea II and Salton Sea III Projects sell electricity to Edison
pursuant to 30 year modified SO4 Agreements. The contract capacities and
contract nameplates are 15 MW and 20 MW for Salton Sea II and 47.5 MW and
49.8 MW for Salton Sea III, respectively. The contracts require Edison 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 Agreements. The energy payments for the first
ten year period, which expires April 4, 2000, are levelized at a time period
weighted average of 10.6 cents per kWh and 9.8 cents per kWh for Salton Sea
II and Salton Sea III, respectively. Thereafter, the monthly energy payments
will be at Edison's Avoided Cost of Energy. For Salton Sea II only, Edison is
entitled to receive, at no cost, 5% of all energy delivered in excess of 80%
of contract capacity for the period April 1, 1994 through June 30, 2004.
31
<PAGE>
The Salton Sea IV Project sells electricity to Edison pursuant to a
modified SO4 agreement which provides for contract capacity payments on 34 MW
of capacity at two different rates based on the respective contract
capacities deemed attributable to the original Salton Sea PPA option (20 MW)
and to the original Fish Lake PPA (14 MW). The capacity payment price for the
20 MW portion adjusts quarterly based upon specified indicies and the
capacity payment price for the 14 MW portion is a fixed levelized rate. The
energy payment (for deliveries up to a rate of 39.6 MW) is at a fixed price
for 55.6% of the total energy delivered by Salton Sea IV and is based on an
energy payment schedule for 44.4% of the total energy delivered by Salton Sea
IV. The contract has a 30-year term but Edison is not required to purchase
the 20 MW of capacity and energy originally attributable to the Salton Sea I
PPA option after June 30, 2017, the original termination date of the Salton
Sea I PPA.
For the six months ended June 30, 1996, Edison's average Avoided Cost of
Energy was 2.2 cents per kWh which is substantially below the contract energy
prices earned for the six months ended June 30, 1996. Estimates of Edison's
future Avoided Cost of Energy vary substantially from year to year. The
Company cannot predict the likely level of Avoided Cost of Energy prices
under the SO4 Agreements and the modified SO4 Agreements at the expiration of
the scheduled payment periods. The revenues generated by each of the projects
operating under SO4 Agreements could decline significantly after the
expiration of the respective scheduled energy payment periods.
RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 AND 1995
The following operating data represent the aggregate capacity and
electricity production of the Coso Project:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------------
1996 1995 1996 1995
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Overall capacity factor .......... 109.5% 106.1% 109.1% 108.1%
kWh produced (in thousands) ..... 574,100 555,900 1,144,000 1,126,900
Installed capacity NMW (average) 240 240 240 240
</TABLE>
The increase in the capacity factor for the second quarter of 1996 from
the same period in 1995 was due to increases in production at all three
plants. The Navy II and BLM plants had experienced scheduled pre-peak outages
in the second quarter of 1995, however in 1996 scheduled pre-peak outages
occurred in the first quarter of 1996.
The increase in the capacity factor for the six months ended June 30, 1996
from the same period in 1995 resulted from increased production at all three
plants, but primarily reflects increased production at the BLM plant due to
the execution of a steam transfer agreement and construction of the related
interties in the third quarter of 1995.
The following operating data represent the aggregate capacity and
electricity production of the Partnership Project:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Overall capacity factor .......... 109.2% 107.5% 103.4% 104.9%
kWh produced (in thousands) ..... 353,000 347,500 668,600 674,650
Installed capacity NMW (average) 148 148 148 148
</TABLE>
The overall capacity factor for the Partnership Project increased for the
second quarter of 1996 compared to the second quarter of 1995 due to
operating improvements at the Leathers plant. The overall capacity factor
decreased for the six months ended June 30, 1996 compared to the same period
in 1995 primarily due to scheduled turbine overhauls at Leathers and Elmore
in the first quarter of 1996.
32
<PAGE>
The following operating data represent the aggregate capacity and
electricity production of the Salton Sea Project:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Overall capacity factor ........... 78.7% 78.3% 83.8% 82.5%
kWh produced (in thousands) ...... 159,700 136,400 315,900 286,000
Installed capacity NMW (average)* 92.9 79.8 86.3 79.8
</TABLE>
- ------------
* Weighted average for the commencement of operations at the Salton Sea
Unit IV project.
The overall capacity factor for the Salton Sea Project has increased for
the three and six months ended June 30, 1996 compared to the same periods in
1995 as a result of increased production at the Salton Sea III Project due to
a scheduled turbine overhaul in the second quarter of 1995 and the
commencement of operations at the Salton Sea IV project partially offset by
lower production at the Salton Sea I and Salton Sea II projects.
Roosevelt Hot Springs steam field supplied 100% of customer power plant
steam requirements in the second quarter of 1996. The Company has an
approximate 70% interest in the Roosevelt Hot Springs field. The Desert Peak
power plant operated at 83% of its 10 net megawatt capacity in the second
quarter of 1996. The Yuma power plant availability was effectively 100%
during the second quarter of 1996 and delivered an average of 89% of its 50
net MW plant capacity, which reflected certain contractual curtailments.
Sales of electricity and steam increased in the second quarter of 1996 to
$104,735 from $81,756 for the same period in 1995, a 28.1% increase. For the
six month period ended June 30, 1996, sales of electricity and steam
increased to $180,679 from $154,734 in 1995, a 16.8% increase. These
increases were primarily the result of the Partnership Interest Acquisition
and the commencement of commercial operations at the Salton Sea Unit IV
project.
Royalty income decreased in the second quarter of 1996 to $1,122 from
$4,912 in the same period in 1995, a 77.2% decrease. For the six months ended
June 30, 1996, royalty income decreased to $5,015 from $8,829, a 43.2%
decrease. These decreases are a result of the Company no longer recognizing
royalty income received from the Partnership Project as the Partnership
Project is now owned 100% by the Company due to the Partnership Interest
Acquisition. The Company continues to receive royalty income from the East
Mesa Project and the Mammoth Project.
Interest and other income decreased in the second quarter of 1996 to
$9,937 from $10,428 for the same period in 1995, a 4.7% decrease. The
decrease reflects that the Company no longer recognizes management services
income received from the Partnership Project as the Partnership Project is
now owned 100% by the Company due to the Partnership Interest Acquisition.
For the six months ended June 30, 1996, interest and other income increased
to $20,456 from $20,218, a 1.2% increase.
The Company's expenses as a percentage of sales of electricity and steam
were as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
1996* 1995 1996* 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Plant operations (net of the Company's
management fees and Yuma fuel cost) . 19.9% 22.2% 20.6% 21.9%
General and administration ............ 4.9% 5.9% 5.1% 7.3%
Royalties ............................. 5.6% 7.2% 5.7% 6.7%
Depreciation and amortization ......... 24.5% 19.1% 24.2% 19.3%
Interest (less amounts capitalized) .. 24.0% 36.8% 26.6% 35.7%
------- ------- ------- -------
78.9% 91.2% 82.2% 90.9%
======= ======= ======= =======
</TABLE>
- ------------
* Excludes loss (associated with negative arbitrage) on equity investment
in Casecnan (currently in construction) and dividends on convertible
preferred securities of subsidiary.
33
<PAGE>
The cost of plant operations increased in the second quarter of 1996 to
$22,431 from $20,447 for the same period in 1995, a 9.7% increase. For the
six months ended June 30, 1996, plant operations costs increased to $41,387
from $38,873 in 1995, a 6.5% increase. These increases reflect the
Partnership Interest Acquisition and were partially offset by lower costs at
the Coso Project and the Desert Peak power plant due to continued savings
from the Company's cost control programs.
General and administration costs increased in the second quarter of 1996
to $5,117 from $4,851 for the same period in 1995, a 5.5% increase due to
increased development expenses. For the six months ended June 30, 1996,
corporate administration decreased to $9,296 from $11,277 in 1995, a 17.6%
decrease. This decrease was primarily due to the savings realized by
consolidating the corporate functions from the Magma acquisition.
Royalty costs marginally decreased in the second quarter of 1996 to $5,896
from $5,922 for the same period in 1995. For the six months ended June 30,
1996 royalty expense marginally decreased to $10,271 from $10,336 in 1995.
Depreciation and amortization increased in the second quarter of 1996 to
$25,660 from $15,641 for the same period in 1995, a 64.1% increase. For the
six months ended June 30, 1996, depreciation and amortization increased to
$43,713 from $29,824 in 1995, a 46.6% increase. These increases were
primarily due to the amortization of the allocated purchase price and
goodwill related to the Magma and Partnership Interest acquisitions and the
commencement of operations at the Salton Sea Unit IV project.
Loss on equity investment in Casecnan reflects the Company's share of
interest expense in excess of capitalized interest and interest income at the
Casecnan project, which is currently in construction.
Interest expense, less amounts capitalized, decreased in the second
quarter of 1996 to $25,123 from $30,096 for the same period in 1995, a 16.5%
decrease. For the six months ended June 30, 1996, interest expense, less
amounts capitalized decreased to $47,996 from $55,174 in 1995, a 13.0%
decrease. These decreases were due to the offsetting effects of increased
interest expense associated with the senior discount notes, convertible debt,
limited recourse senior secured notes and Salton Sea notes and bonds,
decreased interest expense from merger debt and the associated increase in
capitalized interest on the Company's international and domestic projects in
construction.
Dividends on convertible preferred securities of a subsidiary reflect
financial expense related to these securities which were issued in April,
1996.
The provision for income taxes increased in the second quarter of 1996 to
$9,040 from $6,248, for the same period in 1995, a 44.7% increase. For the
six months ended June 30, 1996, provisions for income taxes increased to
$15,537 from $11,788 in 1995, a 31.8% increase. The increase was due to
higher income before taxes.
Net income available for common shareholders increased in the second
quarter of 1996 to $19,272 or $.35 per share from $13,891 or $.27 per share
for the same period in 1995. For the six months ended June 30, 1996, net
income available to common shareholders increased to $33,733 or $.62 per
share from $22,424 or $.48 per share.
Earnings per share for the six months ended June 30, 1996 and 1995 were
favorably affected by the Company's stock repurchase plan.
RESULTS OF OPERATIONS THREE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Sales of electricity and steam increased to $335,630 in the year ended
December 31, 1995 from $154,562 in the year ended December 31, 1994, a 117.1%
increase. This improvement was primarily due to the addition of production
from the Imperial Valley Project, as a result of the acquisition of Magma
Power Company ("Magma") in the first quarter of 1995, an increase in the Coso
Project's electricity revenues to $152,128 from $137,013 due to an increase
in the Coso Project's electric kilowatt hour sales to 2,318.4 million kWh
from 2,238.6 million kWh, and an increased price per kWh in accordance with
the SO4 agreements and an increase in revenue received from the Yuma Project
which commenced operation in late May 1994.
34
<PAGE>
The increase in sales of electricity and steam in 1994 to $154,562 from
$132,059 in 1993 was primarily due to a 2.4% increase in the Coso Project's
electric kWh sales to 2,238.6 million kWh from 2,186.7 million kWh, an
increased price per kWh in accordance with the SO4 agreements, and revenue
received from the Yuma Project, which commenced commercial operation in late
May, 1994. The increase in Coso Project kWh sales was primarily due to the
completion of new production wells.
The following operating data includes the aggregate capacity and
electricity production of the Coso Project:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Overall capacity factor .... 110.3% 106.5% 104.0%
kWh produced (in thousands) 2,318,400 2,238,600 2,186,700
Capacity Factor NMW ......... 240 240 240
</TABLE>
The Coso Plant capacity factor was 112.6% in the fourth quarter of 1995
compared to 112.2%, 106.1% and 110.2% for the third, second and first
quarters of 1995, respectively. A steam transfer agreement was signed and the
interties were constructed in the third quarter of 1995, providing for
increased production primarily at the BLM plant. Technical enhancements
provided for the increase in 1994 from 1993.
The following operating data includes the aggregate capacity and
electricity production of the Partnership Project:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Overall Capacity Factor .... 105.9% 103.8% 100.7%
kWh produced (in thousands) 1,373,310 1,346,000 1,305,700
Capacity Factor NMW ......... 148 148 148
</TABLE>
The Partnership Project capacity factor was 105.8% in the fourth quarter
of 1995 compared to 108.0%, 107.5%, and 102.3% for the third, second, and
first quarters of 1995, respectively. The increased production in 1995 and
1994 are a result of minimizing unscheduled downtime at the plants.
The following operating data includes the aggregate capacity and
electricity production of the Salton Sea Project:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Overall Capacity Factor .... 86.5% 90.8% 91.3%
kWh produced (in thousands) 604,300 634,890 638,262
Capacity Factor NMW ......... 79.8 79.8 79.8
</TABLE>
The overall Salton Sea Project capacity factor was 86.8% in the fourth
quarter of 1995 compared to 93.9%, 78.3% and 86.8% for the third, second and
first quarters of 1995, respectively. The Salton Sea Project capacity factor
has decreased in 1995 from 1994 and 1993 due to the scheduled Salton Sea Unit
III overhaul in the second quarter of 1995 and the conversion of that unit to
the pH Mod technology in the fourth quarter of 1995.
Electric sale price per kWh for the Coso Project varies seasonally in
accordance with the rate schedule included in the SO4 agreements. The Coso
Project's average electricity prices per kWh in 1995, 1994 and 1993 were
comprised of (in cents):
<TABLE>
<CAPTION>
ENERGY CAPACITY & BONUS TOTAL
-------- ---------------- -------
<S> <C> <C> <C>
Average fiscal 1995 11.81 1.82 13.63
Average fiscal 1994 10.91 1.90 12.81
Average fiscal 1993 10.11 1.93 12.04
</TABLE>
35
<PAGE>
Electric sale price per kWh for the Partnership Project also varies
seasonally in accordance with the rate schedule included in the SO4
agreements. The Partnership Project's average electricity prices per kWh in
1995, 1994 and 1993 were comprised of (in cents):
<TABLE>
<CAPTION>
ENERGY CAPACITY & BONUS TOTAL
-------- ---------------- -------
<S> <C> <C> <C>
Average fiscal 1995 11.14 2.10 13.24
Average fiscal 1994 10.29 2.16 12.45
Average fiscal 1993 9.70 2.21 11.91
</TABLE>
Electric sale price per kWh for the Salton Sea Project also varies
seasonally in accordance with the rate schedule included in the power
purchase agreements. The Salton Sea Project's average electricity prices per
kWh in 1995, 1994 and 1993 were comprised of (in cents):
<TABLE>
<CAPTION>
ENERGY CAPACITY & BONUS TOTAL
-------- ---------------- -------
<S> <C> <C> <C>
Average fiscal 1995 . 9.50 2.33 11.83
Average fiscal 1994 . 10.07 1.67 11.74
Average fiscal 1993* 9.54 2.59 12.13
</TABLE>
- ------------
* The 1993 data is for the nine months ended December 31, 1993.
The Roosevelt Hot Springs steam field supplied 100% of customer power
plant steam requirements for each of the past three years. Steam sales from
the Roosevelt Hot Springs field were $2,206, $2,185, and $2,198 in 1995,
1994, and 1993, respectively. The Desert Peak power plant operated at or near
its ten net megawatt capacity for each of the past three years. Electric
sales from Desert Peak were $5,115, $5,281 and $5,177 for the years 1995,
1994, and 1993, respectively. Beginning in 1996, the Desert Peak power plant
will receive payments for delivered electricity based on Sierra Pacific Power
Company's short-run Avoided Cost of Energy. The Yuma power plant availability
was effectively 100% during 1995 and delivered 89.2% of its 50 net MW plant
capacity. Electric and steam sales from Yuma were $16,975 in 1995 and $10,082
for approximately seven months in 1994.
Royalty income in 1995 of $19,482 is a result of the acquisition of Magma
which receives royalties from the Partnership Project, East Mesa Project and
the Mammoth Project.
Interest and other income increased in 1995 to $43,611 from $31,292 in
1994 and from $17,194 in 1993. The increase reflects management fee income
received from the Partnership Project partially offset by lower interest
income due to lower cash and investment balances.
The Company's cost per kWh was as follows (in cents):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Plant operations (net of Company's management fees
and Yuma fuel cost) .............................. 2.31 1.82 1.98
General and administration ........................ .78 .82 1.03
Royalties ......................................... .81 .62 .65
Depreciation and amortization ..................... 2.41 1.34 1.39
Interest, less amounts capitalized ................ 3.40 3.33 1.82
------ ------ ------
Total ............................................ 9.71 7.93 6.87
====== ====== ======
</TABLE>
36
<PAGE>
The Company's expenses as a percentage of sales of electricity and steam
were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Plant operations (net of the Company's management
fees and Yuma fuel cost) ........................ 20.6% 18.7% 19.2%
General and administration ....................... 7.0 8.4 10.0
Royalties ........................................ 7.2 6.4 6.3
Depreciation and amortization .................... 21.5 13.7 13.5
Interest, less amounts capitalized ............... 30.4 34.2 17.7
------- ------- -------
Total ........................................... 86.7% 81.4% 66.7%
======= ======= =======
</TABLE>
The Company's expenses increased in 1995 as a general result of the
acquisition of Magma, the greater electricity production of the Coso Project
and the inclusion of the costs from the Yuma plant for an entire year which
operated for only seven months in 1994.
The cost of plant operations increased to $79,294 in 1995 from $33,015 in
1994, an increase of 140.2%. The addition of the Imperial Valley Project
operations and the full year of operations of the Yuma Project (including
fuel purchases) resulted in the additional plant operations costs. Plant
operations costs for the plants the Company owned in 1994, excluding Yuma,
decreased $2,250 or 8.4% in 1995. The cost per kWh excluding Magma and Yuma
fuel costs decreased to 1.61 cents in 1995 from 1.82 cents and 1.98 cents in
1994 and 1993 respectively. The cost of plant operations increased to $33,015
in 1994 from $25,362 in 1993, an increase of 30.2% as a result of the cost of
plant operations at Yuma.
General and administration costs increased to $23,376 in 1995 from $13,012
in 1994, an increase of 79.6%. This increase is a result of the Company's
acquisition of Magma. General and administration costs per kWh for 1995,
1994, and 1993, continued to decrease due to a proportionally greater
increase in electrical production than general and administration costs.
General and administration costs decreased to $13,012 in 1994 compared to
$13,158 in 1993, a 1.1% decrease.
Royalty cost increased to $24,308 in 1995 from $9,888 in 1994, a 145.8%
increase. The increase was due to the addition of the Imperial Valley
Project, increased revenue from the plants the Company owned in 1994 and
scheduled royalty increases associated with such plants. Overall, the royalty
cost per kWh was 0.81 cents in 1995 compared to 0.62 cents in 1994 and 0.65
cents in 1993. Royalty costs increased to $9,888 in 1994 from $8,274 in 1993,
an increase of 19.5% due to higher electrical sales and effective royalty
rate.
Depreciation and amortization increased to $72,249 in 1995 from $21,197 in
1994, a 240.8% increase. The increase was due to depreciation and
amortization from the Imperial Valley Project and amortization of excess of
cost over fair value of net assets acquired in connection with the purchase
of Magma. Depreciation and amortization for the plants the Company owned in
1994 increased to $25,935 in 1995 from $21,197 in 1994, a 22.4% increase.
Depreciation and amortization expense for 1995 was 2.41 cents per kWh
compared to 1.34 cents per kWh in 1994. The cost per kWh excluding Magma was
1.49 cents in 1995. Depreciation and amortization expense increased to
$21,197 in 1994 from $17,812 in 1993 a 19.0% increase. The increase in 1994
was due to the completion of abatement systems and vacuum pumps at the Coso
plants and an increased number of wells.
Interest expense, less amounts capitalized, increased to $102,083 in 1995
from $52,906 in 1994, a 93.0% increase or 3.40 cents per kWh in 1995 compared
to 3.33 cents per kWh in 1994. The 1995 increase was primarily due to the
interest expense on the debt used to finance the acquisition of Magma, the
increase in the original issue discount amortization on the 10 1/4% senior
discount notes issued in March 1994 and interest expense on the convertible
debt, partially offset by the defeasance of the 12% senior notes in March
1994. Net interest expense in 1994 increased due primarily to the Company's
issuance of 10 1/4% senior discount notes in March 1994. Net interest
increased to $52,906 in 1994 from $23,389 in 1993, an increase of 126.2%, or
3.33 cents per kWh in 1994, compared to 1.82 cents per kWh in 1993.
37
<PAGE>
The provision for income taxes increased to $30,631 in 1995 from $17,002
in 1994, and decreased to $17,002 in 1994 from $18,184 in 1993. The effective
tax rate was 31.6%, 30.5% and 29.7% in 1995, 1994, and 1993, respectively.
Income before the provision for income taxes increased to $97,051 in 1995
from $55,836 in 1994, a 73.8% increase. Net income available to common
shareholders increased to $62,335 or $1.25 per common share for the year
ended December 31, 1995 compared to $31,817 or $0.89 per common share in 1994
and $42,544 or $1.11 per common share in 1993. Net income for the year ended
December 31, 1994 was reduced by $2,007 or $0.06 per share due to an
extraordinary item. Net income for the year ended December 31, 1993 was
increased by $4,100 or $0.11 per share due to a cumulative effect of a change
in accounting principle.
Earnings per share in 1995, 1994, and 1993 were favorably affected by the
Company's stock repurchase plan.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and investments were $253,661 at June 30, 1996 as
compared to $72,114 at December 31, 1995. In addition, the Company's share of
the Coso Project cash and investments retained in project control accounts at
June 30, 1996 was $55,828. At December 31, 1995 the Company's share of the
Coso Project and the Partnership Project cash and investments retained in
project control accounts was $77,590. 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 Project 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 $79,237 and $149,227 at June 30, 1996
and December 31, 1995, respectively. The restricted cash balance as of June
30, 1996 is comprised primarily of amounts deposited in restricted accounts
from which the Company will source its equity contribution requirements
relating to the Upper Mahiao and Mahanagdong projects, fund certain capital
improvements at the Imperial Valley Project and the Company's proportionate
share of Coso Project cash reserves for the debt service reserve funds. Also,
the Company had $3,295 and $34,190 of short term investments as of June 30,
1996 and December 31, 1995, respectively.
Accounts receivable normally represents two months of revenues, and
fluctuates with both production and price per kWh.
The balance due from/to the Joint Ventures relates to operations,
maintenance, and management fees for managing the Coso Project and the
Partnership Project as well as advances and deferred revenue on the
international projects. This amount fluctuates based on the timing of
billings and incurrence of costs.
The Company repurchased 173 and 102 common shares for aggregate amounts of
$3,221 and $1,590 during the first six months of 1996 and 1995, respectively.
At June 30, 1996 the Company held 3 shares of its common stock at a cost of
$61 to provide shares for issuance under the Company's employee stock option
and share purchase plan and other outstanding convertible securities. The
repurchase plan attempts to minimize the dilutive effect of the additional
shares issued under these plans.
On July 8, 1996 the Company obtained a $100,000 three year revolving
credit facility of which the Company had drawn $35,000 as of August 31, 1996.
The facility is unsecured and is available to fund general operating capital
requirements and finance future business opportunities.
On June 20, 1996 the Salton Sea Funding Corporation, a wholly owned
indirect subsidiary of the Company (the "Funding Corporation"), completed the
sale to institutional investors of $135,000 aggregate amount of Senior
Secured Series D Notes and Series E Bonds which are nonrecourse to the
Company.
The Funding Corporation Series D Notes and Series E Bonds which mature in
May 2000 and May 2011 respectively, bear an interest rate of 7.02% and 8.30%
respectively.
38
<PAGE>
The proceeds of the Initial Offering were used by Funding Corporation to
refinance $96,584 of existing project level indebtedness at the Partnership
Project, to fund a portion of the Partnership Interest Acquisition and for
certain capital improvements at the Imperial Valley.
On April 12, 1996, CalEnergy Capital Trust, a special purpose Delaware
business trust organized by the Company (the "Trust") completed a private
placement (with certain shelf registration rights) of $100,000 of convertible
preferred securities ("TIDES"). In addition, an option to purchase an
additional 78.6 TIDES, or $3,930, was exercised by the underwriters to cover
over-allotments.
The Trust has issued 2,078.6 of 6 1/4% TIDES with a liquidation preference
of fifty dollars each. The Company owns all of the common securities of the
Trust. The TIDES and the common securities represent undivided beneficial
ownership interests in the Trust. The assets of the Trust consist solely of
the Company's 6 1/4% Convertible Junior Subordinated Debentures due 2016 in
an outstanding aggregate principal amount of $103,930 ("Junior Debentures").
Each TIDES will be convertible at the option of the holder thereof at any
time into 1.6728 shares of CalEnergy Common Stock (equivalent to a conversion
price of $29.89 per share of the Company's Common Stock), subject to
customary anti-dilution adjustments. Until converted into the Company's
Common Stock, the TIDES will have no voting rights with respect to the
Company and, except under certain limited circumstances, will have no voting
rights with respect to the Trust. Distributions on the TIDES (and Junior
Debentures) are cumulative, accrue from the date of initial issuance and are
payable quarterly in arrears, commencing June 15, 1996. The Junior Debentures
are subordinated in right of payment to all senior indebtedness of the
Company and the Junior Debentures are subject to certain covenants, events of
default and optional and mandatory redemption provisions, all as described in
the Junior Debenture Indenture.
In 1995, the Company commenced development of and has obtained financing
for the Casecnan Project, a multipurpose irrigation and hydroelectric power
facility with a rated capacity of approximately 150 net MW located on the
island of Luzon in the Philippines. The total project cost for the facility
is approximately $495,000. The current capital structure consists of term
loans of $371,500 and $123,836 in equity contributions. The Company's portion
of the contributed equity is approximately $61,918. The Overseas Private
Investment Corporation ("OPIC") is providing political risk insurance on the
equity investment.
The project is structured as a 20 year build-own-operate-transfer
("BOOT"), in which the Company's indirect subsidiary CE Casecnan Water and
Energy Company, Inc., a Philippine corporation, will be responsible as the
BOOT operator. The fixed price, date-certain turnkey contractor is Hanbo
Corporation of South Korea.
In 1996, the Company signed agreements with Broken Hill Proprietary
Company Limited ("BHP"), an international mining company, which provides,
among other things, for the Company, at its option, to deliver power for the
mineral extraction process. The initial phase of the project would require at
least 15 MW. A pilot plant has successfully produced zinc at the Company's
Imperial Valley Project. The mining company has completed construction of its
larger demonstration plant. If successfully developed, the mineral extraction
process will provide an environmentally compatible and low cost minerals
recovery methodology. The project is subject to a number of uncertainties and
implementation cannot be assured.
In April 1994, the Company closed the financing for the 119 net MW 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 lenders is providing the construction financing.
The Export-Import Bank of the U.S. ("ExIm 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 June 30, 1996, draws on the
construction loan totalled $147,129, equity investments made by subsidiaries
of the Company totalled $56,000 and advances by subsidiaries of the Company
totalled $3,355. These advances will be repaid by draws on the construction
loan. OPIC is providing political risk insurance on the equity investment by
the Company in this project. The Upper Mahiao project commenced construction
in April
39
<PAGE>
of 1994, was deemed complete in June, 1996 and began receiving capacity
payments pursuant to the Upper Mahiao Energy Conversion Agreement ("ECA") in
July of 1996. The project is structured as a ten year BOOT, in which the
Company's subsidiary CE Cebu Geothermal Power Company, Inc. ("CE Cebu"), the
project company, was responsible for implementing construction of the
geothermal power plant and, as owner, for providing operations and
maintenance during the ten year BOOT period. The electricity generated by the
Upper Mahiao geothermal power plant will be sold to the PNOC--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.
PNOC-EDC is obligated to pay for 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 pays 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 are denominated in U.S.
dollars, or computed in U.S. dollars and paid in Philippine pesos at the
then-current exchange rate, except for the Energy Fee, which will be used to
pay Philippine peso-denominated expenses. Significant portions of the
Capacity Fee and Energy Fee are 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.
In August 1994, the Company closed the financing for the 165 net MW
Mahanagdong project located in the Philippines. The total project cost for
the facility is approximately $320,000. The capital structure consists of a
term loan of $240,000 and approximately $80,000 in equity contributions. OPIC
and a consortium of international commercial lenders is providing the
construction debt financing facility. The debt provided by the commercial
lenders is insured against political risk by the Ex-Im Bank. Ten year term
debt financing (which will replace the construction debt) will be provided by
Ex-Im Bank and by OPIC. The Mahanagdong project has commenced construction
and as of June 30, 1996, the Company's proportionate share of draws on the
construction loan totalled $65,005, equity investments made by a subsidiary
of the Company totalled $31,580 and advances by subsidiaries of the Company
totalled $2,566. OPIC is providing political risk insurance on the equity.
The Mahanagdong project is targeted for service in July, 1997. As with the
Upper Mahiao project, the Mahanagdong project is structured as a ten year
BOOT, 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 BOOT period. 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 electricity generated by the Mahanagdong project will be sold to
PNOC-EDC, on a "take or pay" basis, which is also responsible for supplying
the facility with the geothermal steam. The terms of the Mahanagdong ECA are
substantially similar to those of the Upper Mahiao ECA. All of PNOC-EDC's
obligations under the Mahanagdong ECA are supported by the Government of the
Philippines through a performance undertaking. The Capacity Fees are expected
to be approximately 97% of total revenues at the design capacity levels and
the Energy Fees are expected to be approximately 3% of such total revenues.
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 CE
Holt Co., a wholly owned subsidiary of the Company (with a 20% interest).
In December 1994, financing was closed and construction commenced on the
Malitbog Project, a 216 net MW geothermal project, located on the island of
Leyte. The Malitbog Project will be built, owned and
40
<PAGE>
operated by Visayas Geothermal Power Company ("VGPC"), a Philippine general
partnership that is wholly owned, indirectly, by the Company. 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
the National Power Corporation of the Philippines.
The Malitbog Project has a total project cost of approximately $280,000,
including interest during construction and project contingency costs. A
consortium of international lenders and OPIC have provided a total of
$210,000 of construction and term loan facilities, the $135 million
international commercial bank portion of which is supported by political risk
insurance from OPIC. As of June 30, 1996, draws on the construction loan
totalled $93,736, the equity investments made by subsidiaries of the Company
totalled $70,000 and advances by subsidiaries of the Company totalled $5,069.
The advances will be repaid by draws on the construction loan. The Company's
equity contribution to VGPC of $70,000 is covered by political risk insurance
from OPIC and the Multilateral Investment Guarantee Agency ("MIGA"). As with
the Upper Mahiao project, the Malitbog project is structured as a ten year
BOOT, 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 BOOT period. 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
Malitbog Project is being constructed by Sumitomo Corporation pursuant to a
fixed-price, date-certain, turnkey supply and construction contract. Unit 1
was deemed complete in late July 1996 and commercial operation of Unit 2 and
Unit 3 is scheduled to commence in July 1997.
Magma is seeking new long-term final SO4 power purchase agreements in
southern California through the bidding process adopted by the CPUC under its
1992 Biennial Resource Plan Update ("BRPU"). In its 1992 BRPU, the CPUC cited
the need for an additional 9,600 MW of power production through 1999 among
California's three investor-owned utilities, Edison, 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 Edison (69 net MW) and SDG&E (94 net MW), with in-service dates in 1997
and 1998. However, the IOUs have to date challenged and 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.
In light of the regulatory uncertainty concerning the BRPU awards
resulting from such IOU challenges, in March 1995 Magma entered into a
settlement agreement with Edison relating to the 69 net MW of capacity
awarded to Magma as a winning bidder in the BRPU solicitation. The agreement
(which is subject to CPUC approval) provides for three lump sum termination
payments in lieu of signing a power sales contract with Edison for the 69 net
MW of BRPU capacity. The amount of the termination payments is subject to a
confidentiality agreement but provides Edison's ratepayers with very
significant savings when compared to payments that would otherwise be made to
Magma over the life of the proposed BRPU power sales contract The agreement
also provides Edison with an option, which can be exercised at any time prior
to February 1, 2002, to negotiate a power sales contract for 69 net MW of
geothermal capacity and energy on commercially reasonable prices and terms,
without giving effect to termination payments previously paid.
The Company is actively seeking to develop, construct, own and operate new
power projects and infrastructure 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 financing related costs. 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, financing or construction 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,
41
<PAGE>
construction 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.
Inflation has not had a substantial impact on the Company's operating
revenues and costs; energy payments for electricity for the Coso Project,
Partnership Project, Salton Sea II and Salton Sea III will continue to be
based upon scheduled rates and are not adjusted for inflation through the
initial ten-year period of each power purchase agreement.
42
<PAGE>
THE BUSINESS OF THE COMPANY
CalEnergy Company, Inc., formerly known as California Energy Company, Inc.
(the "Company"), was founded in 1971 and is primarily engaged in the
development and operation of environmentally responsible independent power
production facilities worldwide utilizing geothermal resources, natural gas
and hydroelectric or other energy sources, such as oil and coal.
The Company is the largest independent geothermal power producer in the
world (on the basis of the Company's estimate of the aggregate megawatts
("MW") of electric generating capacity in operation and under construction).
The Company has an aggregate net legal ownership interest of 916 MW of
electric generating capacity in power production facilities in the United
States having an aggregate net capacity of 1,135 MW (of which 570 MW
constitute natural gas fired plants, consisting of the Yuma plant and the
Saranac, Power Resources and NorCon plants owned by the Company's recently
acquired subsidiary, Falcon). All of these facilities are managed and
operated by the Company. The Company also has an aggregate net legal
ownership of 191 MW of electric generating capacity in two geothermal power
production facilities in operation in the Philippines having an aggregate net
capacity of 191 MW. Both of these facilities are managed and operated by the
Company.
With respect to projects that are financed and under construction, the
Company has an aggregate net ownership interest of 270 MW of electric
generating capacity in two geothermal power projects and one hydroelectric
project in the Philippines having an aggregate net capacity of 459 MW. The
Company is also currently constructing a 55 net MW geothermal project in
Indonesia, in which the Company has an aggregate net ownership interest of 26
MW of electric generating capacity, as the first phase of the Company's
planned Indonesian geothermal project development.
The Company is also currently developing seven additional projects with
executed or awarded power sales contracts in the Philippines, Indonesia and
the United States. The Company is expected to have an approximate net
ownership interest of 760 MW in these development projects (which represent
an aggregate net capacity of 1,423 MW of additional potential electric
generating capacity). Substantial contingencies exist with respect to
development projects, including, without limitation, the need to obtain
financing, permits and licenses and the satisfactory completion of
construction.
IMPERIAL VALLEY PARTNERSHIP PROJECT ACQUISITION
On April 17, 1996, the Company completed the acquisition from Edison
Mission Energy, a unit of Edison International, of the remaining 50%
partnership interests not previously owned by it in the four Partnership
Projects located in Imperial Valley, California. The purchase price for the
acquisition of such interests in the four projects, Vulcan, Hoch (Del Ranch),
Leathers and Elmore, was $70.0 million. The Company operates the facilities
and sells power to Southern California Edison ("Edison") under long-term SO4
Agreements. This acquisition resulted in the Company owning an additional 74
net MW of generating capacity and provides the Company with the opportunity
to achieve operational efficiencies associated with owning 100% of the
Imperial Valley facilities.
FALCON ACQUISITION
On August 7, 1996, the Company completed the acquisition of Falcon,
including its ownership interest in three operating gas-fired cogeneration
plants located in New York, Texas and Pennsylvania and a related natural gas
pipeline, also located in New York, for a cash purchase price of $226
million. The three cogeneration facilities total 520 MW in capacity and sell
power under long-term power purchase agreements.
43
<PAGE>
The Falcon projects acquired were as follows:
<TABLE>
<CAPTION>
COMPANY'S COMPANY'S PPA POWER STEAM
MW OWNERSHIP(2) MW(2) EXPIRATION PURCHASER HOSTS
----- ------------ ----------- ------------ ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Saranac(1) ...... 240 75% 180 6/2009 NYSEG Georgia- Pacific
and Tenneco
Power Resources 200 100% 200 9/2003 TUEC Fina Oil & Chemical
Co.
NorCon .......... 80 80% 64 12/2017 NIMO Welch Foods
----- -----------
Total .......... 520 444
===== ===========
</TABLE>
- ------------
(1) In addition, the Company acquired North Country Gas Pipeline.
(2) Net MW owned indicates current legal ownership, but, in some cases, does
not reflect the current allocation of partnership distributions.
The Company believes the Falcon acquisition provides it with the following
benefits:
o Long-term power sales and steam sales contracts that provide an
important financial contribution to cash flow and earnings;
o Highly efficient gas-fired operating facilities which, upon expiration
of their respective power sales contracts, will be strategically
located for future merchant plant sales in areas which have good
access to fuel supply and transportation and favorable transmission
access and proximity to electric load centers;
o Enhanced fuel diversification and creation of a gas-fired operating
business unit;
o Increased customer diversification;
o Enhanced ability to compete as a low-cost generator throughout
industry deregulation; and
o Increased size and economies of scale which will permit the Company to
more effectively compete as the electric industry restructures and
consolidates.
RECENT DEVELOPMENT
On October 28, 1996, the Company announced that CE Electric UK plc, which
is indirectly owned on a 70% basis by the Company and a 30% basis by PKS, has
offered to pay approximately $1.225 billion cash in an unsolicited offer to
acquire all of the ordinary shares and preference shares of Northern Electric
plc ("Northern"), a regional electricity distribution and supply company in
the United Kingdom. Northern is one of the twelve UK regional electricity
companies which came into existence as a result of the restructuring and
subsequent privatization of the UK electricity industry in 1990. Its main
business is the distribution and supply of electricity to approximately 1.5
million customers in the North East of England. For its fiscal year ended
March 31, 1996, Northern had a profit before tax of approximately $241
million on revenues of approximately $1.44 billion. The Northern offer is not
being made, directly or indirectly, in or into the United States or by use of
the mails or any means or instrumentality (including, without limitation,
facsimile transmission, telex and telephone) of interstate or foreign
commerce of, or any facilities of a national securities exchange of, the
United States and the Northern offer cannot be accepted by any such use,
means, instrumentality or facility or from within the United States. As of
November 8, 1996, CE Electric UK plc owned approximately 29.9 million
ordinary shares of Northern, representing approximately 29.5% of the issued
ordinary share capital of Northern.
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 and privatization policies that
encourage the development of independent power generation.
44
<PAGE>
In the United States, the independent power industry expanded rapidly in
the 1980s, 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 the installation
of approximately 30,000 MW of capacity, or 50%, of the U.S. electric
generation capacity which has been placed in service since 1988.
As the size of the United States independent power market has increased,
available domestic power capacity and competition in the industry have also
significantly increased. Over the past decade, obtaining a power sales
contract from a United States 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. During 1995 and 1996, many states began to
accelerate the movement toward more competition in the electric power market
and extensive federal and state legislative and regulatory reviews are
underway in an effort to further such competition. In addition, recent
deregulation and industry restructuring activity may cause certain utilities
or other contract parties 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. On September 1, 1996, the
California legislature adopted an industry restructuring bill that would
provide for a phased-in competitive power generation industry, with a power
pool and independent system operator, and also would permit direct access to
generation for all power purchasers outside the power exchange under certain
circumstances. Under the bill, consistent with the requirements of PURPA,
existing qualifying facilities power sales agreements would be honored. The
Company cannot predict the final form or timing of the proposed industry
restructuring or the result on its operations.
Large amounts of new electric power generating capacity are required in
developing countries. The movement toward privatization in some developing
countries has created significant new markets outside the United States. In
1990, the World Bank estimated that developing countries will need
approximately 380,000 MW of new power generating capacity through the end of
the decade. The need for such rapid expansion has caused many countries to
select private power development as their only practical alternative and to
restructure their legislative and regulatory systems to facilitate such
development. The Company believes that this significant need for power has
created strong local support for private power 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.
The international independent 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 participate in the domestic market.
STRATEGY
Overall, the Company's strategy is to continue to engage in new project
development as well as opportunistically engage in company and project
acquisitions which diversify the Company's power generation technologies and
facility geographic locations and enhance its competitive capabilities. The
Company believes that increased domestic deregulation and the resulting
industry consolidation will provide attractive investment and acquisition
opportunities. The Falcon acquisition was implemented in furtherance of this
strategy.
Domestically, the Company is focusing on market opportunities in which it
believes it has relative competitive advantages due to its geotechnical,
project management, project financing and operating expertise. In addition,
the Company expects to continue diversification into other environmentally
responsible sources of energy primarily through selected acquisitions,
including acquisitions of partially developed or existing power generating
projects and contracts. The Company is also evaluating the potential impacts
and opportunities of direct access and retail wheeling.
45
<PAGE>
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 financed and has under
construction three projects representing an aggregate of 270 MW of net
ownership of electric generating capacity in the Philippines and is currently
constructing a 55 net MW project in Indonesia in which the Company has a net
ownership interest of 26 MW of electric generating capacity and which
constitutes the first phase of a planned Indonesia geothermal development of
approximately 1,000 MW under contract. In addition, the Company is currently
pursuing a number of other electric power project opportunities in countries
including the Philippines and Indonesia. The Company believes that these
countries are well suited for the Company to develop, finance and operate
power projects successfully because of their 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 from a country,
fuel source and customer perspective, 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
sales contracts contain provisions which index the Company's revenues 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 government agencies such as the OPIC or similar multilateral
agencies or commercial sources 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,
export credit agencies, international commercial financing and political risk
insurance are generally 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. The Company and PKS
each will provide 50% of the equity required for financing a project
developed by the joint venture, and the Company will operate and manage such
project. The agreement creates a joint development structure under which, on
a project by project basis, the Company will be the development manager,
managing partner and/or project operator, an equal equity participant with
PKS and a preferred participant in the construction consortium and PKS will
be an equal equity participant and the preferred turnkey construction
contractor. The joint venture agreement may be terminated by either party on
15 days written notice, provided that such termination cannot affect the
pre-existing contractual obligations of either party.
46
<PAGE>
In order to augment its technical capabilities, in 1993 the Company
acquired CE Holt Company, formerly known as The Ben Holt Co. ("CE Holt"), 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. CE Holt and its affiliates
are joint venture participants with PKS affiliates in the EPC consortium for
the construction of the Mahanagdong project in the Philippines and the Dieng
project in Indonesia and it is anticipated that CE Holt may enter into
similar arrangements with PKS affiliates for the construction of certain
additional projects in 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 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 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.
The financing and development of projects outside the United States entail
significant political and financial risks (including, without limitation,
uncertainties associated with first-time privatization efforts in the
countries involved, currency exchange rate fluctuations, currency
repatriation restrictions, political instability, civil unrest and
expropriation) and other structuring issues that have the potential to cause
substantial delays in respect of or material impairment of the value of the
project being developed, which 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.
GEOTHERMAL ENERGY
Geothermal energy is a clean, renewable and generally sustainable energy
source that, because it does not utilize combustion in the production of
electricity, 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 toward the
surface of the earth where it, if geological conditions are suitable for its
commercial extraction, 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. 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.
47
<PAGE>
The generation of electric power from geothermal resources has certain
advantages when compared to other methods of electric power generation.
Geothermal energy facilities produce significantly less emissions than fossil
fuel power plants. Geothermal energy facilities typically have higher capital
costs due to the front end cost of reservoir development but tend to have
significantly lower variable costs than fossil fuel based power plants
because fuel does not need to be separately purchased. 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 and are eligible to be
qualifying facilities ("QFs") under PURPA, which provides for certain
beneficial federal regulatory treatment.
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 resources
usually occur in areas of high seismic activity. 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 geothermal resource, or a decline in such quality,
could have a material adverse effect on the Company's results of operations.
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 COMPANY'S PROJECTS
The Company has net ownership interests of an aggregate of (i) 1,107 MW in
19 projects in operation representing an aggregate net capacity of 1,326 MW
of electric generating capacity, (ii) 296 MW in four projects under
construction representing an aggregate net capacity of 514 MW of electric
generating capacity and (iii) 760 MW in seven projects in development stages
with signed power sales agreements or under award representing an aggregate
net capacity of 1,423 MW of electric generating capacity. The following table
sets out the Company's various projects in operation, under construction and
in development pursuant to signed power sales agreements or awarded mandates.
48
<PAGE>
INTERNATIONAL PROJECTS
PROJECTS IN OPERATION
<TABLE>
<CAPTION>
FACILITY NET NET OWNER PROJECT
FUEL CAPACITY (IN INTEREST (IN COMMERCIAL CONTRACT
PROJECT SOURCE MW)(1) MW) LOCATION OPERATION DATE EXPIRATION(2)
- -------------------- ---------- -------------- ------------ --------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
UPPER MAHIAO(8) .... GEO 119 119 LEYTE, THE 1996 CO+10
PHILIPPINES
MALITBOG-UNIT I .... GEO 72 72 LEYTE, THE 1996 CO+10
--- --- PHILIPPINES
TOTAL IN OPERATION . 191 191
============== ============
</TABLE>
[TABLE RESTUBBED FROM ABOVE]
<TABLE>
<CAPTION>
CONTRACT POWER
TYPE PURCHASER(3)
------------ ----------------
<S> <C> <C>
UPPER MAHIAO(8) .... BUILD, PNOC-
OWN TRANSFER EDC (GOP)(4)
MALITBOG-UNIT I .... BUILD, PNOC-
OWN EDC
TRANSFER (GOP)(4)
TOTAL IN OPERATION .
</TABLE>
PROJECTS IN CONSTRUCTION
<TABLE>
<CAPTION>
FACILITY NET NET OWNER PROJECT
FUEL CAPACITY (IN INTEREST (IN COMMERCIAL CONTRACT
PROJECT SOURCE MW)(1) MW) LOCATION OPERATION DATE EXPIRATION(2)
- -------------------- ---------- -------------- ------------ --------------- -------------- -----------------
<S> <C>
MAHANAGDONG(5) ...... GEO 165 74 LEYTE, THE 1997 CO+10
PHILIPPINES
MALITBOG-UNIT II AND
III ................. GEO 144 144 LEYTE, THE 1996-1997 CO+10
PHILIPPINES
CASECNAN(5)(6) ...... HYDRO 150 52 LUZON, THE 1999 CO+20
PHILIPPINES
DIENG UNIT I(5) .... GEO 55 26 CENTRAL 1997 CO+30
--- --- JAVA,
INDONESIA
TOTAL IN OPERATION . 514 296
============== ============
</TABLE>
[TABLE RESTUBBED FROM ABOVE]
<TABLE>
<CAPTION>
CONTRACT POWER
TYPE PURCHASER(3)
------------ ----------------
<S> <C> <C>
MAHANAGDONG(5) ......BUILD, PNOC-
OWN TRANSFER EDC (GOP)(4)
MALITBOG-UNIT II AND
III .................BUILD, PNOC-
OWN TRANSFER EDC (GOP)(4)
CASECNAN(5)(6) ......BUILD, NIA
OWN TRANSFER (GOP)(4)
DIENG UNIT I(5) ....BUILD, PLN
OWN (GOI)
TRANSFER
</TABLE>
49
<PAGE>
PROJECTS WITH SIGNED POWER SALES CONTRACTS OR AWARDED DEVELOPMENT RIGHTS
<TABLE>
<CAPTION>
FACILITY PROJECT
NET NET OWNER COMMERCIAL
FUEL CAPACITY INTEREST OPERATION CONTRACT CONTRACT POWER
PROJECT SOURCE (IN MW)(1) (IN MW) LOCATION DATE EXPIRATION(2) TYPE PURCHASER(3)
- ------------------- -------- ---------- ---------- ------------- ------------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dieng(5)(7) ........ Geo 345 162 Central 1998-1999 CO+30 Build, PLN
Java, Own (GOI)
Indonesia Transfer
Patuha(5)(7) ....... Geo 400 200 Western 1998-1999 CO+30 Build, PLN
Java, Own (GOI)
Indonesia Transfer
Bali(5)(7) ......... Geo 400 120 Bali, 1998-1999 CO+30 Build, PLN
Indonesia Own (GOI)
Transfer
Alto Peak .......... Geo 70 70 Leyte, the 1998 CO+10 Build, PNOC-
---------- ----------
Philippines Own EDC
Transfer (GOP)(4)
Total Contracted/
Awarded ............ 1,215 552
========== ==========
Total International
Projects ........... 1,920 1,039
========== ==========
</TABLE>
- ------------
(1) Actual MW may vary depending on operating and reservoir conditions and
plant design. Facility Net Capacity (in MW) represents facility gross
capacity (in MW) less parasitic load. Parasitic load is electrical output
used by the facility and not made available for sale to utilities or other
outside purchasers. Net MW owned indicates current legal ownership, but, in
some cases, does not reflect the current allocation of partnership
distributions.
(2) Commercial Operation (CO) plus number of years.
(3) PNOC-Energy Development Corporation (PNOC-EDC); Government of the
Philippines (GOP); P.T. PLN (Persero) (PLN); Government of Indonesia (GOI);
and Philippine National Irrigation Administration (NIA).
(4) Government of the Philippines undertaking supports PNOC-EDC's and NIA's
respective obligations.
(5) PKS has elected to exercise its ownership option pursuant to its joint
venture agreement with the Company.
(6) NIA also purchases water from this facility.
(7) Significant contingencies exist in respect of awards, including without
limitation, the need to obtain financing, permits and licenses, and the
completion of construction.
(8) Construction of these facilities has been completed and, accordingly, these
facilities have been "deemed complete" by PNOC-EDC and are currently
receiving the full capacity payments under the "take or pay" provisions of
their contracts with PNOC-EDC, pending NPC making available to these projects
a full capacity transmission line. In the interim (until a full capacity
transmission line is in place), the Upper Mahiao project is currently
supplying up to 40 MW of electric generation at PNOC's request on a daily
dispatch basis.
50
<PAGE>
DOMESTIC PROJECTS
PROJECTS IN OPERATION
<TABLE>
<CAPTION>
NET PROJECT
FACILITY NET OWNERSHIP COMMERCIAL
FUEL CAPACITY (IN INTEREST OPERATION
PROJECT SOURCE MW) (1)(2)(3) (IN MW) LOCATION DATE
- ------------------- -------- -------------- ----------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Navy I ............. Geo 88 41 China Lake, CA 8/1987
BLM ................ Geo 88 42 China Lake, CA 3/1989
Navy II ............ Geo 88 44 China Lake, CA 1/1990
Vulcan ............. Geo 34 34 Imperial Valley, CA 2/1986
Hoch (Del Ranch) .. Geo 38 38 Imperial Valley, CA 1/1989
Elmore ............. Geo 38 38 Imperial Valley, CA 1/1989
Leathers ........... Geo 38 38 Imperial Valley, CA 1/1990
Salton Sea I ....... Geo 10 10 Imperial Valley, CA 7/1987
Salton Sea II ...... Geo 20 20 Imperial Valley, CA 4/1990
Salton Sea III ..... Geo 50 50 Imperial Valley, CA 2/1989
Salton Sea IV ...... Geo 40 40 Imperial Valley, CA 6/1996
Saranac ............ Gas 240 180 Plattsburgh, NY 6/1994
Power Resources ... Gas 200 200 Big Spring, TX 6/1988
NorCon ............. Gas 80 64 Erie, PA 12/1992
Yuma Cogen. ........ Gas 50 50 Yuma, AZ 5/1994
Roosevelt Hot
Springs(9) ........ Geo 23 17 Milford, UT 5/1984
Desert Peak ........ Geo 10 10 Desert Peak, NV 12/1985
-------------- -----------
Total in Operation 1,135 916
============== ===========
</TABLE>
[TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
CONTRACT POWER
EXPIRATION CONTRACT TYPE PURCHASER(4)
------------ -------------- ------------
<S> <C> <C> <C>
Navy I ............. 8/2011 SO4 Edison
BLM ................ 3/2019 SO4 Edison
Navy II ............ 1/2010 SO4 Edison
Vulcan ............. 2/2016 SO4 Edison
Hoch (Del Ranch) .. 12/2018 SO4 Edison
Elmore ............. 12/2018 SO4 Edison
Leathers ........... 12/2019 SO4 Edison
Salton Sea I ....... 6/2017 Negot. Edison
Salton Sea II ...... 4/2020 SO4 Edison
Salton Sea III ..... 2/2019 SO4 Edison
Salton Sea IV ...... CO+30 Negot. Edison
Saranac ............ 6/2009 Negot. NYSEG
Power Resources ... 9/2003 Negot. TUEC
NorCon ............. 12/2017 Negot. NIMO
Yuma Cogen. ........ 5/2024 Negot. SDG&E
Roosevelt Hot
Springs(9) ........ 1/2021 Gathered Steam UP&L
Desert Peak ........ Not Fixed Negot. SPPC
</TABLE>
PROJECTS IN CONSTRUCTION
None
PROJECTS WITH SIGNED POWER SALES CONTRACTS OR AWARDED DEVELOPMENT RIGHTS
<TABLE>
<CAPTION>
NET PROJECT
FACILITY NET OWNERSHIP COMMERCIAL
FUEL CAPACITY (IN INTEREST OPERATION
PROJECT SOURCE MW) (1)(2)(3) (IN MW) LOCATION DATE
- ------------------ -------- -------------- ----------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Salton Sea Mineral
Extraction(7)(9) Geo 15 15 Imperial Valley, CA TBD
Newberry/Glass
Mountain ......... Geo 30 30 OR/CA 1997/1998
BRPU(5) ........... Geo 163 163 Imperial Valley, CA TBD
-------------- -----------
Total Contracted/
Awarded .......... 208 208
-------------- -----------
Total Domestic
Projects ......... 1,343 1,124
-------------- -----------
Total Projects ... 3,263 2,163
============== ===========
</TABLE>
<TABLE>
<CAPTION>
CONTRACT CONTRACT POWER
EXPIRATION TYPE PURCHASER(4)
------------ ---------- ------------
<S> <C> <C>
Salton Sea Mineral
Extraction(7)(9) Negot. BHP
Newberry/Glass
Mountain ......... CO+50 Negot. BPA/EWEB
BRPU(5) ........... TBD FS04 Edison
</TABLE>
- ------------
(1) Excludes royalty income received by Magma from the Mammoth and East Mesa
plants.
(2) Actual MW may vary depending on operating and reservoir conditions and
plant design. Facility Net Capacity (in MW) for projects in operation
represents gross electric output of the facility less the parasitic load.
Parasitic load is electrical output used by the facility and not made
available for sale to utilities or other outside purchasers. Net MW owned
indicates current legal ownership, but, in some cases, does not reflect the
current allocation of partnership distributions.
51
<PAGE>
(3) With respect to the Vulcan, Hoch (Del Ranch), Elmore, Leathers, Salton Sea
I, Salton Sea II and Salton Sea III Projects, this represents contract
nameplate.
(4) Southern California Edison Company (Edison); San Diego Gas & Electric
Company (SDG&E); Utah Power & Light Company (UP&L); Sierra Pacific Power
Company (SPPC); Bonneville Power Administration (BPA); Eugene Water and
Electric Board (EWEB); Broken Hill Proprietary Limited ("BHP"); New York
State Electric & Gas Corporation (NYSEG); Texas Utilities Electric Company
(TUEC); and Niagara Mohawk Power Corporation (NIMO).
(5) Edison and SDG&E are currently challenging the BRPU award; accordingly, no
power sales contracts are currently signed. Magma has negotiated a buyout and
option agreement relating to the Edison BRPU award (69 MW) which is subject
to a confidentiality agreement and to CPUC approval and is currently
negotiating a buyout agreement with SDG&E.
(6) Commercial Operation (CO) plus number of years.
(7) Actual MW may vary depending on operating and reservoir conditions and
final plant design. Significant contingencies exist in respect of awards,
including without limitation, the need to obtain financing, permits and
licenses, and the completion of construction.
(8) Represents the electrical equivalent of delivered steam.
(9) In 1996, the Company entered into an agreement with BHP, an international
mining company, with respect to minerals extraction which provides the
Company the right to deliver the power needs for the mineral extraction
facilities planned to be constructed. The MOU contemplates that the mining
company would contribute all capital required to construct the extraction
facilities. The Company would receive a sale price for the minerals extracted
from the geothermal brine. The international mining company has successfully
completed and commenced operation of a small scale pilot minerals extraction
facility to extract zinc of a commercial quality and in commercial
quantities. Accordingly, the mining company is completing a demonstration
project and plans to construct extraction facilities at the Salton Sea for
various minerals as commercial viability is demonstrated.
52
<PAGE>
INTERNATIONAL PROJECTS
PROJECTS IN OPERATION OR CONSTRUCTION
The Company has two Philippines power projects in operation: the Upper
Mahiao geothermal project (119 net MW) and the Malitbog Unit I geothermal
project (72 net MW). Both of these projects recently achieved "deemed
completion" status under their contracts and are receiving the full capacity
payments under their "take or pay" provisions pending completion by NPC of a
full capacity transmission line. Currently, the Upper Mahiao plant is
providing up to 40 MW (the capacity of the interim transmission line) to
PNOC-EDC on a daily dispatch basis.
The Company has four international power projects currently under
construction, which are located in the Philippines and Indonesia. These
projects total 514 net MW of capacity, consisting of three such projects in
the Philippines, the Mahanagdong geothermal project (165 net MW), the
Malitbog geothermal project (144 net MW) and the Casecnan combined irrigation
and hydroelectric project (150 net MW), and Dieng Unit I, a 55 net MW
geothermal project in Indonesia in which the Company has an aggregate net
ownership interest of 26 MW of electric generating capacity. Dieng Unit I
constitutes the first phase of a planned development of approximately 1,000
MW under award in Indonesia.
THE PHILIPPINES. According to the 1995 Power Development Program
(1995-2005) (the "PDP") of NPC, industrial growth, a rising standard of
living and an expanding power distribution network have resulted in increased
demand for electrical power in the Philippines by an average of 6% per year
since 1987. NPC has projected that over the next 10 years the need for
additional generating capacity in the Philippines will exceed 14,000 MW.
The PDP proposes to meet this demand by increasing the participation of
the private sector in power generation to 32% in 2000, and to 61% in 2005,
through direct sales to utilities by independent power producers ("IPPs") and
the use of BOOT projects. NPC also will offer existing power plants to the
private sector through rehabilitate-operate-maintain and
rehabilitate-operate-lease arrangements. In addition, the Department of
Energy of the Philippines ("DOE"), which was created in part to deregulate
the energy sector and privatize government energy agencies, has submitted to
the Philippine Congress a plan to further restructure and liberalize the
electrical power market, including separating the generating and transmission
functions of the NPC and introducing retail wheeling. The government entities
that will lead implementation of the restructuring will be DOE, NPC and the
Energy Regulatory Board ("ERB"), the agency that regulates retail prices of
electricity and petroleum projects.
Demand growth is expected to increase as industrialization continues,
living standards rise and the power distribution network expands. According
to the PDP, for the period 1996 to 2000, projected peak power demand is
estimated to increase by approximately 60%, 64%, and 90% for Luzon, the
Visayas, and Mindanao, respectively. For the country, total projected peak
power is estimated to increase by 3,826 MW or 65% from 1996 to 2000. For the
period 2001 to 2005, projected peak power is estimated to increase by
approximately 50%, 43%, and 59% for Luzon, the Visayas, and Mindanao,
respectively. For the country, total projected peak power is estimated to
increase by 5,459 MW or 51% from 2001 to 2005.
The objective of the electricity supply industry was initially set forth
by Presidential Decree No. 40, dated November 7, 1972 (the "Decree"). The
Decree called for the hastening of the electrification of the country,
particularly the rural areas, and specifically mandates NPC to set up
electricity transmission line grids and generation facilities on the major
islands of the country.
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 NPC. Until 1987,
NPC had a monopoly on power generation and transmission in the Philippines.
In that year the government elected to tap the private sector to implement
power generation projects by passing Executive Order No. 215, which
authorized private sector development of priority infrastructure. In 1991,
the Philippine Congress enacted Republic Act No. 6957, which authorized
private development of priority infrastructure 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
53
<PAGE>
taxes for at least six years and exemption from, or reimbursement for,
customs duties and value added taxes on capital equipment to be incorporated
into such projects. In 1994, certain amendments to Republic Act No. 6957 were
approved by the Philippine Congress and signed into law (R.A. 7718). Among
other things, such amendments provide for the financing of "unsolicited
proposals" on a "build-operate-transfer" basis. As a result, as of the end of
1994, approximately 39% of NPC's total system capacity was being operated and
maintained by the private sector under various schemes of private power
generation.
In an effort to remedy the shortfall of electricity, the Philippines, NPC
and 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. In addition, the
Casecnan ("Casecnan Project") combined irrigation and hydroelectric power
project was awarded through an "unsolicited proposal." Geothermal power has
been identified as a preferred alternative by the Government of the
Philippines 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.
UPPER MAHIAO. In 1994, the Company closed the financing and commenced
construction of the Upper Mahiao Project, a 119 net MW geothermal project to
be located in the Greater Tongonan area of the island of Leyte in the
Philippines. The Upper Mahiao facility was "deemed complete" by PNOC-EDC as
of June 17, 1996, meaning that construction of the facility was completed on
time but the required full capacity transmission line was not completed and
provided to CE Cebu Geothermal Power Company, Inc. ("CE Cebu"), a Philippine
corporation that is approximately 100% indirectly owned by the Company.
During deemed completion, PNOC-EDC is required to pay all capacity fees under
the take or pay provisions of the contract. PNOC-EDC is paying such capacity
fees on a timely basis.
Based on a recent agreement with PNOC-EDC, the "deemed completion" has
been modified, effective September 13, 1996, to allow delivery of up to 40 MW
of power through a temporary transmission facility. This amendment will allow
for payment to CE Cebu of fees for energy delivered in addition to continuing
the payment for the full capacity fee. CE Cebu sells 100% of its capacity on
a "take-or-pay" basis (described below) to PNOC-EDC, which in turn sells the
power to NPC for distribution to the island of Cebu, located about 40 miles
west of Leyte.
The Upper Mahiao Project had 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 provided
approximately $162 million in project-financed construction loans, supported
by political risk insurance from the ExIm Bank. The construction loan is
expected to be converted to a term loan promptly after NPC completes the full
capacity transmission line, which is currently expected by the first quarter
of 1997. The largest portion of the term loan for the project will also be
provided by ExIm Bank. The Company's equity contribution to the Upper Mahiao
Project is $56 million. Subject to the pledge of the project company's stock
to the lenders, the Company has arranged for political risk insurance of its
equity investment through OPIC. The financing is collateralized by all the
assets of the project.
Under the terms of an energy conversion agreement, executed on September
6, 1993 (the "Upper Mahiao ECA"), CE Cebu will own and operate the Upper
Mahiao Project during the ten-year cooperation period, after which ownership
will be transferred to PNOC-EDC at no cost.
The Upper Mahiao Project is located on land provided by PNOC-EDC at no
cost. It will take geothermal steam and fluid, also provided by PNOC-EDC at
no cost, and convert its thermal energy into electrical energy to be sold to
PNOC-EDC on a "take-or-pay" basis. Specifically, PNOC-EDC is 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")
54
<PAGE>
based on the electricity actually delivered to PNOC-EDC (approximately 5% of
total contract revenues). The Capacity Fee serves to recover the capital
costs of the project, to recover fixed operating costs and to cover return on
investment. The Energy Fee is designed to cover all variable operating and
maintenance costs of the power plant. Payments under the Upper Mahiao ECA
will be denominated in U.S. dollars, or computed in U.S. dollars and paid in
Philippine pesos at the then-current exchange rate, except for the Energy
Fee, which will be used to pay Philippine peso-denominated expenses.
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 NPC, 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. In 1994 the Company also closed the financing and commenced
construction of the Mahanagdong Project, a 165 net 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 purchased at completion by another industrial company at the
option of such company. The Mahanagdong Project will sell 100% of its
capacity on a similar basis as described above for the Upper Mahiao Project
to PNOC-EDC, which will in turn sell the power to NPC 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. Subject to the
pledge of the project company's stock to the lenders, the Company has
arranged for political risk insurance on its equity investment through OPIC.
The financing is collateralized by all the assets of the project.
The Mahanagdong Project is being constructed by a consortium (the "EPC
Consortium") of Kiewit Construction Group, Inc. ("KCG") and CE Holt pursuant
to fixed-price, date-certain, turnkey supply and construction contracts
(collectively, the "Mahanagdong EPC"). The obligations of the EPC Consortium
under the Mahanagdong EPC are supported by a guaranty of KCG at an aggregate
amount equal to approximately 50% of the Mahanagdong EPC price. KCG, a wholly
owned subsidiary of PKS, is the lead
55
<PAGE>
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. Construction projects undertaken by KCG during 1994 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 70%
of PKS's revenues, contributing $2.1 billion in revenues in 1994. KCG has an
extensive background in power plant construction.
CE Holt will provide design and engineering services for the EPC
Consortium, and holds a 20% interest. The Company has provided a guaranty of
CE Holt's obligations under the Mahanagdong EPC Contract.
The terms of an energy conversion agreement, executed on September 18,
1993 (the "Mahanagdong ECA"), are substantially similar to those of the Upper
Mahiao ECA. The Mahanagdong ECA provides for an approximately three-year
construction period and a ten-year cooperation period. At the end of the
cooperation period, the facility will be transferred to PNOC-EDC at no cost.
All of PNOC-EDC's obligations under the Mahanagdong ECA are supported by the
Government of the Philippines through a performance undertaking. The capacity
fees are expected to be approximately 97% of total revenues at the design
capacity levels and the energy fees are expected to be approximately 3% of
such total revenues.
MALITBOG. In 1994, the Company closed the financing and commenced
construction of the Malitbog Project, a 216 net MW geothermal project, to be
constructed in two phases, 72 net MW (1996) and 144 net MW (1997) also
located on the island of Leyte. The Malitbog Project will be built, owned and
operated by VGPC, a Philippine general partnership that is wholly owned,
indirectly, by the Company. Unit I of the Malitbog facility was "deemed
complete" by PNOC-EDC as of July 25, 1996, meaning that construction of the
first 72 net MW unit was completed on time but the required transmission line
was not completed and provided to VGPC. During deemed completion, PNOC-EDC is
required to pay all capacity fees under the take or pay provisions of the
contract. VGPC is selling 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 NPC.
The Malitbog Project has a total project cost of approximately $280
million, including interest during construction and project contingency
costs. A consortium of international banks and OPIC have provided a total of
$210 million of construction and term loan facilities, the $135 million
international bank portion of which is supported by political risk insurance
from OPIC. The Company's equity contribution to VGPC was $70 million. The
Company's equity participation is covered by political risk insurance from
OPIC.
Units II and III of the Malitbog Project are being constructed by Sumitomo
Corporation ("Sumitomo") pursuant to a fixed-price, date-certain, turnkey
supply and construction contract (the "Malitbog EPC"). The Malitbog EPC
provides that certain liquidated damages will be paid by Sumitomo for failure
to meet certain scheduled test dates, including the payment of any liquidated
damages or penalties required to be paid by VGPC to PNOC-EDC under an energy
conversion agreement executed on September 10, 1993 (the "Malitbog ECA"),
subject to limitations on the total amount of liquidated damages payable by
Sumitomo. The Malitbog EPC also provides for the payment of certain
liquidated damages on a per unit basis if upon completion of the facility,
tests do not demonstrate such unit's ability to operate at a net generating
capacity of at least 74.1 MW. 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 February 6, 1996, Sumitomo had a credit rating of "Aaa3" from Moody's
Investors Service, Inc. ("Moody's"). The Malitbog EPC requires Sumitomo to
provide engineering, procurement, construction, start-up and testing services
with respect to the facility.
Commercial operation of Units II and III are scheduled to commence prior
to July 25, 1997, subject to extension upon the occurrence of certain events
(each such date, a "Guaranteed Completion Date"). VGPC will be subject to
certain penalties if any generating unit does not achieve commercial
operation
56
<PAGE>
by the applicable Guaranteed Completion Date, and PNOC-EDC may, in its sole
discretion, terminate the Malitbog ECA if any generating unit does not
achieve commercial operation within 90 days of the applicable Guaranteed
Completion Date. Pursuant to the terms of the consent agreement (the
"PNOC-EDC Consent Agreement") entered into by PNOC-EDC and VGPC, among
others, PNOC-EDC has agreed that it will not so terminate the Malitbog ECA
without providing the lenders and OPIC an additional 90 days within which to
cure such abandonment. If the lenders and OPIC are proceeding with due
diligence and in good faith to cure such abandonment, such period may be
extended for an additional 90 days with PNOC-EDC's consent (which shall not
be unreasonably withheld). In the event of such a termination, VGPC will
transfer all of its right, title and interest in the Malitbog Project to
PNOC-EDC upon payment by PNOC-EDC of the buy-out price for each generating
unit that is not so delayed, but without compensation for any generating unit
that is so delayed.
The Malitbog Project is located on land provided by PNOC-EDC at no cost.
The electrical energy produced by the facility will be sold to PNOC-EDC on a
take-or-pay basis. Specifically, PNOC-EDC is obligated to make payments (the
"Capacity Payments") to VGPC based upon the available capacity of the
Malitbog Project. The Capacity Payments equal approximately 100% of total
revenues. The Capacity Payments will be payable so long as the Malitbog
Project is available to produce electricity, even if the Malitbog Project is
not operating due to scheduled maintenance, because PNOC-EDC fails to supply
steam to the Malitbog Project as required or because NPC is unable (or
unwilling) to accept delivery of electricity from the Malitbog Project. In
addition, PNOC-EDC must continue to make the Capacity Payments if there is a
force majeure event (e.g., war, nationalization, etc.) that affects the
operation of the Malitbog Project and that is within the reasonable control
of PNOC-EDC or the Government of the Philippines or any agency or authority
thereof. The Capacity Payments are designed to cover, under expected
operating conditions, the Malitbog Project's operating and maintenance
expenses and VGPC's debt service and to provide a return on investment to the
partners in VGPC. A substantial majority of the Capacity Payments are
required to be made by PNOC-EDC in dollars. The portion of Capacity Payments
payable by PNOC-EDC in pesos is expected to vary over the term of the
Malitbog ECA from 10% of VGPC's revenues in the early years of the
Cooperation Period (as defined below) to 23% of VGPC's revenues at the end of
the Cooperation Period. Payments made in pesos will generally be made to a
peso-denominated account and will be used to pay peso-denominated operation
and maintenance expenses with respect to the Malitbog Project and Philippine
withholding taxes, if any, on the Malitbog Project's debt service. The
Government of the Philippines has entered into a performance undertaking (the
"Performance Undertaking"), which provides that all of PNOC-EDC's obligations
pursuant to the Malitbog ECA carry the full faith and credit of, and are
affirmed and guaranteed by, the Government of the Philippines.
PNOC-EDC is obligated to purchase VGPC's interest in the facility under
certain circumstances, including (i) certain material changes in policies or
laws which adversely affect VGPC's interest in the project, (ii) any event of
force majeure which delays performance by more than 90 days and (iii) certain
other events. Prior to completion of the Malitbog Project, the buy-out price
generally will be equal to 100% of all costs incurred through the date of the
buy-out. In a post-completion buy-out, the price will be the net present
value of the capital cost recovery fees that would have been due for the
remainder of the Cooperation Period with respect to such generating unit(s).
The Malitbog ECA cooperation period will expire ten years after the date
of commencement of commercial operation of unit 3. At the end of the
cooperation period, the facility will be transferred to PNOC-EDC at no cost,
on an "as is" basis. 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.
CASECNAN. In November 1995, the Company closed the financing and commenced
construction of the Casecnan Project, a combined irrigation and 150 net MW
hydroelectric power generation project located in the central part of the
island of Luzon in the Republic of the Philippines. The Casecnan Project will
consist generally of diversion structures in the Casecnan and Denip Rivers
that will divert water into a tunnel of approximately 23 kilometers. The
tunnel will transfer the water from the Casecnan and Denip Rivers into the
Pantabangan Reservoir for irrigation and hydroelectric use in the Central
Luzon area. An
57
<PAGE>
underground powerhouse located at the end of the water tunnel and before the
Pantabangan Reservoir will house a power plant consisting of approximately
150 MW of newly installed rated electrical capacity. A tailrace tunnel of
approximately three kilometers will deliver water from the water tunnel and
the new powerhouse to the Pantabangan Reservoir, providing additional water
for irrigation and increasing the potential electrical generation at two
downstream existing hydroelectric facilities of the NPC.
CE Casecnan Water and Energy Company, Inc., a Philippine corporation ("CE
Casecnan") is developing the Casecnan Project under the terms of the Project
Agreement between CE Casecnan and the National Irrigation Administration
("NIA"). Under the Project Agreement, CE Casecnan will develop, finance and
construct the Casecnan Project over an estimated four-year construction
period, and thereafter own and operate the Casecnan Project for 20 years (the
"Cooperation Period"). During the Cooperation Period, NIA is obligated to
accept all deliveries of water and energy, and so long as the Casecnan
Project is physically capable of operating, NIA will pay CE Casecnan a
guaranteed fee for the delivery of water and a guaranteed fee for the
delivery of electricity, regardless of the amount of water or electricity
actually delivered. In addition, NIA will pay a fee for all electricity
delivered in excess of a threshold amount up to a specified amount. NIA will
sell the electric energy it purchases to NPC, although NIA's obligations to
CE Casecnan under the Project Agreement are not dependent on NPC's purchase
of the electricity from NIA. All fees to be paid by NIA to CE Casecnan are
payable in U.S. dollars. The guaranteed fees for the delivery of water and
energy are expected to provide approximately 70% of CE Casecnan's revenues.
The Project Agreement provides for additional compensation to the CE
Casecnan upon the occurrence of certain events, including increases in
Philippine taxes and adverse changes in Philippine law. Upon the occurrence
and during the continuance of certain force majeure events, including those
associated with political action, NIA may be obligated to buy the Casecnan
Project from CE Casecnan at a buy out price expected to be in excess of the
aggregate principal amount of the outstanding debt securities, together with
accrued but unpaid interest. At the end of the Cooperation Period, the
Casecnan Project will be transferred to NIA and NPC for no additional
consideration on an "as is" basis.
The Republic of the Philippines has provided a Performance Undertaking
under which NIA's obligations under the Project Agreement are guaranteed by
the full faith and credit of the Republic of the Philippines. The Project
Agreement and the Performance Undertaking provide for the resolution of
disputes by binding arbitration in Singapore under international arbitration
rules.
The Casecnan Project will be constructed on a joint and several basis by
Hanbo Corporation and You One Engineering & Construction Co., Ltd.
(collectively, the "Contractor"), both of which are South Korean
corporations, pursuant to a fixed-price, date-certain, turnkey construction
contract (the "Turnkey Construction Contract"). Hanbo Corporation, which
holds a controlling interest in You One, is an international construction
company. You One is a leading contractor in tunnel projects with over 25
years experience in tunnel construction, using both the drill-and-blast and
tunnel boring machine ("TBM") methods. It currently has access to nine TBMs
and five additional cutter head assemblies.
The Contractor's obligations under the Turnkey Construction Contract are
guaranteed by Hanbo Steel Company, Ltd. ("Hanbo Steel"), a large South Korean
steel company. In addition, the Contractor's obligations under the Turnkey
Construction Contract are secured by an unconditional, irrevocable standby
letter of credit issued by Korea First Bank ("KFB") in the approximate amount
of $118 million. The total cost of the Casecnan Project, including
development, construction, testing and startup, is estimated to be
approximately $495 million.
INDONESIA. Indonesia, which has the world's fourth largest population, has
experienced rapid growth in electricity demand. The Company believes that
annual load growth has exceeded 13% since 1980. Furthermore, the Company
believes that rapid expansion in industrial growth has created a backlog of
unconnected industrial users in excess of 4,000 MW. In its sixth five-year
plan, the Indonesian government has called for the addition of 12,000 MW of
additional generating capacity by 1999. The long range plan calls for an
additional 15,000 MW to be added by the year 2004. The plans call for
approximately 75% of this capacity to be added by independent power
producers. Although Indonesia is a member of OPEC
58
<PAGE>
and is also the world's largest exporter of liquified natural gas, the
Indonesian 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.
The Indonesian state-owned utility has recently been converted to a
limited liability company, P.T. PLN (Persero) ("PLN"), as a first step toward
the privatization of its two largest generating subsidiaries. The main
objective of Indonesia's electric energy policy has been to secure a
continuity of supply at reasonable rates for households (more than 50% of
which have been reported to have no power) and to minimize the utilization of
hydrocarbons. Rural electrification will remain an important component of the
energy policy as PLN is targeting the addition of 2 million customers a year.
Indonesia is rated "Baa3" by Moody's and "BBB" by Standard & Poor's
Ratings Group ("S&P"). The Company believes that Indonesia represents an
attractive development opportunity, as it combines growing power needs with
ample geothermal resources and creditworthy contract parties.
DIENG UNIT 1. On December 2, 1994, a subsidiary of the Company, Himpurna
California Energy Ltd. ("HCE") 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. HCE was formed pursuant to 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 holding an approximate 47% interest (including certain
assignments of dividend rights representing an economic interest of 2%), and
subsidiaries of PKS holding an approximate 47% interest (including certain
assignments of dividend rights representing an economic interest of 2%) and
P.T. HEA holding a 6% interest in the Dieng Project. The construction
contractor for the Dieng Unit I project, a joint venture of PKS and CE Holt,
is on schedule to complete the Unit I plant and commence commercial operation
by the fourth quarter of 1997. Major activities since the notice to proceed
was issued to the contractor in March 1996 have focused on site civil work,
including site preparation, foundation work, and access road construction.
The turbine/generator purchased from the Italian national utility, ENEL, has
been shipped from Italy and delivered to the site.
All government approvals necessary for closing have been received,
including a support letter from the Republic of Indonesia, an off-shore loan
board (Decree 39) approval, consents to assignment from the Republic of
Indonesia, PLN and Pertamina, and all required environmental approvals.
Financial closing and first disbursement of construction loan funds occurred
on October 3, 1996.
Pursuant to the Dieng JOC and ESC, Pertamina has granted to HCE the
geothermal field and the wells and other facilities presently located thereon
and HCE will build, own and operate power production units with an aggregate
capacity of up to 400 MW. HCE will accept the field operation responsibility
for developing and supplying the geothermal steam and fluids required to
operate the plant. The Dieng JOC is structured as a build own transfer
agreement and will expire (subject to extension by mutual agreement) on the
date which is the later of (i) 42 years following effectiveness of the Dieng
JOC and (ii) 30 years following the date of commencement of commercial
generation of the final unit completed. Upon the expiration of the proposed
Dieng JOC, all facilities will be transferred to Pertamina at no cost. HCE is
required to pay Pertamina a production allowance equal to three percent of
HCE'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.
59
<PAGE>
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.
HCE began well testing in the fourth quarter of 1995 and issued a notice
to proceed for the construction and supply of an initial 55 net MW unit
("Dieng Unit I") in the first quarter of 1996. PT Kiewit/Holt Indonesia, a
consortium consisting of KCG and CE Holt, will construct Dieng Unit I
pursuant to a fixed price, date certain, turnkey construction contract
("Construction Contract"). Affiliates of KCG and CE Holt will provide the
engineered supply with respect to Dieng Unit I pursuant to a fixed price,
date certain, turnkey supply contract ("Supply Contract"). The Construction
Contract and Supply Contract are sometimes referred to herein as the "Dieng
EPC" and KCG, CE Holt and their affiliates party to the Construction Contract
and Supply Contract are sometimes referred to herein, collectively, as the
"Construction Consortium." The obligations of the Construction Consortium
under the Construction and Supply Contracts are supported by a guaranty of
KCG and CE Holt Company. KCG is the lead member of the Construction
Consortium, with a 60% interest. HCE will be responsible for operating and
managing the Dieng Project.
Pursuant to the Dieng JOC and ESC, the Company presently intends to
proceed on a modular basis with construction of three additional units to
follow Dieng Unit I, 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 Dieng field has been explored domestically for over 20 years and CE
Holt 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 completing the drilling of
wells and the construction of the plant for Dieng Unit I and obtaining
required regulatory permits and approvals, completing the well testing,
entering into a construction agreement and other project contracts, and
arranging financing for the other units at Dieng.
PROJECTS IN DEVELOPMENT
The following is a summary description of certain information concerning
the Company's development projects. Since this project is still in
development 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.
PHILIPPINES
ALTO PEAK. The Alto Peak Project is a smaller geothermal project in the
same general area of Leyte as the Upper Mahiao, Mahanagdong and Malitbog
Projects. A subsidiary of the Company and PNOC-EDC have executed a 70 net MW
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 because PNOC-EDC has not finalized the steam conditions
(pressure, composition and pH). PNOC-EDC is still drilling and testing the
geothermal wells that will supply steam to such project. Consequently, the
ECA has been extended and the Company has not commenced financing
arrangements for the Alto Peak Project.
INDONESIA
DIENG. Pursuant to the Dieng JOC and ESC, the Company intends to proceed
on a modular basis with construction of additional units to follow Dieng Unit
I, resulting in an aggregate first phase net
60
<PAGE>
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. See the discussion set forth
above concerning construction of Dieng Unit I for a more complete description
of the Dieng Project.
PATUHA. The Company is also developing a geothermal power plant in the
Patuha geothermal field in Java, Indonesia (the "Patuha Project").
Subsidiaries of the Company will have a 50% interest and subsidiaries of PKS
will have a 50% interest in the Patuha Project.
On December 2, 1994, the project company developing the Patuha Project,
Patuha Power, Ltd. ("Patuha Power") executed both a joint operation contract
and an energy sales contract, each of which contains terms substantially
similar to those described above for the Dieng Project. Patuha Power 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 began well testing and exploration in
the fourth quarter of 1995 and expects to commence construction of the first
unit in 1997.
The Patuha Project remains subject to a number of significant
uncertainties, as described above in connection with the Dieng Project, and
there can be no assurance that the Patuha Project will proceed or reach
commercial operation.
BALI. The Company and PT Panutan Group, an Indonesian consortium of
energy, oil, gas and mining companies, have formed a joint venture to pursue
the development of geothermal resources in Bali (the "Bali Project"). The PT
Panutan Group is entitled to contribute up to 40% of the total equity and
obtain up to 40% of the net profit of the Bali Project. On November 17, 1995,
the project company developing the Bali Project, Bali Energy Ltd. ("Bali
Energy"), executed both a joint operation contract and an energy sales
contract, each of which currently contains terms substantially similar to
those described above for the Dieng Project. Bali Energy 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 of the Bali
Project will be approximately $1 billion. The Company presently intends to
begin well testing and exploration in late 1996 or early 1997 and expects to
commence construction of the first unit in 1998.
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.
61
<PAGE>
DOMESTIC PROJECTS
PROJECTS IN OPERATION
THE COSO PROJECT
In 1979, the Company entered into a 30-year contract (the "Navy Contract")
with the United States Department of the Navy (the "Navy") to develop
geothermal power facilities located on approximately 5,000 acres of the Naval
Air Weapons Station at China Lake, California (150 miles northeast of Los
Angeles). In 1985, the Company entered into a 30-year lease (the "BLM Lease")
with the United States Bureau of Land Management ("BLM") for approximately
19,000 acres of land adjacent to the land covered by the Navy Contract. The
Navy Contract and the BLM Lease provide for certain royalty payments as a
percentage of gross revenue and certain other formulas. The Company formed
three joint ventures (the "Coso Joint Ventures") with one primary joint
venture partner to develop and construct the three facilities which comprise
the Navy I project (the "Navy I Project"), the BLM project (the "BLM
Project") and the Navy II project (the "Navy II Project") (collectively the
"Coso Project").
The Coso Partnerships 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; 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.
Each of the Coso Partnerships is managed by a management committee which
consists of two representatives of the Company and two representatives of the
Company's partners. The Company is the managing partner of each of the Coso
Partnerships and operates the Coso Project, for which it receives fees from
the Coso Partnerships.
The Coso Project sells all electricity generated by the respective plants
pursuant to three long-term SO4 Agreements between the Navy I Partnership,
the BLM Partnership, and the Navy II Partnership, respectively, and Edison.
These SO4 Agreements provide for capacity payments, capacity bonus payments
and energy payments. Edison makes fixed annual capacity payments to the Coso
Partnerships and, to the extent that capacity factors exceed certain
benchmarks, is required to make capacity bonus payments. The price for
capacity and capacity bonus payments is fixed for the life of the SO4
Agreements. Energy is sold at increasing fixed rates for the first ten years
of each contract and thereafter at Edison's Avoided Cost of Energy. The fixed
price periods of the SO4 Agreements extend until at least August 1997, March
1999 and January 2000 for each of the units operated by the Navy I, BLM and
Navy II Partnerships, respectively, at rates of 11.8 cents per kWh in 1995.
The Company's share of the revenues received by the Coso Partnerships for
1994 and 1995 was $137.0 million and $152.1 million, respectively.
The physical facilities used for geothermal energy production are
substantially the same at the Navy I, BLM and Navy II Projects.
THE NAVY I PROJECT. The geothermal resource for the Navy I Project
currently is produced from approximately 32 wells. The Navy I Project
consists of three turbine generators, each with approximately 32 gross MW of
electrical generating capacity. Based on an assumed net capacity of 80 MW,
the Navy I Project operated at an average operating capacity factor of 111.2%
in 1993, 114.0% in 1994 and 112.1% in 1995.
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, and one is located at the BLM West site in
a single flash system, each with an electrical generating capacity of 32
gross MW. Based on an assumed net capacity of 80 MW, the BLM Project operated
at an average operating capacity factor of 98.1% in 1993, 99.5% in 1994 and
107.5% in 1995.
62
<PAGE>
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
gross MW of electrical generating capacity. Based on an assumed net capacity
of 80 MW, the Navy II Project operated at an average operating capacity
factor of 102.6% in 1993, 105.9% in 1994 and 111.3% in 1995.
IMPERIAL VALLEY PROJECT
The Company currently operates eight geothermal plants in the Imperial
Valley in California (the "Imperial Valley Project"). Four of these Imperial
Valley Project plants (the "Partnership Projects") were developed by Magma
which originally owned a 50% interest. On April 17, 1996, the Company
completed the Partnership Project Acquisition pursuant to which the Company
acquired the remaining 50% interests in each of the Partnership Projects for
$70 million. The Partnership Projects consist of the Vulcan, Hoch (Del
Ranch), Elmore and Leathers projects (the "Vulcan Project," the "Hoch (Del
Ranch) Project," the "Elmore Project" and the "Leathers Project,"
respectively).
The remaining four operating Imperial Valley Project plants (the "Salton
Sea Projects") are wholly owned by subsidiaries of Magma. Three of these
plants were purchased on March 31, 1993 from Union Oil Company of California.
These geothermal power plants consist of 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"). The
fourth plant, the Salton Sea IV project (the "Salton Sea IV Project"),
commenced commercial operations in 1996.
The Salton Sea Projects operated at a combined contract nameplate factor
of 91.3% in 1993, 90.8% in 1994 and 86.5% in 1995. The Partnership Projects
operated at a combined contract nameplate factor of 100.7% in 1993, 103.8% in
1994 and 105.9% in 1995.
VULCAN. The Vulcan Project sells electricity to Edison under a 30-year SO4
Agreement that commenced on February 10, 1986. The Vulcan Project has a
contract capacity and contract nameplate of 29.5 MW and 34 MW, respectively.
Under the SO4 Agreement, Edison 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 increased
each year for the first ten years, which period expired on February 9, 1996.
Thereafter, the energy payments are based on Edison's Avoided Cost of Energy.
The energy payment per kWh was 11.8 cents for 1995. The Vulcan Project is
unleveraged.
HOCH (DEL RANCH). The Hoch (Del Ranch) Project sells electricity to Edison
under a 30-year SO4 Agreement that commenced on January 2, 1989. The contract
capacity and contract nameplate are 34 MW and 38 MW, respectively. The
provisions of such SO4 Agreement are substantially the same as the SO4
Agreement with respect to the Vulcan Project.
The price for contract capacity payments is fixed for the life of the SO4
Agreement. The energy payments per kWh for the first ten-year period, which
expires on January 1, 1999, are fixed at rates ranging from 11.8 cents for
1995 to 14.6 cents for 1998. Thereafter, the energy payments will be based on
Edison's Avoided Cost of Energy.
ELMORE. The Elmore Project sells electricity to Edison under a 30-year SO4
Agreement that commenced on January 1, 1989. The contract capacity and
contract nameplate are 34 MW and 38 MW, respectively. The provisions of such
SO4 Agreement are substantially the same as the SO4 Agreement with respect to
the Vulcan Project.
The price for contract capacity payments is fixed for the life of the SO4
Agreement. The energy payments per kWh for the first ten-year period, which
expires on December 31, 1998, are fixed at rates ranging from 11.8 cents in
1995 to 14.6 cents in 1998. Thereafter, the energy payments will be based on
Edison's Avoided Cost of Energy.
63
<PAGE>
LEATHERS. The Leathers Project sells electricity to Edison pursuant to a
30-year SO4 Agreement that commenced on January 1, 1990. The contract
capacity and contract nameplate are 34 MW and 38 MW, respectively. The
provisions of such SO4 Agreement are substantially the same as the SO4
Agreement with respect to the Vulcan Project.
The price for contract capacity payments is fixed for the life of the SO4
Agreement. The energy payments per kWh for the first ten-year period, which
expires on December 31, 1999, are fixed at rates ranging from 11.8 cents in
1995 to 15.6 cents in 1999. Thereafter, the energy payments are based on
Edison's Avoided Cost of Energy.
SALTON SEA I PROJECT. The Salton Sea I Project sells electricity to Edison
pursuant to a 30-year negotiated power purchase agreement, as amended (the
"Salton Sea I PPA"), which provides for capacity and energy payments. The
contract capacity and contract nameplate are each 10 MW.
The capacity payment is based on the firm capacity price which is
currently $127.80/kW-year. The contract capacity payment adjusts quarterly
based on a basket of energy indices for the term of the Salton Sea I PPA. The
energy payment is calculated using a Base Price (defined as the initial value
of the energy payment (4.701 cents 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 Salton Sea I was 4.99 cents
per kWh during 1995. As the Salton Sea I PPA is not an SO4 Agreement, the
energy payments do not revert to Edison's Avoided Cost of Energy.
SALTON SEA II PROJECT. The Salton Sea II Project sells electricity to
Edison pursuant to a 30-year modified SO4 Agreement that commenced on April
5, 1990. The contract capacity and contract nameplate are 15 MW (16.5 MW
during on-peak periods) and 20 MW, respectively. The contract requires Edison
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 cents per kWh. Thereafter, the monthly
energy payments will be Edison's Avoided Cost of Energy. For the period April
1, 1994 through March 31, 2004, Edison is entitled to receive, at no cost, 5%
of all energy delivered in excess of 80% of contract capacity.
SALTON SEA III PROJECT. The Salton Sea III Project sells electricity to
Edison pursuant to a 30-year modified SO4 Agreement that commenced on
February 13, 1989. The contract capacity is 47.5 MW and the contract
nameplate is 49.8 MW. The SO4 Agreement requires Edison to make capacity
payments, capacity bonus payments and energy payments for the life of the SO4
Agreement. The price for contract capacity payments is fixed at $175/kW per
year. The energy payments for the first ten-year period, which period expires
on February 12, 1999, are levelized at a time period weighted average of 9.8
cents per kWh. Thereafter, the monthly energy payments will be Edison's
Avoided Cost of Energy.
SALTON SEA IV PROJECT. The Salton Sea IV Project consists of the
consolidated expansion project pursuant to the Salton Sea I PPA and the Fish
Lake SO4 described below. The Salton Sea I Project had an option to supply an
additional 20 MW of power to Edison under the Salton Sea I PPA. Magma,
through its wholly-owned subsidiary, Fish Lake Power Company ("FLPC"),
acquired in 1992 a modified SO4 Agreement (the "Fish Lake SO4") to supply
electric power to Edison from a 16 MW geothermal power plant proposed to be
built at Fish Lake in Esmeralda County, Nevada (the "Fish Lake Project").
In 1994, Magma and Edison negotiated the consolidation of the expansion
portion of the Salton Sea I PPA and the Fish Lake SO4 (the "Amended PPA").
The Amended PPA was approved by the CPUC on April 26, 1995. The Amended PPA
is a 30 year contract and provides for contract capacity payments based on a
blended rate of 20/34 of $121.72/kW-year in 1992 dollars escalated quarterly
by an index plus 14/34 of $158/kW-year. The Amended PPA provides for energy
payments pursuant to a schedule to commence in 1996 at 16/36 of 8.8 cents per
kWh plus 20/36 of 4.7 cents per kWh in 1992 dollars escalated by an index.
Construction of the Salton Sea IV Project was completed and commencement
of commercial operation occurred in 1996.
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
64
<PAGE>
and to provide 50 MW of electricity to San Diego Gas & Electric Company
("SDG&E") under an existing 30-year power purchase contract. The energy is
sold at SDG&E's Avoided Cost of Energy and the capacity is sold to SDG&E at a
fixed price for the life of the power purchase contract. 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 agreement to terminate the agreement upon one year's notice
if a change in its technology eliminates its need for steam, and in any case
to terminate the agreement at any time upon three years notice, there can be
no assurance that the Yuma Project will maintain its status as a QF. However,
if the industrial entity terminates the agreement, the Company anticipates
that it will be able to locate an alternative thermal host in order to
maintain its status as a QF or build a greenhouse at the site for which the
Company believes it would obtain QF status. A natural gas supply and
transportation agreement has been executed with Southwest Gas Corporation,
terminable under certain circumstances by the Company and Southwest Gas
Corporation. The Yuma Project is unleveraged other than intercompany debt.
ROOSEVELT HOT SPRINGS
The Company operates and owns an approximately 70% interest in a 25 MW
geothermal steam field which supplies geothermal steam to a power plant owned
by Utah Power & Light Company ("UP&L") located on the Roosevelt Hot Springs
property under a 30-year steam sales contract. The Company obtained
approximately $20.3 million of cash under a pre-sale agreement with UP&L
whereby UP&L paid in advance for the steam produced by the steam field. The
Company must make certain penalty payments to UP&L if the steam produced does
not meet certain quantity and quality requirements.
DESERT PEAK
The Company is the owner and operator of a 10 MW geothermal plant at
Desert Peak, Nevada. The Desert Peak Project had been selling electricity to
Sierra Pacific Power Company ("SPPCo")under a power sales contract that
expired December 31, 1995. A new letter agreement was executed providing for
the sale of capacity and energy at SPPCo's avoided cost.
ROYALTY INTEREST IN THE MAMMOTH PLANTS
Magma receives royalty revenues from a 10 MW and a 12 MW contract
nameplate geothermal power plant (the "First Mammoth Plant" and the "Second
Mammoth Plant," respectively, and referred to herein, collectively, as the
"Mammoth Plants") at Mammoth Lakes, California. Electricity from the Mammoth
Plants is sold to Edison under two long-term power purchase agreements. The
First Mammoth Plant and the Second Mammoth Plant began commercial operation
in 1985 and 1991, respectively. Magma leases both property and geothermal
resources to support the Mammoth Plants in return for certain base royalty
and bonus royalty payments. For the First Mammoth Plant and the Second
Mammoth Plant, the base royalty is 12.5% and 12%, respectively, of gross
electricity sales revenues. The bonus royalty for the Mammoth Plants is 50%
of the excess of annual gross electricity sales revenues over an annual
revenue standard based on the Mammoth Plants operating at 85% of contract
capacity.
ROYALTY INTEREST IN THE EAST MESA PLANT
Magma also receives royalty revenues from a 37 MW contract nameplate
geothermal power plant (with two units) at East Mesa in Imperial Valley,
California (the "East Mesa Plant"). Electricity from the plant is sold to
Edison 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.
65
<PAGE>
FALCON ACQUISITION
On August 7, 1996 the Company completed the acquisition of Falcon,
including its ownership interest in three operating gas-fired cogeneration
plants located in New York, Texas and Pennsylvania and a related natural gas
pipeline, also located in New York, for a cash purchase price of $226
million. The three cogeneration facilities, which are described below, total
520 MW in capacity and sell power under long-term power purchase agreements.
THE SARANAC PROJECT. Saranac is a 240 MW natural gas-fired cogeneration
facility located in Plattsburgh, New York, which began commercial operation
in June 1994. Saranac has entered into a 15-year power purchase agreement
(the "Saranac PPA") with New York State Electric & Gas Corporation ("NYSEG").
Saranac is a QF and has entered into 15-year steam purchase agreements (the
"Saranac Steam Purchase Agreements") with Georgia-Pacific Corporation and
Tenneco Packaging Corporation.
Saranac has a 15-year natural gas supply contract (the "Saranac Gas Supply
Agreement") with Shell Canada Ltd. ("Shell Canada") to supply 100% of
Saranac's fuel requirements. Shell Canada is responsible for production and
delivery of natural gas to the U.S.-Canadian border; the gas is then
transported by the North Country Gas Pipeline Corporation ("NCGP") the
remaining 22 miles to the plant. NCGP is a wholly-owned subsidiary of Saranac
Power Partners, L.P. (the "Saranac Partnership"), which also owns Saranac.
NCGP also transports gas for NYSEG and Georgia-Pacific.
Each of the Saranac PPA, the Saranac Steam Purchase Agreements and the
Saranac Gas Supply Agreement contains rates that are fixed for the respective
contract terms. Revenues escalate at a higher rate than fuel costs.
The Saranac Partnership is comprised of subsidiaries of (i) Falcon
Seaboard and (ii) Tomen Corporation ("Tomen") and General Electric Capital
Corporation ("GECC").
On February 14, 1995, NYSEG filed with the FERC a Petition for a
Declaratory Order seeking FERC to declare that the rates NYSEG pays under its
PPA with Saranac, which was approved by the New York State Public Service
Commission ("NYPSC"), were in excess of the level permitted under PURPA and
authorize the NYPSC to reform the PPA. On April 12, 1995, the FERC by a
unanimous (5-0) decision issued an order denying the various forms of relief
requested by NYSEG and finding that the rates required under the
NYSEG/Saranac PPA were consistent with PURPA and the FERC's regulations. On
May 11, 1995, NYSEG requested rehearing of the order and, by order issued
July 19, 1995, the FERC unanimously (5-0) denied the request. On June 14,
1995, NYSEG petitioned the United States Court of Appeals for the District of
Columbia Circuit for review of FERC's April 12, 1995 order. FERC moved to
dismiss NYSEG's petition for review on July 28, 1995 and the Court has not
yet acted on FERC's motion to dismiss. Based on the advice of its outside
legal counsel, the Company believes Saranac's position is meritorious and
that it will prevail before the D.C. Circuit if the matter is ultimately
heard on its merits.
THE POWER RESOURCES PROJECT. Power Resources is a 200 MW natural gas-fired
cogeneration project located near Big Spring, Texas, which has a 15-year
power purchase agreement (the "Power Resources PPA") with Texas Utilities
Electric Company. Power Resources began commercial operation in June 1988.
Power Resources is a QF and has entered into a 15-year steam purchase
agreement (the "Power Resources Steam Purchase Agreement") with Fina Oil and
Chemical Company ("Fina"), a subsidiary of Petrofina S.A. of Belgium.
Power Resources has two natural gas supply agreements in place. Natural
Gas Clearinghouse ("NGC") has entered into a 10-year agreement (the "NGC Gas
Supply Agreement") which ends May 1997. In addition, Power Resources has
entered into an agreement (the "FSGC Gas Supply Agreement") with Falcon
Seaboard Gas Corporation ("FSGC") for the remainder of Power Resources' fuel
requirements through December 2003. FSGC has fulfilled its commitments to
Power Resources, Inc. ("PRI") to date using a combination of spot purchases
plus short-term contracts. In June 1995 FSGC and Louis Dreyfus Natural Gas
Corporation ("Dreyfus") executed an eight-year natural gas supply agreement
(the "FSGC-Dreyfus Gas Supply Agreement"), with which FSGC will fulfill its
supply commitment to PRI from October 1995 to the end of the term of the
Power Resources PPA. Accordingly, through the combination of the NGC Gas
Supply Agreement and the FSGC-Dreyfus Gas Supply Agreement, all gas
requirements have been contracted for through the end of the Power Resources
PPA.
66
<PAGE>
Each of the Power Resources PPA, the Power Resources Steam Purchase
Agreement and the FSGC Gas Supply Agreement contains rates that are fixed for
the respective contract terms. Revenues escalate at a higher rate than fuel
costs.
THE NORCON PROJECT. NorCon is an 80 MW natural gas-fired cogeneration
facility located in North East, Pennsylvania which began commercial operation
in December 1992. NorCon has a 25-year power purchase agreement (the "NorCon
PPA") with Niagara Mohawk Power Corporation ("NIMO"). NorCon is a QF and has
entered into a 20-year steam purchase agreement (the "NorCon Thermal Energy
Agreement") with Welch Foods Inc., a Cooperative ("Welch Foods").
NorCon has a 15-year natural gas supply contract (the "NorCon Gas Purchase
Agreement") with Dreyfus to supply 100% of NorCon's fuel requirements. A
twenty-year natural gas transportation agreement has been entered into with
National Fuel Gas Supply Corporation ("National Fuel") to provide
transportation to NorCon. Transportation costs are deducted from payments
made pursuant to the NorCon Gas Purchase Agreement.
The NorCon PPA has rates that are subject to a specified floor amount. The
NorCon Thermal Energy Agreement contains rates that escalate at an
inflation-based index, and the NorCon Gas Purchase Agreement's rates are
fixed per a schedule for the contract term.
NorCon Power Partners, L.P. (the "NorCon Partnership"), which owns NorCon,
is comprised of subsidiaries of Falcon and Tomen.
The NorCon project has had a number of on-going contractual disputes with
NIMO which are unresolved and in August 1996 NIMO proposed a buyout of the
NorCon PPA as part of a generic restructuring by NIMO of all of its QF
contracts in an effort to restructure NIMO's purchased power obligations to
meet the challenge of industry deregulation and avoid what NIMO alleges as
the risk of a possible NIMO insolvency. The Company believes that any
contractual restructuring or even a NIMO insolvency would not have a material
adverse effect on its consolidated financial results of operations.
BENEFITS OF FALCON ACQUISITION. The Company believes the Falcon
acquisition provides it with the following benefits:
o Long-term power sales and steam sales contracts that provide an
important financial contribution to cash flow and earnings;
o Highly efficient gas-fired operating facilities which, upon expiration
of their respective power sales contracts, will be strategically
located for future merchant plant sales in areas which have good
access to fuel supply and transportation and favorable transmission
access and proximity to electric load centers;
o Enhanced fuel diversification and creation of a gas-fired operating
business unit;
o Increased customer diversification;
o Enhanced ability to compete as a low-cost generator throughout
industry deregulation; and
o Increased size and economies of scale which will permit the Company to
more effectively compete as the electric industry restructures and
consolidates.
PROJECTS IN DEVELOPMENT
SALTON SEA MINERALS EXTRACTION. The Company signed an agreement with BHP,
a large international mining company in 1996 which provides, among other
things, for the Company, at its option, to deliver power for the mineral
extraction process (the "Salton Sea Extraction Project"). The initial phase
of the project would require delivery of approximately 15 MW. A pilot plant
has successfully produced zinc at the Company's Imperial Valley Project. BHP
has completed construction of its larger demonstration plant. If successfully
developed, the mineral extraction process will provide an environmentally
compatible and low cost minerals recovery methodology. The project is subject
to a number of uncertainties and implementation cannot be assured.
67
<PAGE>
NEWBERRY/GLASS MOUNTAIN. Under a Bonneville Power Administration ("BPA")
geothermal pilot program, the Company has been developing a 30 MW net
geothermal project which was originally located in the Newberry Known
Geothermal Resource Area in Deschutes County, Oregon (the "Newberry
Project"). Pursuant to two power sales contracts executed in September 1994,
the Company has agreed to sell 20 MW to BPA and 10 MW to Eugene Water and
Electric Board ("EWEB") from the Project. In addition, BPA and EWEB together
have an option to purchase up to an additional 100 MW of production from the
Newberry Project under certain circumstances. In a public-private development
effort, the Company is responsible for development, permitting, financing,
construction and operation of the project (which will be 100% owned by the
Company), while EWEB will cooperate in the development efforts by providing
assistance with government and community affairs and sharing in certain
development costs (up to 30%). The Newberry Project is currently expected to
commence commercial operation in late 1997 or early 1998. The power sales
contracts provide that under certain circumstances the contracts may be
utilized at an alternative location. Pursuant to its resource exploration
program, the Company has determined that the geothermal resource at Newberry
is not sufficient to support the contracts and accordingly has determined to
utilize the contracts at its leasehold position in Glass Mountain in northern
California, where it has two successful production wells. Movement of the
contracts to this alternative location is subject to approval by BPA and EWEB
and obtaining a final environmental impact statement relating to the new site
location. Completion of the Newberry Project is subject to a number of
significant uncertainties and cannot be assured.
THE BRPU PROCESS. Magma was seeking new long-term final SO4 Agreements in
the Salton Sea area through the bidding process adopted by the CPUC under its
1992 Biennial Resource Plan Update ("BRPU"). In its BRPU, the CPUC cited the
need for an additional 9,600 MW of power production through 1999 among
California's three investor-owned utilities, Edison, SDG&E and Pacific Gas
and Electric Company. 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 Edison and SDG&E, with
in-service dates in 1997 and 1998. On February 23, 1995 the Federal Energy
Regulatory Commission ("FERC") issued an order finding that the CPUC's BRPU
program violated PURPA and FERC's implementing regulations and recommended
negotiated settlements. In response, the CPUC issued an Assigned
Commissioners Ruling encouraging settlements between the final winning
bidders and the utilities. The utilities are expected to continue to
challenge the BRPU and, in the light of the regulatory uncertainty, there can
be no assurance that power sales contracts will be executed or that any such
projects will be completed. In light of these developments, the Company
agreed to execute an agreement with Edison on March 16, 1995 providing that
in certain circumstances it would withdraw its Edison BRPU bid in
consideration for the payment of certain sums. Such agreement is subject to
CPUC approval but does not affect the Company's award from SDG&E. Agreement
in principle on a settlement with SDG&E has been obtained, but is subject to
finalization.
REGULATORY, ENERGY AND ENVIRONMENTAL MATTERS
The Company is subject to a number of environmental laws and other
regulations affecting many aspects of its present and future operations,
including the construction or permitting of new and existing facilities, the
drilling and operation of new and existing wells and the disposal of various
geothermal solids. Such laws and regulations generally require the Company to
obtain and comply with a wide variety of licenses, permits and other
approvals. No assurance can be given, however, that in the future all
necessary permits and approvals will be obtained and all applicable statutes
and regulations complied with. 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 Company
believes that its operating power facilities are currently in material
compliance with all applicable federal, state and local laws and regulations.
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. In particular, the
independent power
68
<PAGE>
market in the United States is dependent on the existing energy regulatory
structure, including PURPA and its implementation by utility commissions in
the various states.
Each of the Company's operating domestic power facilities 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, as amended ("PUHCA"), most provisions of the Federal
Power Act (the "FPA") and the state laws concerning rates of electric
utilities, and financial and organization regulations of electric utilities.
Second, FERC's regulations promulgated under PURPA require that (1) electric
utilities purchase electricity generated by qualifying facilities, the
construction of which commenced on or after November 9, 1978, at a price
based on the purchasing utility's full Avoided Cost, (2) the electric utility
sell back-up, interruptible, maintenance and supplemental power to the
qualifying facility on a non-discriminatory basis and (3) the electric
utility interconnect with a qualifying facility in its service territory.
Currently, Congress is considering proposed legislation that would amend
PURPA by eliminating the requirement that utilities purchase electricity from
qualifying facilities at prices based on Avoided Costs. The Company does not
know whether such legislation will be passed or what form it may take. The
Company believes that if any such legislation is passed, it would apply to
new projects only and thus, although potentially impacting the Company's
ability to develop new domestic projects, it would not affect the Company's
existing qualifying facilities. There can be no assurance, however, that any
legislation passed would not adversely impact the Company's existing domestic
projects.
In addition, many states are implementing or considering regulatory
initiatives designed to increase competition in the domestic power generation
industry and increase access to electric utilities' transmission and
distribution systems for independent power producers and electricity
consumers. On September 1, 1996, the California legislature adopted an
industry restructuring bill that would provide for a phased-in competitive
power generation industry with a power pool and independent system operator
and also would permit direct access to generation for all power purchasers
outside the power exchange under certain circumstances. Under the bill,
consistent with the requirements of PURPA, existing qualifying facilities
power sales agreements would be honored. The Company cannot predict the final
form or timing of the proposed industry restructuring or the results of its
operations.
The structure of such federal and state energy regulations have in the
past, and may in the future, be the subject of various challenges and
restructuring proposals by utilities and other industry participants. The
implementation of regulatory changes in response to such changes or
restructuring proposals, or otherwise 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.
EMPLOYEES
As of June 30, 1996, the Company and its subsidiaries employed
approximately 667 people. Neither the Coso Partnerships, Falcon nor the
Imperial Valley Project partnerships hire or retain any employees. All
employees necessary to the operation of the Coso Project and Falcon projects
are provided by the Company under certain plant and field operations and
maintenance agreements. All employees necessary to operate the Imperial
Valley Projects are provided by an affiliate of the Company under certain
administrative services and operation and maintenance agreements.
International development activities in Indonesia and the Philippines are
principally performed by employees of affiliates of the Company and
operations will be performed by employees of the local project entities. The
Company's affiliates currently maintain offices in Manila and Jakarta.
69
<PAGE>
COMPETITION AND DOMESTIC DEREGULATION
The Company competes with other independent power producers, including
affiliates of utilities, in obtaining long-term contracts to sell electric
power and steam to utilities. In addition, utilities may elect to expand or
create generating capacity through their own direct investments in new
plants. Over the past decade, obtaining a power sales contract from a utility
has generally become increasingly difficult, expensive and competitive. Many
states now require power sales contracts to be awarded by competitive
bidding, which both increases the cost of obtaining such contracts and
decreases the chances of obtaining such contracts as bids significantly
outnumber awards in most competitive solicitations. Finally, in the domestic
market the Energy Act is expected to increase competition. During 1995 and
1996, several states began to accelerate the movement toward more competition
in the electric power market and extensive federal and state legislative and
regulatory reviews are underway in an effort to further such 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.
The international independent 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 participate in the domestic market.
INSURANCE
The Company's operating facilities are insured for $600 million per
occurrence for general property damage and $600 million per occurrence for
business interruption, subject to a $25,000 deductible for property damage
($500,000 for turbine generator and machinery) and a 45-day deductible on
business interruption. Catastrophic insurance (earthquake and flood) is
capped at $200 million per occurrence for property damage and $200 million
per occurrence for business interruption, with a deductible that is the
higher of 5% of the loss or $2.5 million per occurrence. Liability insurance
coverage is $51 million with a $75,000 deductible. Operators' extra expense
(control of well) insurance is $10 million per occurrence with a $25,000
deductible, which is non-auditable. The policies are issued by international
and domestic syndicates with each domestic company rated A-or better by A.M.
Best Co. Inc. There can be no assurance, however, that earthquake, property
damage, business interruption or other insurance will be adequate to cover
all potential losses sustained by the Company or that such insurance will
continue to be available on commercially reasonable terms.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
Certain of the Company's projects are parties to litigation or contractual
disputes. See "Business--Domestic Projects."
70
<PAGE>
DESCRIPTION OF THE NOTES
The Old Notes have been, and the Exchange Notes will be, issued under an
Indenture (the "Indenture") dated as of September 20, 1996 between the
Company and IBJ Schroder Bank & Trust Company (the "Trustee"). The following
summary of certain provisions of the Indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Indenture, a copy of which is available upon
request from the Company and the Trustee, including the definitions of
certain terms therein and those terms made a part thereof by the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). Wherever
particular Sections or defined terms of the Indenture are referred to, such
Sections or defined terms are incorporated herein by reference. A summary of
certain defined terms used in the Indenture and referred to in the following
summary description of the Notes is set forth below under "Certain
Definitions."
GENERAL
The Old Notes are, and the Exchange Notes will be, senior unsecured
obligations of the Company, will rank pari passu with all other senior
unsecured indebtedness of the Company, will be limited to $225 million
aggregate principal amount and will mature on September 15, 2006.
The principal of, premium, if any, and any interest on the Notes will be
payable, and the Notes may be exchanged or transferred, at the office or
agency of the Company in the Borough of Manhattan, The City of New York
(which initially will be the corporate trust office of the Trustee), or at
such additional offices or agencies as the Company from time to time may
designate for such purpose. At the option of the Company, payment of interest
may be made by check mailed to the address of the Person entitled thereto as
such address may appear in the Security Register. While the Notes are
represented by Global Notes, the Company will make payments of principal and
interest by wire transfer to DTC or its nominee, as the case may be, which
will distribute payments to beneficial holders in accordance with its
customary procedures. The Notes (other than Global Notes and beneficial
interests therein) are transferable and exchangeable at the office of the
Security Registrar. The Company has initially appointed the Trustee as the
Paying Agent and the Security Registrar.
Interest on the Notes will accrue at the rate of 9 1/2% per annum and will
be payable semi-annually in arrears on each March 15 and September 15,
commencing March 15, 1997, to the Holders thereof at the close of business on
the preceding March 1 and September 1, respectively. Interest on overdue
principal and (to the extent permitted by applicable law) on overdue interest
will accrue at a rate of 1% in excess of the rate per annum borne by the
Notes. Interest on the Notes will be computed on the basis of a 360-day year
of twelve 30-day months.
Interest on the Old Notes is also subject to increase in certain
circumstances if the Company does not file a registration statement relating
to the Exchange Offer or if the registration statement is not declared
effective within certain time periods, or if certain other conditions are not
satisfied. See "Registration Rights Agreement--Exchange Offer."
The Old Notes have been, and the Exchange Notes will be, issued without
coupons and in fully registered form only in denominations of $1,000 and
integral multiples thereof.
The Company is subject to the informational reporting requirements of
Sections 13 and 15(d) under the Exchange Act and, in accordance therewith,
files certain reports and other information with the Commission. See
"Available Information." In addition, if Sections 13 and 15(d) cease to apply
to the Company, the Company will covenant in the Indenture to file comparable
reports and information with the Trustee and the Commission, and mail such
reports and information to Noteholders at their registered addresses, for so
long as any Notes remain outstanding.
71
<PAGE>
OPTIONAL REDEMPTION
The Notes may be redeemed at the Company's option, in whole or in part, at
any time on or after September 15, 2001 and prior to maturity, upon not less
than 30 nor more than 60 days' prior notice, at the following redemption
prices (expressed in percentages of principal amount), plus accrued interest
(if any) to the date of redemption, if redeemed during the 12-month period
commencing on or after September 15 of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- -------------------- ----------------
<S> <C>
2001 ................ 104.750%
2002 ................ 103.167%
2003 ................ 101.583%
2004 and thereafter 100.000%
</TABLE>
If less than all the outstanding Notes are to be redeemed, the Notes or
portions of Notes to be redeemed will be selected by the Trustee pro rata or
otherwise in such manner as the Trustee deems to be fair and appropriate in
the circumstances.
The Notes will not be subject to any mandatory sinking fund.
RANKING
The Old Notes are, and the Exchange Notes will be, general, unsecured
senior obligations of the Company and will rank pari passu with all other
unsecured senior indebtedness of the Company. As of June 30, 1996, the
Company's total consolidated indebtedness was $1,922.7 million (excluding
deferred income and convertible preferred securities of a subsidiary), its
total consolidated assets were $2,975.1 million and its stockholders' equity
was $587.9 million. At such date, on a pro forma basis, after giving effect
to the completion of the Initial Offering, the use of a portion of the
proceeds therefrom to repay the $35.0 million outstanding balance of the
Company's revolving line of credit, the Company's acquisition of Falcon, and
the Conversions, the Company's total consolidated indebtedness (excluding
deferred income and convertible preferred securities of a subsidiary) would
have been $2,102.4 million, its total consolidated assets would have been
$3,424.8 million and its stockholders' equity would have been $755.8 million.
See "Capitalization" and "Selected Historical Consolidated Financial and
Operating Data." The Indenture does not limit the amount of Non-Recourse Debt
which may be incurred by the Company or at the subsidiary or project level.
As a result, the Notes are effectively subordinated to any secured
Non-Recourse Debt of the Company and to indebtedness and other obligations of
the Company's subsidiaries and the partnerships and joint ventures in which
the Company has direct or indirect interests. See "Investment
Considerations--High Leverage: Additional Debt Permitted at Subsidiary or
Project Level; Priority of Project Debt."
CERTAIN COVENANTS
The Indenture contains certain covenants, including the ones summarized
below, which covenants will be applicable (unless they are waived or amended
or unless the Notes are defeased, see "Defeasance" below) so long as any of
the Notes are outstanding.
Limitation on Debt
The Company will not Incur any Debt, including Acquisition Debt, unless,
after giving effect to the incurrence of such Debt and the receipt and
application of the proceeds therefrom, the Fixed Charge Ratio of the Company
would be equal to or greater than 2.0 to 1.
Notwithstanding the foregoing, the Company may Incur each and all of the
following: (i) Company Refinancing Debt, (ii) Debt of the Company to any of
its Restricted Subsidiaries or any Eligible Joint Venture that is expressly
subordinated in right of payment to the Notes, provided that any transfer of
such Debt by a Restricted Subsidiary or an Eligible Joint Venture (other than
to another Restricted Subsidiary or another Eligible Joint Venture), or any
transfer of the Company's ownership interest, or a portion thereof, in such
Restricted Subsidiary or such Eligible Joint Venture or the interest, or a
portion thereof,
72
<PAGE>
of Kiewit in a Permitted Joint Venture or an Eligible Joint Venture (which
transfer has the effect of causing such Restricted Subsidiary or such
Eligible Joint Venture to cease to be a Restricted Subsidiary or an Eligible
Joint Venture, as the case may be), will be deemed to be an Incurrence of
Debt that is subject to the provisions of this covenant other than this
clause (ii), (iii) Debt in an aggregate principal amount not to exceed $100
million outstanding at any one time may be issued under or in respect of
Permitted Working Capital Facilities, (iv) Non-Recourse Debt Incurred in
respect of one or more Permitted Facilities in which the Company has a direct
or indirect interest, (v) Debt in respect of Currency Protection Agreements
or Interest Rate Protection Agreements, (vi) Purchase Money Debt, provided
that the amount of such Debt (net of any original issue discount) does not
exceed 90% of the fair market value of the Property acquired, (vii) the Notes
and other Debt outstanding as of the date of original issuance of the Notes
(other than Debt to the extent that it is extinguished, retired, defeased or
repaid in connection with the original issuance of the Notes), including Debt
that is Incurred in respect of interest or discount on such Debt (or
Redeemable Stock issued as dividends in respect of Redeemable Stock) pursuant
to the terms of the agreement or instrument that governs such Debt (or such
Redeemable Stock) as in effect on the date of original issuance of the Notes
and (viii) Debt in an aggregate principal amount not to exceed $75 million
outstanding at any one time.
Limitation on Subsidiary Debt
The Company will not permit any of its Restricted Subsidiaries or any
Eligible Joint Venture, to Incur any Debt.
Notwithstanding the foregoing, each and all of the following Debt may be
Incurred by a Restricted Subsidiary or an Eligible Joint Venture: (i) Debt
outstanding as of the date of original issuance of the Notes, (ii) Debt owed
by a Restricted Subsidiary or an Eligible Joint Venture to the Company or
another Restricted Subsidiary of the Company or another Eligible Joint
Venture that either directly or indirectly owns all or a portion of the
Company's interest in, or directly or indirectly is owned by, such Restricted
Subsidiary, or such Eligible Joint Venture, as the case may be, (iii)
Non-Recourse Debt Incurred in respect of one or more Permitted Facilities,
provided that such Restricted Subsidiary or such Eligible Joint Venture has a
direct or an indirect interest (which may include Construction Financing
provided by the Company to the extent permitted under the covenant described
under "Limitation on Restricted Payments" below as a "Permitted Investment")
in one or more of such Permitted Facilities in respect of which one or more
Restricted Subsidiaries or Eligible Joint Ventures shall have a direct or
indirect interest, (iv) Subsidiary Refinancing Debt, (v) Acquired Debt, (vi)
Debt in respect of Currency Protection Agreements or Interest Rate Protection
Agreements, (vii) Permitted Funding Company Loans and (viii) Permitted
Facilities Debt, provided that at the time of Incurrence thereof and after
giving effect to the application of the proceeds thereof, the aggregate
principal amount of Permitted Facilities Debt shall not exceed 15% of total
consolidated Debt of the Company computed in accordance with GAAP.
Limitation on Restricted Payments
The Company will not, and will not permit any of its Restricted
Subsidiaries or any Eligible Joint Venture to, directly or indirectly, make
any Restricted Payment unless at the time of such Restricted Payment and
after giving effect thereto (a) no Event of Default and no event that, after
the giving of notice or lapse of time or both, would become an Event of
Default, has occurred and is continuing, (b) the Company could Incur at least
$1 of Debt under the provision described in the first paragraph of
"Limitation on Debt" above and (c) the aggregate amount of all Restricted
Payments made by the Company, its Restricted Subsidiaries and the Eligible
Joint Ventures (the amount so made, if other than in cash, to be determined
in good faith by the Chief Financial Officer, as evidenced by an Officers'
Certificate, or, if more than $30 million, by the Board of Directors, as
evidenced by a Board resolution) after March 24, 1994, is less than the sum
(without duplication) of (i) 50% of the Adjusted Consolidated Net Income of
the Company for the period (taken as one accounting period) beginning on the
first day of the first fiscal quarter that begins after March 24, 1994 and
ending on the last day of the fiscal quarter immediately prior to the date of
such calculation, provided that if throughout any fiscal quarter within such
period the Ratings Categories applicable to the Notes are rated Investment
Grade by Standard &
73
<PAGE>
Poor's Corporation and Moody's Investors Service, Inc. (or if both do not
make a rating of the Notes publicly available, an equivalent Rating Category
is made publicly available by another Rating Agency), then 100% (instead of
50%) of the Adjusted Consolidated Net Income (if more than zero) with respect
to such fiscal quarter will be included pursuant to this clause (i), and
provided further that if Adjusted Consolidated Net Income for such period is
less than zero, then minus 100% of the amount of such net loss, plus (ii)
100% of the aggregate net cash proceeds received by the Company from and
after March 24, 1994 from (A) the issuance and sale (other than to a
Restricted Subsidiary or an Eligible Joint Venture) of its Capital Stock
(excluding Redeemable Stock, but including Capital Stock other than
Redeemable Stock issued upon conversion of, or in exchange for Redeemable
Stock or securities other than its Capital Stock), (B) the issuance and sale
or the exercise of warrants, options and rights to purchase its Capital Stock
(other than Redeemable Stock) and (C) the issuance and sale of convertible
Debt upon the conversion of such convertible Debt into Capital Stock (other
than Redeemable Stock), but excluding the net proceeds from the issuance,
sale, exchange, conversion or other disposition of its Capital Stock (I) that
is convertible (whether at the option of the Company or the holder thereof or
upon the happening of any event) into (x) any security other than its Capital
Stock or (y) its Redeemable Stock or (II) that is Capital Stock referred to
in clauses (ii) and (iii) of the definition of "Permitted Payment", plus
(iii) the net reduction in Investments of the types specified in clauses (iv)
and (v) of the definition of "Restricted Payment" that result from payments
of interest on Debt, dividends, or repayment of loans or advances, the
proceeds of the sale or disposition of the Investment or other return of the
amount of the original Investment to the Company, the Restricted Subsidiary
or the Eligible Joint Venture that made the original Investment from the
Person in which such Investment was made, provided that (x) the aggregate
amount of such payments will not exceed the amount of the original Investment
by the Company or such Restricted Subsidiary that reduced the amount
available pursuant to this clause (c) for making Restricted Payments and (y)
such payments may be added pursuant to this clause (iii) only to the extent
such payments are not included in the calculation of Adjusted Consolidated
Net Income, provided further that if Investments of the types specified in
clauses (iv) and (v) of the Definition of "Restricted Payment" have been made
in any Person and such Person thereafter becomes a Restricted Subsidiary or
an Eligible Joint Venture, then the aggregate amount of such Investment (to
the extent that they have reduced the amount available pursuant to this
clause (c) for making Restricted Payments), net of the amounts previously
added pursuant to this clause (iii), may be added to the amount available for
making Restricted Payments, plus (iv) an amount equal to the principal amount
of Debt of the Company extinguished in connection with the conversion into
Common Stock of the Company of the Company's 5% Convertible Subordinated
Debentures due 2000 and its 9.5% Convertible Subordinated Debenture due 2003.
The foregoing clause (c) will not prevent the payment of any dividend within
60 days after the date of its declaration if such dividend could have been
made on the date of its declaration without violation of the provisions of
this covenant.
None of the Company, any of its Restricted Subsidiaries or any Eligible
Joint Venture will be deemed to have made an Investment at the time that a
Person that is a Restricted Subsidiary of the Company or an Eligible Joint
Venture ceases to be a Restricted Subsidiary or an Eligible Joint Venture
(other than as a result of being designated as an Unrestricted Subsidiary),
although any subsequent Investment made by the Company, its Restricted
Subsidiaries and Eligible Joint Ventures in such Person will be Investments
that will be subject to the foregoing paragraph unless and until such time as
such Person becomes a Restricted Subsidiary or an Eligible Joint Venture.
Notwithstanding the foregoing, (i) the designation of a Restricted Subsidiary
as an Unrestricted Subsidiary, in the manner provided in the definition of
"Unrestricted Subsidiary," will be an Investment that will be subject to the
foregoing paragraph and (ii) the transfer of the Company's interest (or any
portion thereof) in an entity that has been deemed to be an Eligible Joint
Venture, directly or indirectly, to an Unrestricted Subsidiary will be an
Investment (to the extent of the interest transferred) that will be subject
to the foregoing paragraph.
Restricted Payments are defined in the Indenture to exclude Permitted
Payments, which include Permitted Investments. See "Certain Definitions"
below.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries
The Company will not, and will not permit any of its Restricted
Subsidiaries or any Eligible Joint Venture to, create or cause to become, or
as a result of the acquisition of any Person or Property, or upon
74
<PAGE>
any Person becoming a Restricted Subsidiary or an Eligible Joint Venture,
remain subject to, any consensual encumbrance or consensual restriction of
any kind on the ability of any Restricted Subsidiary or any Eligible Joint
Venture to (a) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary or such
Eligible Joint Venture owned by the Company, any other Restricted Subsidiary
or any other Eligible Joint Venture, (b) make payments in respect of any Debt
owed to the Company, any other Restricted Subsidiary of the Company or any
Eligible Joint Venture, (c) make loans or advances to the Company or to any
other Restricted Subsidiary of the Company or any other Eligible Joint
Venture that is directly or indirectly owned by such Restricted Subsidiary or
such Eligible Joint Venture or (d) transfer any of its Property to the
Company or to any other Restricted Subsidiary or any other Eligible Joint
Venture that directly or indirectly owns or is owned by such Restricted
Subsidiary or such Eligible Joint Venture, other than those encumbrances and
restrictions created or existing (i) on the date of the original issuance of
the Notes, (ii) pursuant to the Indenture, (iii) in connection with the
Incurrence of any Debt permitted under the provisions described in clause
(iii) of the second paragraph of "Limitation on Subsidiary Debt" above,
provided that, in the case of Debt owed to Persons other than the Company,
its Restricted Subsidiaries and any Eligible Joint Venture, the President or
the Chief Financial Officer of the Company determines in good faith, as
evidenced by an Officers' Certificate, that such encumbrances or restrictions
are required to effect such financing and are not materially more
restrictive, taken as a whole, on the ability of the applicable Restricted
Subsidiary or the applicable Eligible Joint Venture to make the payments,
distributions, loans, advances or transfers referred to in clauses (a)
through (d) above than encumbrances and restrictions, taken as a whole,
customarily accepted (or, in the absence of any industry custom, reasonably
acceptable) in comparable financings or comparable transactions in the
applicable jurisdiction, (iv) in connection with the execution and delivery
of an electric power or thermal energy purchase contract, or other contract
related to the output or product of, or services rendered by one or more
Permitted Facilities to which such Restricted Subsidiary or such Eligible
Joint Venture is a supplying party or other contracts with customers,
suppliers and contractors to which such Restricted Subsidiary or such
Eligible Joint Venture is a party and where such Restricted Subsidiary or
such Eligible Joint Venture is engaged, directly or indirectly, in the
development, design, engineering, procurement, construction, acquisition,
ownership, management or operation of one or more of such Permitted
Facilities, provided that the President or the Chief Financial Officer of the
Company determines in good faith, as evidenced by an Officers' Certificate,
that such encumbrances or restrictions are required to effect such contracts
and are not materially more restrictive, taken as a whole, on the ability of
the applicable Restricted Subsidiary or the applicable Eligible Joint Venture
to make the payments, distributions, loans, advances or transfers referred to
in clauses (a) through (d) above than encumbrances and restrictions, taken as
a whole, customarily accepted (or, in the absence of any industry custom,
reasonably acceptable) in comparable financings or comparable transactions in
the applicable jurisdiction, (v) in connection with any Acquired Debt,
provided that such encumbrance or restriction was not incurred in
contemplation of such Person becoming a Restricted Subsidiary or an Eligible
Joint Venture and provided further that such encumbrance or restriction does
not extend to any other Property of such Person at the time it became a
Restricted Subsidiary or an Eligible Joint Venture, (vi) in connection with
the Incurrence of any Debt permitted under clause (iv) of the provision
described in the second paragraph of "Limitation on Subsidiary Debt" above,
provided that, in the case of Debt owed to Persons other than the Company and
its Restricted Subsidiaries, the President or the Chief Financial Officer of
the Company determines in good faith, as evidenced by an Officers'
Certificate, that such encumbrances or restrictions taken as a whole are not
materially more restrictive than the encumbrances and restrictions applicable
to the Debt and/or equity being exchanged or refinanced, (vii) customary
non-assignment provisions in leases or other contracts entered into in the
ordinary course of business of the Company, any Restricted Subsidiary or any
Eligible Joint Venture, (viii) any restrictions imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially
all of the Capital Stock or Property of any Restricted Subsidiary or Joint
Venture that apply pending the closing of such sale or disposition, (ix) in
connection with Liens on the Property of such Restricted Subsidiary or such
Eligible Joint Venture that are permitted by the covenant described under
"Limitation on Liens" below but only with respect to transfers referred to in
clause (d) above, (x) in connection with the Incurrence of any Debt permitted
under clause (ii) of the provisions described in the second paragraph of
"Limitation on Subsidiary Debt" above or (xi) in
75
<PAGE>
connection with the Incurrence of any Permitted Facilities Debt permitted
under clause (viii) of the provisions described in the second paragraph of
"Limitation on Subsidiary Debt" above, provided that any such encumbrance or
restriction relates only to those Restricted Subsidiaries or Eligible Joint
Ventures having a direct or indirect interest in the Permitted Facilities in
respect of which such Permitted Facilities Debt was Incurred.
Limitation on Dispositions
Subject to the covenant described under "Mergers, Consolidations and Sales
of Assets" below, the Company will not make, and will not permit any of its
Restricted Subsidiaries or any Eligible Joint Venture to make, any Asset
Disposition unless (i) the Company, the Restricted Subsidiary or the Eligible
Joint Venture, as the case may be, receives consideration at the time of each
such Asset Disposition at least equal to the fair market value of the
Property or securities sold or otherwise disposed of (to be determined in
good faith by the Chief Financial Officer, as evidenced by an Officers'
Certificate, or, if more than $30 million, by the Board of Directors, as
evidenced by a Board resolution), (ii) at least 85% of such consideration is
received in cash or Cash Equivalents or, if less than 85%, the remainder of
such consideration consists of Property related to the business of the
Company as described in the first sentence of the covenant described under
"Limitation on Business" below, and (iii) unless otherwise required under the
terms of Senior Debt, at the Company's election, the Net Cash Proceeds are
either (A) invested in the business of the Company, any of its Restricted
Subsidiaries or any Eligible Joint Venture or (B) applied to the payment of
any Debt of the Company or and of its Restricted Subsidiaries or any Eligible
Joint Venture (or as otherwise required under the terms of such Debt),
provided that, no such payment of Debt (x) under Permitted Working Capital
Facilities or any other revolving credit agreement will count for this
purpose unless the related loan commitment, standby facility or the like will
be permanently reduced by an amount equal to the principal amount so repaid
or (y) owed to the Company, a Restricted Subsidiary thereof or an Eligible
Joint Venture will count for this purpose, provided further that such
investment or such payment, as the case may be, must be made within 365 days
from the later of the date of such Asset Disposition or the receipt by the
Company, such Restricted Subsidiary or such Eligible Joint Venture of the Net
Cash Proceeds related thereto. Any Net Cash Proceeds from Asset Dispositions
that are not applied as provided in clause (A) or (B) of the preceding
sentence will constitute "Excess Proceeds." Excess Proceeds will be applied,
as described below, to make an offer (an "Offer") to purchase Notes at a
purchase price equal to 100% of principal thereof, plus accrued interest, if
any, to the date of purchase.
Notwithstanding anything in the foregoing to the contrary, the Company,
its Restricted Subsidiaries and the Eligible Joint Ventures may exchange with
other Persons (i) Property that constitutes a Restricted Subsidiary or an
Eligible Joint Venture for Property that constitutes a Restricted Subsidiary
or an Eligible Joint Venture, (ii) Property that constitutes a Restricted
Subsidiary or an Eligible Joint Venture for Property that does not constitute
a Restricted Subsidiary or an Eligible Joint Venture, (iii) Property that
does not constitute a Restricted Subsidiary or an Eligible Joint Venture for
Property that does not constitute a Restricted Subsidiary or an Eligible
Joint Venture and (iv) Property that does not constitute a Restricted
Subsidiary or an Eligible Joint Venture for Property that constitutes a
Restricted Subsidiary or an Eligible Joint Venture, provided that in each
case the fair market value of the Property received is at least equal to the
fair market value of the Property exchanged as determined in good faith by
the Chief Financial Officer, as evidenced by an Officers' Certificate, or, if
more than $25 million, by the Board of Directors, as evidenced by a Board
resolution, provided that the Investment in the Property received in the
exchanges described in clauses (ii) and (iii) of the prior sentence will be
subject to the covenant described under "Limitation on Restricted Payments"
above. Notwithstanding anything in the foregoing to the contrary, the Company
may not, and will not permit any of its Restricted Subsidiaries or any
Eligible Joint Venture to, make an Asset Disposition of any of their interest
in, or Property of, any of the Coso Project other than for consideration
consisting solely of cash.
To the extent that any or all of the Net Cash Proceeds of any Foreign
Asset Disposition are prohibited from (or delayed in) being repatriated to
the United States by applicable local law, the portion of such Net Cash
Proceeds so affected will not be required to be applied at the time provided
above but may be retained by any Restricted Subsidiary or any Eligible Joint
Venture so long, but only so long, as
76
<PAGE>
the applicable local law does not permit (or delays) repatriation to the
United States. If such Net Cash Proceeds are transferred by the Restricted
Subsidiary or Eligible Joint Venture that conducted the Foreign Asset
Disposition to another Restricted Subsidiary or Eligible Joint Venture, the
Restricted Subsidiary or Eligible Joint Venture receiving such Net Cash
Proceeds must not be directly or indirectly obligated on any Debt owed to and
Person other than the Company. The Company will take or cause such Restricted
Subsidiary or such Eligible Joint Venture to take all actions required by the
applicable local law to permit such repatriation promptly. Once repatriation
of any of such Net Cash Proceeds is permitted under the applicable local law,
repatriation will be effected immediately and the repatriated Net Cash
Proceeds will be applied in the manner set forth in this covenant as if such
Asset Disposition had occurred on the date of such repatriation. In addition,
if the Chief Financial Officer determines, in good faith, as evidenced by an
Officers' Certificate, that repatriation of any or all of the Net Cash
Proceeds of any Foreign Asset Disposition would have a material adverse tax
consequence to the Company, the Net Cash Proceeds so affected may be retained
outside of the United States by the applicable Restricted Subsidiary or the
applicable Eligible Joint Venture for so long as such material adverse tax
consequence would continue. Notwithstanding the foregoing provisions of this
paragraph to the contrary, if applicable local law prohibits (or delays) the
repatriation of Net Cash Proceeds of a Foreign Asset Disposition but such
local law does not prohibit the application of such Net Cash Proceeds
pursuant to the first sentence of the first paragraph of this covenant, the
Company may apply such Net Cash Proceeds pursuant to such provision.
If the Notes tendered pursuant to an Offer have an aggregate purchase
price that is less than the Excess Proceeds available for the purchase of the
Notes, the Company, may use the remaining Excess Proceeds for (general
corporate purposes without regard to the provisions of this covenant. The
Company will not be required to make an Offer pursuant to this covenant if
the Excess Proceeds available therefor are less than $10 million, provided
that the lesser amounts of such Excess Proceeds will be carried forward and
cumulated for each 36 consecutive month period for purposes of determining
whether an Offer is required with respect to any Excess Proceeds of any
subsequent Asset Dispositions. Any such lesser amounts so carried forward and
cumulated need not be segregated or reserved and may be used for general
corporate purposes, provided that such use will not reduce the amount of
cumulated Excess Proceeds or relieve the Company of its obligation hereunder
to make an Offer with respect thereto.
The Company will make an Offer by mailing to each Holder, with a copy to
the Trustee, within 30 days after the receipt of Excess Proceeds that cause
the cumulated Excess Proceeds to exceed $10 million, a written notice that
will specify the purchase date, which will not be less than 30 days nor more
than 60 days after the date of such notice (the "Purchase Date"), that will
contain certain information concerning the business of the Company that the
Company believes in good faith will enable the Holders to make an informed
decision and that will contain information concerning the procedures
applicable to the Offer (including, without limitation, the right of
withdrawal) and the effect of such Offer on the Notes tendered. Holders that
elect to have their Notes purchased will be required to surrender such Notes
at least one Business Day prior to the Purchase Date. If at the expiration of
the Offer period the aggregate purchase price of the Notes properly tendered
by Holders pursuant to the Offer exceeds the amount of such Excess Proceeds,
the Notes or portions of Notes to be accepted for purchase will be selected
by the Trustee in such manner as the Trustee deems to be fair and appropriate
in the circumstances.
If the Company is prohibited by applicable law from making the Offer or
purchasing Notes thereunder, the Company need not make an Offer pursuant to
this covenant for so long as such prohibition is in effect.
The Company will comply with all applicable tender offer rules, including,
without limitation, Rule 14e-1 under the Exchange Act, in connection with an
Offer.
Limitation on Transactions with Affiliates
The Company will not, and will not permit any of its Restricted
Subsidiaries or and Eligible Joint Venture to, directly or indirectly,
conduct any business or enter into or permit to exist any transaction or
series of related transactions (including, but not limited to, the purchase,
sale or exchange of Property, the making of any Investment, the giving of any
Guarantee or the rendering of any service) with any Affiliate
77
<PAGE>
of the Company, such Restricted Subsidiary or such Eligible Joint Venture, as
the case may be, unless (i) such business, transaction or series of related
transactions is in the best interest of the Company such Restricted
Subsidiary or such Eligible Joint Venture, (ii) such business, transaction or
series of related transactions is on terms no less favorable to the Company,
such Restricted Subsidiary or such Eligible Joint Venture than those that
could be obtained in a comparable arm's length transaction with a Person that
is not such an Affiliate and (iii) with respect to such business, transaction
or series of related transactions that has a fair market value or involves
aggregate payments equal to, or in excess of, $10 million, such business,
transaction or series of transactions is approved by a majority of the Board
of Directors (including a majority of the disinterested directors), which
approval is set forth in a Board resolution delivered to the Trustee
certifying that, in good faith, the Board of Directors believes that such
business, transaction or series of transactions complies with clauses (i) and
(ii) above.
Limitation on Liens
The Company may not Incur any Debt that is secured, directly or
indirectly, with, and the Company will not, and will not permit any of its
Restricted Subsidiaries or an Eligible Joint Venture to, grant a Lien on the
Property of the Company, its Restricted Subsidiaries or any Eligible Joint
Venture now owned or hereafter acquired unless contemporaneous therewith or
prior thereto the Notes are equally and ratably secured except for (i) any
such Debt secured by Liens existing on the Property of any entity at the time
such Property is acquired by the Company, any of its Restricted Subsidiaries
or any Eligible Joint Venture, whether by merger, consolidation, purchase of
such Property or otherwise, provided that such Liens (x) are not created,
incurred or assumed in contemplation of such Property being acquired by the
Company, any of its Restricted Subsidiaries or any Eligible Joint Venture and
(y) do not extend to any other Property of the Company, any of its Restricted
Subsidiaries or any Eligible Joint Venture, (ii) any other Debt that is
required by the terms thereof to be equally and ratably secured as a result
of the Incurrence of Debt that is permitted to be secured pursuant to another
clause of this covenant, (iii) Liens that are granted in good faith to secure
Debt (A) contemplated by clause (iv) of the covenant described under
"Limitation on Debt" above or (B) contemplated by clauses (ii), (iii), (vi)
and (viii) of the covenant described under "Limitation on Subsidiary Debt"
above, provided that, in the case of Debt owed to a Person other than the
Company or a Restricted Subsidiary, the President or Chief Financial Officer
of the Company determines in good faith, as evidenced by an Officers'
Certificate, that such Liens are required in order to effect such financing
and are not materially more restrictive, taken as a whole, than Liens, taken
as a whole, customarily accepted (or in the absence of industry custom,
reasonably acceptable) in comparable financings or comparable transactions in
the applicable jurisdiction, (iv) Liens existing on the date of the original
issuance of the Notes, (v) Liens incurred to secure Debt incurred by the
Company as permitted by clause (vi) of the covenant described under
"Limitation on Debt" above, provided that such Liens may not cover any
Property other than that being purchased and improvements and additions
thereto, (vi) Liens on any Property of the Company securing Permitted Working
Capital Facilities, Guarantees thereof and any Interest Rate Protection
Agreements or Currency Protection Agreements, provided that such Liens may
not extend to the Capital Stock owned by the Company in any Restricted
Subsidiary of the Company or any Eligible Joint Venture, (vii) Liens in
respect of extensions, renewals, refundings or refinancings of any Debt
secured by the Liens referred to in the foregoing clauses, provided that the
Liens in connection with such renewal, extension, refunding or refinancing
will be limited to all or part of the specific property that was subject to
the original Lien, (viii) Liens incurred to secure obligations in respect of
letters of credit, bankers' acceptances, surety, bid, operating and
performance bonds, performance guarantees or other similar instruments or
obligations (or reimbursement obligations with respect thereto) (in each
case, to the extent incurred in the ordinary course of business), (ix) any
Lien arising by reason of (A) any judgment, decree or order of any court, so
long as such Lien is being contested in good faith and is appropriately
bonded, and any appropriate legal proceedings that may have been duly
initiated for the review of such judgment, decree or order have not been
finally terminated or the period within which such proceedings may be
initiated has not expired, (B) taxes, duties, assessments, imposts or other
governmental charges that are not yet delinquent or are being contested in
good faith, (C) security for payment of worker's compensation or other
insurance, (D) security for the performance of tenders, contracts (other than
contracts for the payment of money) or leases, (E) deposits to secure public
or statutory obligations, or to secure permitted contracts for the purchase
or sale of any currency
78
<PAGE>
entered into in the ordinary course of business, (F) the operation of law in
favor of carriers, warehousemen, landlords, mechanics, materialmen, laborers,
employees or suppliers, incurred in the ordinary course of business for sums
that are not yet delinquent or are being contested in good faith by
negotiations or by appropriate proceedings that suspend the collection
thereof, (G) easements, rights-of-way, zoning and similar covenants and
restrictions and other similar encumbrances or title defects that do not in
the aggregate materially interfere with the ordinary conduct of the business
of the Company, any of its Restricted Subsidiaries or any Eligible Joint
Venture or (H) leases and subleases of real property that do not interfere
with the ordinary conduct of the business of the Company, any of its
Restricted Subsidiaries or any Eligible Joint Venture and that are made on
customary and usual terms applicable to similar properties, or (x) Liens, in
addition to the foregoing, that secure obligations not in excess of $5
million in the aggregate.
Purchase of Notes Upon a Change of Control
Upon the occurrence of a Change of Control, each Holder of the Notes will
have the right to require that the Company repurchase such Holder's Notes at
a purchase price in cash equal to 101% of the principal thereof on the date
of purchase plus accrued interest, if any, to the date of purchase.
The Change of Control provisions may not be waived by the Trustee or by
the Board of Directors, and any modification thereof must be approved by each
Holder. Nevertheless, the Change of Control provisions will not necessarily
afford protection to Holders, including protection against an adverse effect
on the value of the Notes, in the event that the Company or its Subsidiaries
Incur additional Debt, whether through recapitalizations or otherwise.
Within 30 days following a Change of Control, the Company will mail a
notice to each Holder, with a copy to the Trustee, stating (1) that a Change
of Control has occurred and that such Holder has the right to require the
Company to purchase such Holder's Notes at the purchase price described above
(the "Change of Control Offer"), (2) the circumstances and relevant facts
regarding such Change of Control (including information with respect to pro
forma historical income, cash flow and capitalization after giving effect to
such Change of Control), (3) the purchase date (which will be not earlier
than 30 days nor later than 60 days from the date such notice is mailed) (the
"Purchase Date"), (4) and thereafter interest on and such Note will continue
to accrue, (5) any Note properly tendered pursuant to the Change of Control
Offer will cease to accrue interest after the Purchase Date (assuming
sufficient moneys for the purchase thereof are deposited with the Trustee),
(6) that Holders electing to have a Note purchased pursuant to a Change of
Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder To Elect Purchase" on the reverse of the Note completed, to
the paying agent at the address specified in the notice prior to the close of
business on the fifth Business Day prior to the Purchase Date, (7) that a
Holder will be entitled to withdraw such Holder's election if the paving
agent receives, not later than the close of business on the third Business
Day (or such shorter periods as may, be required by applicable law) preceding
the Purchase Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the Holder, the principal amount of Notes the
Holder delivered for purchase, and a statement that such Holder is
withdrawing his election to have such Notes purchased and (8) that Holders
that elect to have their Notes purchased only in part will be issued new
Notes having a principal amount equal to the portion of the Notes that were
surrendered but not tendered and purchased.
On the Purchase Date, the Company will (i) accept for payment all Notes or
portions thereof tendered pursuant to the Change of Control Offer, (ii)
deposit with the Trustee money sufficient to pay the purchase price of all
Notes or portions thereof so tendered for purchase and (iii) deliver or cause
to be delivered to the Trustee the Notes properly tendered together with an
Officers' Certificate identifying the Notes or portions thereof tendered to
the Company for purchase. The Trustee will promptly mail, to the Holders of
the Notes properly tendered and purchased, payment in an amount equal to the
purchase price, and promptly authenticate and mail to each Holder a new Note
having a principal amount equal to any portion of such Holder's Notes that
were surrendered but not tendered and purchased, the Company will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Purchase Date.
79
<PAGE>
If the Company is prohibited by applicable law from making the Change of
Control Offer or purchasing Notes thereunder, the Company need not make a
Change of Control Offer pursuant to this covenant for so long as such
prohibition is in effect.
The Company will comply with all applicable tender offer rules, including,
without limitation, Rule 14e-1 under the Exchange Act, in connection with a
Change of Control Offer.
Limitation on Business
The Company will, and will cause its Restricted Subsidiaries and the
Eligible Joint Ventures to, engage only in (i) the ownership, design,
engineering, procurement, construction, development, acquisition, operation,
servicing, management or disposition of Permitted Facilities, (ii) the
ownership, creation, development, acquisition, servicing, management or
disposition of Restricted Subsidiaries and Joint Ventures that own,
construct, develop, design, engineer, procure, acquire, operate, service,
manage or dispose of Permitted Facilities, (iii) obtaining, arranging or
providing financing incident to any of the foregoing and (iv) other related
activities incident to any of the foregoing. The Company will not, and will
not permit and of its Restricted Subsidiaries or any Eligible Joint Venture
to, make any Investment or otherwise acquire any Property that is not
directly related to the business of the Company as described in the preceding
sentence (collectively, the "Ineligible Investments") other than as a part of
an Investment or an acquisition of Property that is predominantly and
directly related to the business of the Company as described above, and if
the aggregate fair market value of such Ineligible Investments in the
aggregate exceeds 20% (the "Percentage Limit") of the total assets of the
Company and its consolidated Restricted Subsidiaries (as determined in
accordance with GAAP) as determined in good faith by the Chief Financial
Officer, as evidenced by an Officers' Certificate, the Company, its
Restricted Subsidiaries and the Eligible Joint Ventures must cease acquiring
any additional Ineligible Investments and, within 18 months of the
acquisition that caused the Ineligible Assets to exceed the Percentage Limit,
must return to compliance with the Percentage Limit by disposing of
Ineligible Assets or otherwise, provided that such 18-month period may be
extended up to an additional six months if, despite the Company's active
efforts during such 18-month period to dispose of such Ineligible Investments
or to otherwise come into compliance with such Percentage Limit, the Company
is unable to do so because of regulatory restrictions or delays or adverse
market conditions.
Limitation on Certain Sale-Leasebacks
The Company will not, and will not permit any of its Restricted
Subsidiaries or any Eligible Joint Venture to, Incur or otherwise become
obligated with respect to any sale-leaseback (other than a sale-leaseback
with respect to a Permitted Facility that is Non-Recourse) unless, (i) (a) if
effected by the Company, the Company would be permitted to Incur such
obligation under the covenant described under "Limitation on Debt" above or,
(b) if effected by a Restricted Subsidiary or an Eligible Joint Venture, such
Restricted Subsidiary or such Eligible Joint Venture would be permitted to
Incur such obligation under the covenant described under "Limitation on
Subsidiary Debt" above, assuming for the purpose of this covenant and the
covenants described under "Limitation on Debt" and "Limitation on Subsidiary
Debt" that (x) the obligation created by such sale-leaseback is a Capitalized
Lease and (y) the Capitalized Lease Obligation with respect thereto is the
Attributable Value thereof, (ii) the Company, such Restricted Subsidiary or
such Eligible Joint Venture is permitted to grant a Lien with respect to the
property that is the subject of such sale-leaseback under the covenant
described under "Limitation on Liens" above, (iii) the proceeds of such
sale-leaseback are at least equal to the fair market value of the property
sold (determined in good faith as evidenced by an Officers' Certificate
delivered to the Trustee in respect of a transaction involving less than $25
million, or, if equal to or in excess of $25 million, by the Board of
Directors, as evidenced by a Board resolution) and (iv) the Net Cash Proceeds
of the sale-leaseback are applied pursuant to the covenants described under
"Limitation on Dispositions" above.
Limitation on Sale of Subsidiary Preferred Stock
The Company will not permit any of its Restricted Subsidiaries or any
Eligible Joint Venture to create, assume or otherwise cause or suffer to
exist any Preferred Stock except: (i) Preferred Stock
80
<PAGE>
outstanding on the date of the Indenture, including Preferred Stock issued as
dividends in respect of such Preferred Stock pursuant to the terms of the
agreement or instrument that governs such Preferred Stock as in effect on the
date of original issuance of the Notes, (ii) Preferred Stock held by the
Company, a Restricted Subsidiary of the Company or an Eligible Joint Venture,
(iii) Preferred Stock issued by a Person prior to the time (a) such Person
becomes a Restricted Subsidiary or an Eligible Joint Venture, (b) such Person
merges with or into another Restricted Subsidiary or another Eligible Joint
Venture or (c) a Restricted Subsidiary, or an Eligible Joint Venture merges
with or into such Person (in a transaction in which such Person becomes a
Restricted Subsidiary or an Eligible Joint Venture), provided that such
Preferred Stock was not issued in anticipation of such Person becoming a
Restricted Subsidiary or an Eligible Joint Venture or of such merger, (iv)
Preferred Stock issued or agreed to be issued by a Restricted Subsidiary or
an Eligible Joint Venture in connection with the financing of the
construction, design, engineering, procurement, equipping, developing,
operation, ownership, management, servicing or acquisition of one or more
Permitted Facilities in which the Company or one or more Restricted
Subsidiaries or Eligible Joint Ventures has a direct or indirect interest or
the retirement of Debt or Preferred Stock secured by any such Permitted
Facility or in order to enhance the repatriation of equity, advances or
income or the increase of after-tax funds available for distribution to the
owners of any such Permitted Facility (v) Preferred Stock issued or agreed to
be issued by a Restricted Subsidiary or an Eligible Joint Venture in
satisfaction of legal requirements applicable to a Permitted Facility or to
maintain the ordinary course of conduct of such Restricted Subsidiary's or
such Eligible Joint Venture's business in the applicable jurisdiction and
(vi) Preferred Stock that is exchanged for, or the proceeds of which are used
to refinance, any Preferred Stock permitted to be outstanding pursuant to
clauses (i) through (v) hereof (or any extension, renewal or refinancing
thereof), having a liquidation preference not to exceed the liquidation
preference of the Preferred Stock so exchanged or refinanced and having a
redemption period no shorter than the redemption period of the Preferred
Stock so exchanged or refinanced.
MERGERS, CONSOLIDATIONS AND SALES OF ASSETS
The Company may not consolidate with, merge with or into, or transfer all
or substantially all its Property (as an entirety or substantially an
entirety in one transaction or a series of related transactions), to any
Person unless: (i) the Company will be the continuing Person, or the Person
(if other than the Company) formed by such consolidation or into which the
Company is merged or to which the Property of the Company is transferred will
be a corporation organized and existing under the laws of the United States
or any State thereof or the District of Columbia and will expressly assume in
writing all the obligations of the Company, under the Indenture and the
Notes, (ii) immediately after giving effect to such transaction, no Event of
Default and no event or condition that through the giving of notice or lapse
of time or both would become an Event of Default will have occurred and be
continuing, (iii) immediately after giving effect to such transaction on a
pro forma basis, the Company or the surviving entity would be able to Incur
at least $1 of Debt under the provision described in the first paragraph of
"Limitation on Debt" above and (iv) the Net Worth of the Company or the
surviving entity, as the case may be, on a pro forma basis after giving
effect to such transaction (without giving effect to the fees and expenses
incurred in respect of such transaction), is not less than the Net Worth of
the Company immediately prior to such transaction.
None of the Company, any of its Restricted Subsidiaries or any Eligible
Joint Ventures may merge with or into, or be consolidated with, an
Unrestricted Subsidiary of the Company, except to the extent that such
Unrestricted Subsidiary has been designated a Restricted Subsidiary as
provided in the Indenture in advance of or in connection with such merger.
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the Holders of not less than a majority in principal
amount of the Notes at the time outstanding, to modify the Indenture or any
supplemental indenture or the rights of the Holders of the Notes, except that
no such modification may (i) extend the final maturity of any of the Notes,
reduce the principal amount thereof,
81
<PAGE>
reduce any amount payable on redemption or purchase thereof or impair the
right of any Holder to institute suit for the payment thereof or make any
change in the covenants regarding a Change of Control or an Asset Disposition
or the related definitions without the consent of the Holder of each of the
Notes so affected or (ii) reduce the percentage of Notes, the consent of the
Holders of which is required for any such modification, without the consent
of the Holders of all Notes then outstanding.
EVENTS OF DEFAULT
An Event of Default is defined in the Indenture as being: (i) default as
to the payment of principal, or premium, if any, on any Note or as to any
payment required in connection with a Change of Control or an Asset
Disposition, (ii) default as to the payment of interest on any Note for 30
days after payment is due, (iii) failure to make an offer required under
either of the covenants described under "Limitation on Dispositions" or
"Purchase of Notes Upon a Change of Control" above or a failure to purchase
Notes tendered in respect of such offer, (iv) default in the performance, or
breach, of any covenant, agreement or warranty contained in the Indenture and
the Notes and such failure continues for 30 days after written notice is
given to the Company by the Trustee or the Holders of at least 25% in
principal amount of the outstanding Notes, as provided in the Indenture, (v)
default on any other Debt of the Company or any Significant Subsidiary (other
than Non-Recourse Debt of Significant Subsidiaries) if either (x) such
default results from failure to pay principal of such Debt in excess of $25
million when due after any applicable grace period or (y) as a result of such
default, the maturity of such Debt has been accelerated prior to its
scheduled maturity and such default has not been cured within the applicable
grace period, and such acceleration has not been rescinded, and the principal
amount of such Debt, together with the principal amount of any other Debt of
the Company and its Significant Subsidiaries (not including Non-Recourse Debt
of the Significant Subsidiaries) that is in default as to principal, or the
maturity of which has been accelerated, aggregates $25 million or more, (vi)
the entry by a court of one or more judgments or orders against the Company
or any Significant Subsidiary for the payment of money that in the aggregate
exceeds $25 million (excluding the amount thereof covered by insurance or by
a bond written by a Person other than an Affiliate of the Company), which
judgments or orders have not been vacated, discharged or satisfied or stayed
pending appeal within 60 days from the entry thereof, provided that such a
judgment or order will not be an Event of Default if such judgment or order
does not require any payment by the Company or any Significant Subsidiary,
except to the extent that such judgment is only against Property that secures
Non-Recourse Debt that was permitted under the Indenture, and the Company
could, at the expiration of the applicable 60 day period, after giving effect
to such judgment or order and the consequences thereof, Incur at least $1 of
Debt under the provision described in the first paragraph of "Limitation on
Debt" above, and (vii) certain events involving bankruptcy, insolvency or
reorganization of the Company or any of its Significant Subsidiaries.
The Indenture provides that the Trustee may withhold notice to the Holders
of any default (except in payment of principal of, premium, if any, or
interest on the Notes and any payment required in connection with a Change of
Control or an Asset Disposition) if the Trustee considers it in the interest
of Holders to do so.
The Indenture provides that if an Event of Default (other than an event of
bankruptcy, insolvency or reorganization of the Company or a Significant
Subsidiary) has occurred and is continuing, either the Trustee or the Holders
of not less than 25% in principal amount of the Notes then outstanding may
declare the Default Amount of all Notes to be due and payable immediately,
but upon certain conditions such declaration may be annulled and past
defaults (except, unless theretofore cured, a default in payment of principal
of, premium, if any, or interest on the Notes or any payment required in
connection with a Change of Control or an Asset Disposition, as the case may
be) may be waived by the Holders of a majority in principal amount of the
Notes then outstanding. If an Event of Default due to the bankruptcy,
insolvency or reorganization of the Company or a Significant Subsidiary
occurs, the Indenture provides that the Default Amount of all Notes will
become immediately due and payable.
The Holders of a majority in principal amount of the Notes then
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee under the
Indenture, subject to certain limitations specified in the Indenture,
provided that the Holders
82
<PAGE>
of Notes must have offered to the Trustee reasonable indemnity against
expenses and liabilities. The Indenture requires the annual filing by the
Company with the Trustee of a written statement as to compliance with the
principal covenants contained in the Indenture.
DEFEASANCE
Legal Defeasance
The Indenture provides that the Company will be deemed to have paid and
will be discharged from any and all obligations in respect of the Notes, on
the 123rd day after the deposit referred to below has been made (or
immediately if an Opinion of Counsel is delivered to the effect described in
clause (B)(iii)(y) below), and the provisions of the Indenture will cease to
be applicable with respect to the Notes (except for, among other matters,
certain obligations to register the transfer or exchange of the Notes, to
replace stolen, lost or mutilated Notes, to maintain paying agencies and to
hold monies for payment in trust) if, among other things, (A) the Company has
deposited with the Trustee, in trust, money and/or U.S. Government
Obligations that through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on
the Notes, on the respective Stated Maturities of the Notes or, if the
Company makes arrangements satisfactory to the Trustee for the redemption of
the Notes prior to their Stated Maturity, on any earlier redemption date in
accordance with the terms of the Indenture and the Notes, (B) the Company has
delivered to the Trustee (i) either (x) an Opinion of Counsel to the effect
that Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit, defeasance and discharge and will be
subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred and the Company had paid or redeemed such Notes on
the applicable dates, which Opinion of Counsel must be based upon a ruling of
the Internal Revenue Service to the same effect or a change in applicable
federal income tax law or related Treasury regulations after the date of the
Indenture or (y) a ruling directed to the Trustee or the Company received
from the Internal Revenue Service to the same effect as the aforementioned
Opinion of Counsel, (ii) an Opinion of Counsel to the effect that the
creation of the defeasance trust does not violate the Investment Company Act
of 1940 and (iii) an Opinion of Counsel to the effect that either (x) after
the passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 or 548 of the U.S. Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law or (y) based upon existing
precedents, if the matter were properly briefed, a court should hold that the
deposit of moneys and/or U.S. Government Obligations as provided in clause
(A) would not constitute a preference voidable under Section 547 or 548 of
the U.S. Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law, (C) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or lapse
of time or both would become an Event of Default, will have occurred and be
continuing on the date of such deposit or (unless an Opinion of Counsel is
delivered to the effect described in clause (B)(iii)(y) above) during the
period ending on the 123rd day after the date of such deposit and the deposit
will not result in a breach or violation of, or constitute a default under,
any other agreement or instrument to which the Company is a party or by which
the Company is bound and (D) if at such time the Notes are listed on a
national securities exchange, the Company has delivered to the Trustee an
Opinion of Counsel to the effect that the Notes will not be delisted as a
result of such deposit, defeasance and discharge.
Covenant Defeasance
The Indenture further provides that the provisions of clause (iii) under
"Mergers, Consolidations and Sales of Assets" and all the covenants described
herein under "Certain Covenants," clause (iv) under "Events of Default" with
respect to such covenants and with respect to clause (iii) under "Mergers,
Consolidations and Sales of Assets," clauses (i) and (iii) with respect to
certain offers for the Notes required by certain covenants and clauses (v)
and (vi) under "Events of Default" will cease to be applicable to the
Company, its Restricted Subsidiaries and its Eligible Joint Ventures upon the
satisfaction of the provisions described in clauses (A), (B)(ii) and (iii),
(C) and (D) of the preceding paragraph and the delivery by the Company to the
Trustee of an Opinion of Counsel to the effect that, among other
83
<PAGE>
things, the Holders of the Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit and the defeasance of
certain covenants and Events of Default and will be subject to federal income
tax on the same amount and in the same manner and at the same times as would
have been the case if such deposit and defeasance had not occurred and the
Company had paid or redeemed such Notes on the applicable dates.
Defeasance and Certain Other Events of Default
If the Company exercises its option to omit compliance with certain
covenants and provisions of the Indenture with respect to the Notes as
described in the immediately preceding paragraph and the Notes are declared
due and payable because of the occurrence of an Event of Default that remains
applicable, the amount of money and/or U.S. Government Obligations on deposit
with the Trustee will be sufficient to pay amounts due on the Notes at the
time of their Stated Maturity or scheduled redemption, but may not be
sufficient to pay amounts due on the Notes at the time of acceleration
resulting from such Event of Default. The Company will remain liable for such
payments.
THE TRUSTEE
IBJ Schroder Bank & Trust Company is the Trustee under the Indenture.
GOVERNING LAW
The Indenture and the Notes will be governed by, and construed in
accordance with, the law of the State of New York, including Section 5-1401
of the New York General Obligations Law, but otherwise without regard to
conflict of laws rules.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definitions of all such terms as well as any other
capitalized terms used herein for which no definition is provided.
"Acquired Debt" is defined to mean Debt Incurred by a Person prior to the
time (i) such Person becomes a Restricted Subsidiary of the Company or an
Eligible Joint Venture, (ii) such Person merges with or into a Restricted
Subsidiary of the Company or an Eligible Joint Venture, or (iii) a Restricted
Subsidiary of the Company or an Eligible Joint Venture merges with or into
such Person (in a transaction in which such Person becomes a Restricted
Subsidiary of the Company or an Eligible Joint Venture), provided that, after
giving effect to such transaction, any Non-Recourse Debt of such Person could
have been Incurred pursuant to clause (iii) of the provision described under
"Limitation on Subsidiary Debt", any Permitted Facilities Debt of such Person
could have been Incurred pursuant to clause (viii) of the provision described
under "Limitation on Subsidiary Debt" and would not otherwise violate any
other provision of the Indenture, and all the other Debt of such Person could
have been Incurred by the Company at the time of such merger or acquisition
pursuant to the provision described in the first paragraph of "Limitation on
Debt" above, and provided further that such Debt was not Incurred in
connection with, or in contemplation of, such merger or such Person becoming
a Restricted Subsidiary of the Company or an Eligible Joint Venture.
"Acquisition Debt" is defined to mean Debt of any Person existing at the
time such Person is merged into the Company or assumed in connection with the
acquisition of Property from any such Person (other than Property acquired in
the ordinary course of business), including Debt Incurred in connection with,
or in contemplation of, such Person being merged into the Company (but
excluding Debt of such Person that is extinguished, retired or repaid in
connection with such merger or acquisition).
"Adjusted Consolidated Net Income" is defined to mean for any period, for
any Person (the "Referenced Person") the aggregate Net Income (or loss) of
the Referenced Person and its consolidated Subsidiaries for such period
determined in conformity with GAAP, provided that the following items will be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the Net Income
84
<PAGE>
(or loss) of any other Person (other than a Subsidiary of the Referenced
Person) in which any third Person has an interest, except to the extent of
the amount of dividends or other distributions actually paid in cash to the
Referenced Person during such period, or after such period and on or before
the date of determination, by such Person in which the interest is held,
which dividends and distributions will be included in such computation, (ii)
solely for the purposes of calculating the amount of Restricted Payments that
may be made pursuant to the provision described in clause (c) of the first
paragraph of "Limitation on Restricted Payments" above (and in such case,
except to the extent includable pursuant to clause (i) above), the Net Income
(if positive) of any other Person accrued prior to the date it becomes a
Subsidiary of the Referenced Person or is merged into or consolidated with
the Referenced Person or any of its Subsidiaries or all or substantially all
the Property of such other Person are acquired by the Referenced Person or
any of its Subsidiaries, (iii) the Net Income (if positive) of any Subsidiary
of the Referenced Person to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary to such Person or to
any other Subsidiary of such Net Income is not at the time permitted by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Subsidiary, (iv) any gains or losses (on an after-tax basis) attributable to
Asset Sales (except, solely for the purposes of calculating the amount of
Restricted Payments that may be made pursuant to the provision described in
clause (c) of the first paragraph of "Limitation on Restricted Payments"
above, any gains or losses of the Company and any of its Restricted
Subsidiaries from Asset Sales of Capital Stock of Unrestricted Subsidiaries),
(v) the cumulative effect of a change in accounting principles and (vi) any
amounts paid or accrued as dividends on Preferred Stock of any Subsidiary of
the Referenced Person that is not held by the Referenced Person or another
Subsidiary thereof. When the "Referenced Person" is the Company, the
foregoing references to "Subsidiaries" will be deemed to refer to "Restricted
Subsidiaries."
"Affiliate" of any Person is defined to mean any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such Person. For the purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling", "controlled
by" and "under common control with") when used with respect to any Person
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such Person, whether through
the ownership of voting securities, by contract or otherwise. For the purpose
of the covenant described under "Limitation on Transactions with Affiliates"
above, the term "Affiliate" will be deemed to include only Kiewit, any entity
owning beneficially 10% or more of the Voting Stock of the Company and their
respective Affiliates other than the Restricted Subsidiaries and the Eligible
Joint Ventures and the other equity investors in the Restricted Subsidiaries
and the Eligible Joint Ventures (solely on account of their investments in
the Restricted Subsidiaries and the Eligible Joint Ventures), and for such
purpose such term also will be deemed to include the Unrestricted
Subsidiaries.
"Asset Acquisition" is defined to mean (i) an investment by the Company,
any of its Subsidiaries or any Joint Venture in any other Person pursuant to
which such Person will become a direct or indirect Subsidiary of the Company
or a Joint Venture or will be merged into or consolidated with the Company,
any of its Subsidiaries or any Joint Venture or (ii) an acquisition by the
Company, any of its Subsidiaries or any Joint Venture of the Property of any
Person other than the Company, any of its Subsidiaries or any Joint Venture
that constitutes substantially all of an operating unit or business of such
Person.
"Asset Disposition" is defined to mean any sale, transfer, conveyance,
lease or other disposition (including by way of merger, consolidation or
sale-leaseback) by the Company, any of its Restricted Subsidiaries or any
Eligible Joint Venture to any Person (other than to the Company, a Restricted
Subsidiary of the Company or an Eligible Joint Venture and other than in the
ordinary course of business) of any Property of the Company, any of its
Restricted Subsidiaries or any Eligible Joint Venture other than any shares
of Capital Stock of the Unrestricted Subsidiaries. Notwithstanding the
foregoing to the contrary, the term "Asset Disposition" will include the
sale, transfer, conveyance or other disposition of any shares of Capital
Stock of any Unrestricted Subsidiary to the extent that the Company or any of
its Restricted Subsidiaries or Eligible Joint Ventures made an Investment in
such Unrestricted Subsidiary pursuant to clause (vii) of the definition of
"Permitted Payment," and the Company will, and will cause each of its
Restricted Subsidiaries and Eligible Joint Ventures to, apply pursuant to the
covenant
85
<PAGE>
described under "Limitation on Dispositions" that portion of the Net Cash
Proceeds from the sale, transfer, conveyance or other disposition of such
Unrestricted Subsidiary that is equal to the portion of the total Investment
in such Unrestricted Subsidiary that is represented by the Investment that
was made pursuant to clause (vii) of the definition of "Permitted Payment."
For purposes of this definition, any disposition in connection with
directors' qualifying shares or investments by foreign nationals mandated by
applicable law will not constitute an Asset Disposition. In addition, the
term "Asset Disposition" will not include (i) any sale, transfer, conveyance,
lease or other disposition of the Capital Stock or Property of Restricted
Subsidiaries or Eligible Joint Ventures pursuant to the terms of any power
sales agreements or steam sales agreements to which such Restricted
Subsidiaries or such Eligible Joint Ventures are parties on the date of the
original issuance of the Notes or pursuant to the terms of any power sales
agreements or steam sales agreements, or other agreements or contracts that
are related to the output or product of, or services rendered by, a Permitted
Facility as to which such Restricted Subsidiary or such Eligible Joint
Venture is the supplying party, to which such Restricted Subsidiaries or such
Eligible Joint Ventures become a party after such date if the President or
Chief Financial Officer of the Company determines in good faith (evidenced by
an Officers' Certificate) that such provisions are customary (or, in the
absence of any industry custom, reasonably necessary) in order to effect such
agreements and are reasonable in light of comparable transactions in the
applicable jurisdiction, (ii) any sale, transfer, conveyance, lease or other
disposition of Property governed by the covenant described under "Mergers,
Consolidations and Sales of Assets" above, (iii) any sale, transfer,
conveyance, lease or other disposition of any Cash Equivalents, (iv) any
transaction or series of related transactions consisting of the sale,
transfer, conveyance, lease or other disposition of Capital Stock or Property
with a fair market value aggregating less than $5 million and (v) any
Permitted Payment or any Restricted Payment that is permitted to be made
pursuant to the covenant described under "Limitation on Restricted Payments"
above. The term "Asset Disposition" also will not include (i) the grant of or
realization upon a Lien permitted under the covenant described under
"Limitation on Liens" above or the exercise of remedies thereunder, (ii) a
sale-leaseback transaction involving substantially all the Property
constituting a Permitted Facility pursuant to which a Restricted Subsidiary
of the Company or an Eligible Joint Venture sells the Permitted Facility to a
Person in exchange for the assumption by that Person of the Debt financing
the Permitted Facility and the Restricted Subsidiary or the Eligible Joint
Venture leases the Permitted Facility from such Person, (iii) dispositions of
Capital Stock, contract rights, development rights and resource data made in
connection with the initial development of Permitted Facilities, or the
formation or capitalization of Restricted Subsidiaries or Eligible Joint
Ventures in respect of the initial development of Permitted Facilities, in
respect of which only an insubstantial portion of the prospective
Construction Financing that would be required to commence commercial
operation has been funded or (iv) transactions determined in good faith by
the Chief Financial Officer, as evidenced by an Officers' Certificate, made
in order to enhance the repatriation of Net Cash Proceeds for a Foreign Asset
Disposition or in order to increase the after-tax proceeds thereof available
for immediate distribution to the Company. Any Asset Disposition that results
from the bona fide exercise by any governmental authority of its claimed or
actual power of eminent domain need not comply with the provisions of clauses
(i) and (ii) of the covenant described under "Limitation on Dispositions"
above. Any Asset Disposition that results from a casualty loss need not
comply with the provisions of clause (i) of the covenant described under
"Limitation on Dispositions" above.
"Asset Sale" is defined to mean the sale or other disposition by the
Company, any of its Subsidiaries or any Joint Venture (other than to the
Company, another Subsidiary of the Company or another Joint Venture) of (i)
all or substantially all of the Capital Stock of any Subsidiary of the
Company or any Joint Venture or (ii) all or substantially all of the Property
that constitutes an operating unit or business of the Company, any of its
Subsidiaries or any Joint Venture.
"Attributable Value" means, as to a Capitalized Lease Obligation under
which any Person is at the time liable and at any date as of which the amount
thereof is to be determined, the capitalized amount thereof that would appear
on the face of a balance sheet of such Person in accordance with GAAP.
"Average Life" is defined to mean, at any date of determination with
respect to any Debt security or Preferred Stock, the quotient obtained by
dividing (i) the sum of the product of (A) the number of years
86
<PAGE>
from such date of determination to the dates of each successive scheduled
principal or involuntary liquidation value payment of such Debt security or
Preferred Stock, respectively, multiplied by (B) the amount of such principal
or involuntary liquidation value payment by (ii) the sum of all such
principal or involuntary liquidation value payments.
"Board of Directors" is defined to mean either the Board of Directors of
the Company or any duly authorized committee of such Board.
"Business Day" is defined to mean a day that, in the city (or in any of
the cities, if more than one) where amounts are payable in respect of the
Notes, is neither a legal holiday nor a day on which banking institutions are
authorized or required by law, regulation or executive order to close.
"Capital Stock" is defined to mean, with respect to any Person, any and
all shares, interests, participations or other equivalents (however
designated, whether voting or non-voting) in, or interests (however
designated) in, the equity of such Person that is outstanding or issued on or
after the date of Indenture, including, without limitation, all Common Stock
and Preferred Stock and partnership and joint venture interests in such
Person.
"Capitalized Lease" is defined to mean, as applied to any Person, any
lease of any Property of which the discounted present value of the rental
obligations of such Person as lessee, in conformity with GAAP, is required to
be capitalized on the balance sheet of such Person, and "Capitalized Lease
Obligation" means the rental obligations, as aforesaid, under such lease.
"Cash Equivalent" is defined to mean any of the following: (i) securities
issued or directly and fully guaranteed or insured by the United States of
America or any agency or instrumentality thereof (provided that the full
faith and credit of the United States of America is pledged in support
thereof), (ii) time deposits and certificates of deposit of any commercial
bank organized in the United States having capital and surplus in excess of
$500,000,000 or any commercial bank organized under the laws of any other
country having total assets in excess of $500,000,000 with a maturity date
not more than two years from the date of acquisition, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clauses (i) or (v) that was entered into with any bank
meeting the qualifications set forth in clause (ii) or another financial
institution of national reputation, (iv) direct obligations issued by any
state or other jurisdiction of the United States of America or any other
country or any political subdivision or public instrumentality thereof
maturing, or subject to tender at the option of the holder thereof, within 90
days after the date of acquisition thereof and, at the time of acquisition,
having a rating of A from Standard & Poor's Corporation ("S&P") or A-2 from
Moody's Investors Service, Inc. ("Moody's") (or, if at any time neither S&P
nor Moody's may be rating such obligations, then from another nationally
recognized rating service acceptable to the Trustee), (v) commercial paper
issued by (a) the parent corporation of any commercial bank organized in the
United States having capital and surplus in excess of $500,000,000 or any
commercial bank organized under the laws of any other country having total
assets in excess of $500,000,000, and (b) others having one of the two
highest ratings obtainable from either S&P or Moody's (or, if at any time
neither S&P nor Moody's may be rating such obligations, then from another
nationally recognized rating service acceptable to the Trustee) and in each
case maturing within one year after the date of acquisition, (vi) overnight
bank deposits and bankers' acceptances at any commercial bank organized in
the United States having capital and surplus in excess of $500,000,000 or any
commercial bank organized under the laws of any other country having total
assets in excess of $500,000,000, (vii) deposits available for withdrawal on
demand with any commercial bank organized in the United States having capital
and surplus in excess of $500,000,000 or any commercial bank organized under
the laws of any other country having total assets in excess of $500,000,000,
(viii) investments in money market funds substantially all of whose assets
comprise securities of the types described in clauses (i) through (vi) and
(ix), and (ix) auction rate securities or money market preferred stock having
one of the two highest ratings obtainable from either S&P or Moody's (or, if
at any time neither S&P nor Moody's may be rating such obligations, then from
another nationally recognized rating service acceptable to the Trustee).
87
<PAGE>
"Change of Control" is defined to mean the occurrence of one or more of
the following events:
(i) for so long as at least $25 million principal amount of the Company's
5% Convertible Subordinated Debentures due July 1, 2000 remain outstanding
and are not defeased, (x) a report is filed on Schedule 13D or 14D-1 (or
any successor schedule, form or report) pursuant to the Exchange Act,
disclosing that any person (for the purposes of this provision only, as
the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the
Exchange Act or any successor provision to either of the foregoing) has
become the beneficial owner (as the term "beneficial owner" is defined
under Rule 13d-3 or any successor rule or regulation promulgated under the
Exchange Act) of 50% or more of the then outstanding shares of the Voting
Stock of the Company and (y) such beneficial ownership is acquired by
means of a tender offer in which cash is the sole consideration paid and
the purchase price for each share tendered is less than the conversion
price then in effect under the Company's 5% Convertible Subordinated
Debentures due July 1, 2000; provided that a person will not be deemed to
be the beneficial owner of, or to own beneficially, any securities
tendered until such tendered securities are accepted for purchase under
the tender offer;
(ii) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than Kiewit, is or becomes the beneficial owner
(as defined in clause (i) above), directly or indirectly, of more than 35%
of the total voting power of the Voting Stock of the Company (for the
purposes of this clause (ii), any person will be deemed to beneficially
own any Voting Stock of any corporation (the "specified corporation") held
by any other corporation (the "parent corporation"), if such person
"beneficially owns" (as so defined), directly or indirectly, more than 35%
of the voting power of the Voting Stock of such parent corporation) and
Kiewit "beneficially owns" (as so defined), directly or indirectly, in the
aggregate a lesser percentage of the voting power of the Voting Stock of
the Company and does not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the
board of directors of the Company;
(iii) during any one-year period, individuals who at the beginning of
such period constituted the Board of Directors of the Company (together
with any new directors elected by such Board of Directors or nominated for
election by the shareholders of the Company by a vote of at least a
majority of the directors of the Company then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason
to constitute a majority of the Board of Directors then in office, unless
a majority of such new directors were elected or appointed by Kiewit; or
(iv) the Company or its Restricted Subsidiaries sell, convey, assign,
transfer, lease or otherwise dispose of all or substantially all the
Property of the Company and the Restricted Subsidiaries taken as a whole;
provided that with respect to the foregoing subparagraphs (ii), (iii) and
(iv), a Change of Control will not be deemed to have occurred unless and
until a Rating Decline has occurred as well.
"Common Stock" is defined to mean with respect to any Person, Capital
Stock of such Person that does not rank prior, as to the payment of dividends
or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Company Refinancing Debt" is defined to mean Debt issued in exchange for,
or the proceeds of which are used to refinance (including to purchase),
outstanding Notes or other Debt of the Company Incurred pursuant to clauses
(i), (iv), and (vii) of "Limitation on Debt" and Debt Incurred pursuant to
the first paragraph under "Limitation on Debt" in an amount (or, if such new
Debt provides for an amount less than the principal amount thereof to be due
and payable upon a declaration of acceleration thereof, with an original
issue price) not to exceed the amount so exchanged or refinanced (plus
accrued interest and all fees, premiums (in excess of the accreted value) and
expenses related to such exchange or refinancing), for which purpose the
amount so exchanged or refinanced will be deemed to equal the lesser of (x)
the principal amount of the Debt so exchanged or refinanced and (y) if the
Debt being exchanged or refinanced was issued with an original issue
discount, the accreted value thereof (as
88
<PAGE>
determined in accordance with GAAP) at the time of such exchange or
refinancing, provided that (A) such Debt will be subordinated in right of
payment to the Notes at least to the same extent, if any, as the Debt so
exchanged or refinanced is subordinated to the Notes, (B) such Debt will be
Non-Recourse if the Debt so exchanged or refinanced is Non-Recourse, (C) the
Average Life of the new Debt will be equal to or greater than the Average
Life of the Debt to be exchanged or refinanced and (D) the final Stated
Maturity of the new Debt will not be sooner than the earlier of the final
Stated Maturity of the Debt to be exchanged or refinanced or six months after
the final Stated Maturity of the Notes, provided that if such new Debt
refinances the Notes in part only, the final Stated Maturity of such new Debt
must be at least six months after the final Stated Maturity of the Notes.
"Consolidated EBITDA" of any Person for any period is defined to mean the
Adjusted Consolidated Net Income of such Person, plus, only to the extent
deducted in computing Adjusted Consolidated Net Income and without
duplication, (i) income taxes, excluding income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
Asset Sales, all determined on a consolidated basis for such Person and its
consolidated Subsidiaries in accordance with GAAP, (ii) Consolidated Fixed
Charges, (iii) depreciation and amortization expense, all determined on a
consolidated basis for such Person and its consolidated Subsidiaries in
accordance with GAAP and (iv) all other non-cash items reducing Adjusted
Consolidated Net Income for such period, all determined on a consolidated
basis for such Person and its consolidated Subsidiaries in accordance with
GAAP, and less all non-cash items increasing Adjusted Consolidated Net Income
during such period, provided that depreciation and amortization expense of
any Subsidiary of such Person and any other non-cash item of any Subsidiary
of such Person that reduces Adjusted Consolidated Net Income will be excluded
(without duplication) in computing Consolidated EBITDA, except to the extent
that the positive cash flow associated with such depreciation and
amortization expense and other non-cash items is actually distributed in cash
to such Person during such period, provided further that as applied to the
Company, cash in respect of depreciation and amortization and other non-cash
items of Restricted Subsidiaries and Eligible Joint Ventures may be deemed to
have been distributed or paid to the Company to the extent that such cash (I)
is or was under the exclusive dominion and control of such Restricted
Subsidiary or such Eligible Joint Venture and is or was free and clear of the
Lien of any other Person, (II) is or was immediately available for
distribution and (III) could be or could have been repatriated to the United
States by means that are both lawful and commercially reasonable, provided
that the amount of the cash deemed by this sentence to have been distributed
or paid will be reduced by the amount of tax that would have been payable
with respect to the repatriation thereof, provided further that any cash that
enables the recognition of depreciation and amortization and other non-cash
items pursuant to this sentence may not be used to enable the recognition of
depreciation and amortization and other non-cash items with respect to any
prior or subsequent period, regardless of whether such cash is distributed to
the Company, and provided further that the recognition of any depreciation
and amortization and other non-cash items as a result of this sentence will
be determined in good faith by the Chief Financial Officer, as evidenced by
an Officers' Certificate that will set forth in reasonable detail the
relevant facts and assumptions supporting such recognition. When the "Person"
referred to above is the Company, the foregoing references to "Subsidiaries"
will be deemed to refer to "Restricted Subsidiaries."
"Consolidated Fixed Charges" of any Person is defined to mean, for any
period, the aggregate of (i) Consolidated Interest Expense, (ii) the interest
component of Capitalized Leases, determined on a consolidated basis for such
Person and its consolidated Subsidiaries in accordance with GAAP, excluding
any interest component of Capitalized Leases in respect of that portion of a
Capitalized Lease Obligation of a Subsidiary that is Non-Recourse to such
Person, and (iii) cash and non-cash dividends due (whether or not declared)
on the Preferred Stock of any Subsidiary of such Person held by any Person
other than such Person and any Redeemable Stock of such Person or any
Subsidiary of such Person. When the "Person" referred to above is the
Company, the foregoing references to "Subsidiaries" will be deemed to refer
to "Restricted Subsidiaries."
"Consolidated Interest Expense" of any Person is defined to mean, for any
period, the aggregate interest expense in respect of Debt (including
amortization of original issue discount and non-cash interest payments or
accruals) of such Person and its consolidated Subsidiaries, determined on a
89
<PAGE>
consolidated basis in accordance with GAAP, including all commissions,
discounts, other fees and charges owed with respect to letters of credit and
bankers' acceptance financing and net costs associated with Interest Rate
Protection Agreements and Currency Protection Agreements and any amounts paid
during such period in respect of such interest expense, commissions,
discounts, other fees and charges that have been capitalized, provided that
Consolidated Interest Expense of the Company will not include any interest
expense (including all commissions, discounts, other fees and charges owed
with respect to letters of credit and bankers' acceptance financing and net
costs associated with Interest Rate Protection Agreements or Currency
Protection Agreements) in respect of that portion of any Debt that is
Non-Recourse, and provided further that Consolidated Interest Expense of the
Company in respect of a Guarantee by the Company of Debt of another Person
will be equal to the commissions, discounts, other fees and charges that
would be due with respect to a hypothetical letter of credit issued under a
bank credit agreement that can be drawn by the beneficiary thereof in the
amount of the Debt so guaranteed if (i) the Company is not actually making
directly or indirectly interest payments on such Debt and (ii) GAAP does not
require the Company on an unconsolidated basis to record such Debt as a
liability of the Company. When the "Person" referred to above is the Company,
the foregoing references to "Subsidiaries" will be deemed to refer to
"Restricted Subsidiaries."
"Construction Financing" is defined to mean the debt and/or equity
financing provided (over and above the owners' equity investment) to permit
the acquisition, development, design, engineering, procurement, construction
and equipping of a Permitted Facility and to enable it to commence commercial
operations, provided that Construction Financing may remain outstanding after
the commencement of commercial operations of a Permitted Facility, without
any increase in the amount of such financing, and such Construction Financing
will not cease to be Construction Financing.
"Currency Protection Agreement" is defined to mean, with respect to any
Person, any foreign exchange contract, currency swap agreement or other
similar agreement or arrangement intended to protect such Person against
fluctuations in currency values to or under which such Person is a party or a
beneficiary on the date of the Indenture or becomes a party or a beneficiary
thereafter.
"Debt" is defined to mean, with respect to any Person, at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit, bankers' acceptances, surety, bid,
operating and performance bonds, performance guarantees or other similar
instruments or obligations (or reimbursement obligations with respect
thereto) (except, in each case, to the extent incurred in the ordinary course
of business), (iv) all obligations of such Person to pay the deferred
purchase price of property or services, except Trade Payables, (v) the
Attributable Value of all obligations of such Person as lessee under
Capitalized Leases, (vi) all Debt of others secured by a Lien on any Property
of such Person, whether or not such Debt is assumed by such Person, provided
that, for purposes of determining the amount of any Debt of the type
described in this clause, if recourse with respect to such Debt is limited to
such Property, the amount of such Debt will be limited to the lesser of the
fair market value of such Property or the amount of such Debt, (vii) all Debt
of others Guaranteed by such Person to the extent such Debt is Guaranteed by
such Person, (viii) all Redeemable Stock valued at the greater of its
voluntary or involuntary liquidation preference plus accrued and unpaid
dividends and (ix) to the extent not otherwise included in this definition,
all net obligations of such Person under Currency Protection Agreements and
Interest Rate Protection Agreements.
For purposes of determining any particular amount of Debt that is or would
be outstanding, Guarantees of, or obligations with respect to letters of
credit or similar instruments supporting (to the extent the foregoing
constitutes Debt), Debt otherwise included in the determination of such
particular amount will not be included. For purposes of determining
compliance with the Indenture, in the event that an item of Debt meets the
criteria of more than one of the types of Debt described in the above
clauses, the Company, in its sole discretion, will classify such item of Debt
and only be required to include the amount and type of such Debt in one of
such clauses.
"Default Amount" is defined to mean the principal amount plus accrued
interest.
90
<PAGE>
"Eligible Joint Venture" is defined to mean a Joint Venture (other than a
Subsidiary) (i) that is or will be formed with respect to the construction,
development, acquisition, servicing, ownership, operation or management of
one or more Permitted Facilities and (ii) in which the Company and Kiewit
together, directly or indirectly, own at least 50% of the Capital Stock
therein (of which the Company must own at least half (in any event not less
than 25% of the total outstanding Capital Stock)) and (iii) in respect of
which the Company alone or in combination with Kiewit, directly or
indirectly, (a) controls, by voting power, board or management committee
membership, or through the provisions of any applicable partnership,
shareholder or other similar agreement or under an operating, maintenance or
management agreement or otherwise, the management and operation of the Joint
Venture or any Permitted Facilities of the Joint Venture or (b) otherwise has
significant influence over the management or operation of the Joint Venture
or any Permitted Facility of the Joint Venture in all material respects
(significant influence includes, without limitation, the right to control or
veto any material act or decision) in connection with such management or
operation. Any Joint Venture that is an Eligible Joint Venture pursuant to
this definition because of the ownership of Capital Stock therein by Kiewit
will cease to be an Eligible Joint Venture if (x) Kiewit disposes of any
securities issued by the Company and, as a result of such disposition, Kiewit
becomes the beneficial owner (as such term is defined under Rule 13d-3 or any
successor rule or regulation promulgated under the Exchange Act) of less than
25% of the outstanding shares of Voting Stock of the Company or (y) (I) as a
result of any action other than a disposition of securities by Kiewit, Kiewit
becomes the beneficial owner of less than 25% of the outstanding shares of
Voting Stock of the Company and (II) thereafter Kiewit disposes of any
securities issued by the Company as a result of which the beneficial
ownership by Kiewit of the outstanding Voting Stock of the Company is further
reduced, provided that thereafter such Joint Venture may become an Eligible
Joint Venture if Kiewit becomes the beneficial owner of at least 25% of the
outstanding shares of Voting Stock of the Company and the other conditions
set forth in this definition are fulfilled.
"Fixed Charge Ratio" is defined to mean the ratio, on a pro forma basis,
of (i) the aggregate amount of Consolidated EBITDA of any Person for the
Reference Period immediately prior to the date of the transaction giving rise
to the need to calculate the Fixed Charge Ratio (the "Transaction Date") to
(ii) the aggregate Consolidated Fixed Charges of such Person during such
Reference Period, provided that for purposes of such computation, in
calculating Consolidated EBITDA and Consolidated Fixed Charges, (1) the
Incurrence of the Debt giving rise to the need to calculate the Fixed Charge
Ratio and the application of the proceeds therefrom (including the retirement
or defeasance of Debt) will be assumed to have occurred on the first day of
the Reference Period, (2) Asset Sales and Asset Acquisitions that occur
during the Reference Period or subsequent to the Reference Period and prior
to the Transaction Date (but including any Asset Acquisition to be made with
the Debt Incurred pursuant to (1) above) and related retirement of Debt
pursuant to an Offer (in the amount of the Excess Proceeds with respect to
which such Offer has been made or would be made on the Transaction Date if
the purchase of Notes pursuant to such Offer has not occurred on or before
the Transaction Date) will be assumed to have occurred on the first day of
the Reference Period, (3) the Incurrence of any Debt during the Reference
Period or subsequent to the Reference Period and prior to the Transaction
Date and the application of the proceeds therefrom (including the retirement
or defeasance of other Debt) will be assumed to have occurred on the first
day of such Reference Period, (4) Consolidated Interest Expense attributable
to any Debt (whether existing or being Incurred) computed on a pro forma
basis and bearing a floating interest rate will be computed as if the rate in
effect on the date of computation had been the applicable rate for the entire
period unless the obligor on such Debt is a party to an Interest Rate
Protection Agreement (that will remain in effect for the twelve month period
after the Transaction Date) that has the effect of fixing the interest rate
on the date of computation, in which case such rate (whether higher or lower)
will be used and (5) there will be excluded from Consolidated Fixed Charges
any Consolidated Fixed Charges related to any amount of Debt that was
outstanding during or subsequent to the Reference Period but is not
outstanding on the Transaction Date, except for Consolidated Fixed Charges
actually incurred with respect to Debt borrowed (as adjusted pursuant to
clause (4)) (x) under a revolving credit or similar arrangement to the extent
the commitment thereunder remains in effect on the Transaction Date or (y)
pursuant to the provision described in clause (iii) in the second paragraph
of "Limitation on Debt" above. For the purpose of making this computation,
Asset Sales and Asset Acquisitions that have been made by
91
<PAGE>
any Person that has become a Restricted Subsidiary of the Company or an
Eligible Joint Venture or been merged with or into the Company or any
Restricted Subsidiary of the Company or an Eligible Joint Venture during the
Reference Period, or subsequent to the Reference Period and prior to the
Transaction Date, will be calculated on a pro forma basis, as will be all the
transactions contemplated by the calculations referred to in clauses (1)
through (5) above with respect to the Persons or businesses that were the
subject of such Asset Sales and Asset Dispositions, assuming such Asset Sales
or Asset Acquisitions occurred on the first day of the Reference Period.
"Foreign Asset Disposition" means an Asset Disposition in respect of the
Capital Stock or Property of a Restricted Subsidiary of the Company or an
Eligible Joint Venture to the extent that the proceeds of such Asset
Disposition are received by a Person subject in respect of such proceeds to
the tax laws of a jurisdiction other than the United States of America or any
State thereof or the District of Columbia.
"GAAP" is defined to mean generally accepted accounting principles in the
U.S. as in effect as of the date of the Indenture, applied on a basis
consistent with the principles, methods, procedures and practices employed in
the preparation of the Company's audited financial statements, including,
without limitation, those set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved
by a significant segment of the accounting profession.
"Guarantee" is defined to mean any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Debt of any other Person
and, without limiting the generality of the foregoing, any Debt obligation,
direct or indirect, contingent or otherwise, of such Person (i) to purchase
or pay (or advance or supply funds for the purchase or payment of) such Debt
of such other Person (whether arising by virtue of partnership arrangements
(other than solely by reason of being a general partner of a partnership), or
by agreement to keep-well, to purchase assets, goods, securities or services,
or to take-or-pay, or to maintain financial statement conditions or
otherwise) or (ii) entered into for purposes of assuring in any other manner
the obligee of such Debt of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part), provided that the term
"Guarantee" will not include endorsements for collection or deposit in the
ordinary course of business or the grant of a Lien in connection with any
Non-Recourse Debt. The term "Guarantee" used as a verb has a corresponding
meaning.
"Holder", "holder of Notes", "Noteholder" and other similar terms are
defined to mean the registered holder of any Note.
"Incur" is defined to mean with respect to any Debt, to incur, create,
issue, assume, Guarantee or otherwise become liable for or with respect to,
or become responsible for, the payment of, contingently or otherwise, such
Debt, provided that neither the accrual of interest (whether such interest is
payable in cash or kind) nor the accretion of original issue discount will be
considered an Incurrence of Debt. The term "Incurrence" has a corresponding
meaning.
"Interest Rate Protection Agreement" is defined to mean, with respect to
any Person, any interest rate protection agreement, interest rate future
agreement, interest rate option agreement, interest rate swap agreement,
interest rate cap agreement, interest rate collar agreement, interest rate
hedge agreement or other similar agreement or arrangement intended to protect
such Person against fluctuations in interest rates to or under which such
Person or any of its Subsidiaries is a party or a beneficiary on the date of
the Indenture or becomes a party or a beneficiary thereafter.
"Investment" in a Person is defined to mean any investment in, loan or
advance to, Guarantee on behalf of, directly or indirectly, or other transfer
of assets to such Person (other than sales of products and services in the
ordinary course of business).
"Investment Grade" is defined to mean with respect to the Notes, (i) in
the case of S&P, a rating of at least BBB-, (ii) in the case of Moody's, a
rating of at least Baa3, and (iii) in the case of a Rating Agency other than
S&P or Moody's, the equivalent rating, or in each case, any successor,
replacement or equivalent definition as promulgated by S&P, Moody's or other
Rating Agency as the case may be.
92
<PAGE>
"Joint Venture" is defined to mean a joint venture, partnership or other
similar arrangement, whether in corporate, partnership or other legal form.
"Kiewit" is defined to mean and include Kiewit Energy Company and any
other Subsidiary of Peter Kiewit Sons', Inc., Kiewit Construction Group Inc.
or Kiewit Diversified Group, Inc.
"Lien" is defined to mean, with respect to any Property, any mortgage,
lien, pledge, charge, security interest or encumbrance of any kind in respect
of such Property, but will not include any partnership, joint venture,
shareholder, voting trust or other similar governance agreement with respect
to Capital Stock in a Subsidiary or Joint Venture. For purposes of the
Indenture, the Company will be deemed to own subject to a Lien any Property
that it has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement relating to such Property.
"Net Cash Proceeds" from an Asset Disposition is defined to mean cash
payments received (including any cash payments received by way of a payment
of principal pursuant to a note or installment receivable or otherwise, but
only as and when received (including any cash received upon sale or
disposition of any such note or receivable), excluding any other
consideration received in the form of assumption by the acquiring Person of
Debt or other obligations relating to the Property disposed of in such Asset
Disposition or received in any form other than cash) therefrom, in each case,
net of (i) all legal, title and recording tax expenses, commissions and other
fees and expenses of any kind (including consent and waiver fees and any
applicable premiums, earn-out or working interest payments or payments in
lieu or in termination thereof) incurred, (ii) all federal, state,
provincial, foreign and local taxes and other governmental charges required
to be accrued as a liability under GAAP (a) as a consequence of such Asset
Disposition, (b) as a result of the repayment of any Debt in any jurisdiction
other than the jurisdiction where the Property disposed of was located or (c)
as a result of any repatriation of any proceeds of such Asset Disposition,
(iii) a reasonable reserve for the after-tax cost of any indemnification
payments (fixed and contingent) attributable to seller's indemnities to the
purchaser undertaken by the Company, any of its Restricted Subsidiaries or
any Eligible Joint Venture in connection with such Asset Disposition (but
excluding any payments that by the terms of the indemnities will not, under
any circumstances, be made during the term of the Notes), (iv) all payments
made on any Debt that is secured by such Property, in accordance with the
terms of any Lien upon or with respect to such Property, or that must by its
terms or by applicable law or in order to obtain a required consent or waiver
be repaid out of the proceeds from or in connection with such Asset
Disposition, and (v) all distributions and other payments made to holders of
Capital Stock of Restricted Subsidiaries or Eligible Joint Ventures (other
than the Company or its Restricted Subsidiaries) as a result of such Asset
Disposition.
"Net Income" of any Person for any period is defined to mean the net
income (loss) of such Person for such period, determined in accordance with
GAAP, except that extraordinary and non-recurring gains and losses as
determined in accordance with GAAP will be excluded.
"Net Worth" of any Person is defined to mean, as of any date, the
aggregate of capital, surplus and retained earnings (including any cumulative
currency translation adjustment) of such Person and its consolidated
Subsidiaries as would be shown on a consolidated balance sheet of such Person
and its consolidated Subsidiaries prepared as of such date in accordance with
GAAP. When the "Person" referred to above is the Company, the foregoing
references to "Subsidiaries" will be deemed to refer to "Restricted
Subsidiaries."
"Non-Recourse", as applied to any Debt or any sale-leaseback, is defined
to mean any project financing that is or was Incurred with respect to the
development, acquisition, design, engineering, procurement, construction,
operation, ownership, servicing or management of one or more Permitted
Facilities in respect of which the Company or one or more Restricted
Subsidiaries or Eligible Joint Ventures has a direct or indirect interest,
provided that such financing is without recourse to the Company, any
Restricted Subsidiary or any Eligible Joint Venture other than any Restricted
Subsidiary or any Eligible Joint Venture that does not own any Property other
than one or more of such Permitted Facilities or a direct or indirect
interest therein, provided further that such financing may be secured by a
Lien on only (i) the Property that constitutes such Permitted Facilities,
(ii) the income from and proceeds of such Permitted Facilities, (iii) the
Capital Stock of, and other Investments in, any Restricted Subsidiary or
93
<PAGE>
Eligible Joint Venture that owns the Property that constitutes any such
Permitted Facility, and (iv) the Capital Stock of, and other Investments in,
any Restricted Subsidiary or Eligible Joint Venture obligated with respect to
such financing and of any Subsidiary or Joint Venture (that is a Restricted
Subsidiary or an Eligible Joint Venture) of such Person that owns a direct or
indirect interest in any such Permitted Facility, and provided further that
an increase in the amount of Debt with respect to one or more Permitted
Facilities pursuant to the financing provided pursuant to the terms of this
definition (except for the first refinancing of Construction Financing) may
not be Incurred to fund or enable the funding of any dividend or other
distribution in respect of Capital Stock. The fact that a portion of
financing with respect to a Permitted Facility is not Non-Recourse will not
prevent other portions of the financing with respect to such Permitted
Facility from constituting Non-Recourse Debt if the foregoing requirements of
this definition are fulfilled with respect to such other portions.
"Officers' Certificate" is defined to mean a certificate signed by the
Chairman of the Board of Directors, the President or any Vice President and
by the Chief Financial Officer, the Treasurer, an Assistant Treasurer, the
Controller, the Assistant Controller, the Secretary or any Assistant
Secretary of the Company and delivered to the Trustee. Each such certificate
will comply with Section 314 of the Trust Indenture Act and include the
statements provided for in the Indenture if and to the extent required
thereby.
"Opinion of Counsel" is defined to mean an opinion in writing signed by
legal counsel who may be an employee of or counsel to the Company or who may
be other counsel satisfactory to the Trustee. Each such opinion will comply
with Section 314 of the Trust Indenture Act and include the statements
provided for in the Indenture, if and to the extent required thereby.
"Permitted Facility" is defined to mean (i) an electric power or thermal
energy generation or cogeneration facility or related facilities (including
residual waste management and facilities that use thermal energy from a
cogeneration facility), and its or their related electric power transmission,
fuel supply and fuel transportation facilities, together with its or their
related power supply, thermal energy and fuel contracts and other facilities,
services or goods that are ancillary, incidental, necessary or reasonably
related to the marketing, development, construction, management, servicing,
ownership or operation of the foregoing, owned by a utility or otherwise, as
well as other contractual arrangements with customers, suppliers and
contractors or (ii) any infrastructure facilities related to (A) the
treatment of water for municipal and other uses, (B) the treatment and/or
management of waste water, (C) the treatment, management and/or remediation
of waste, pollution and/or potential pollutants and (D) any other process or
environmental purpose.
"Permitted Facilities Debt" is defined to mean any Debt that is or was
Incurred with respect to the direct or indirect development, acquisition,
design, engineering, procurement, construction, operation, ownership,
servicing or management of one or more Permitted Facilities (x) currently in
development by the Company (directly or indirectly) or which are hereafter
acquired or developed by the Company (directly or indirectly) and (y) in
which the Company or one or more Restricted Subsidiaries or Eligible Joint
Ventures has a direct or indirect interest.
"Permitted Funding Company Loans" is defined to mean (a) Debt of a
Restricted Subsidiary, all the Capital Stock of which is owned, directly or
indirectly, by the Company and that (x) does not own any direct or indirect
interest in a Permitted Facility and (y) is not directly or indirectly
obligated on any Debt owed to any Person other than the Company, a Restricted
Subsidiary or an Eligible Joint Venture (a "Funding Company"), owed to a
Restricted Subsidiary or an Eligible Joint Venture that is not directly or
indirectly obligated on any Debt owed to any Person other than the Company, a
Restricted Subsidiary or an Eligible Joint Venture (except to the extent that
it has pledged the Capital Stock of its Subsidiaries and Joint Ventures to
secure Non-Recourse Debt) (a "Holding Company"), provided that such Debt (i)
does not require that interest be paid in cash at any time sooner than six
months after the final Stated Maturity of the Notes, (ii) does not require
any payment of principal at any time sooner than six months after the final
Stated Maturity of the Notes, (iii) is subordinated in right of payment to
all other Debt of such Restricted Subsidiary other than Debt Incurred
pursuant to clause (vii) of the covenant described under "Limitation on
Subsidiary Debt," all of which will be pari passu, and (iv) is evidenced by a
subordinated note in the form attached to the Indenture, and (b) Debt of a
Holding Company to a Funding Company.
94
<PAGE>
"Permitted Investment" is defined to mean any Investment that is made
directly or indirectly by the Company and its Restricted Subsidiaries in (i)
a Restricted Subsidiary or Eligible Joint Venture (excluding for the purpose
of this clause (i) any Construction Financing) that, directly or indirectly,
is or will be engaged in the construction, development, acquisition,
operation, servicing, ownership or management of a Permitted Facility or in
any other Person as a result of which such other Person becomes such a
Restricted Subsidiary or an Eligible Joint Venture, provided that at the time
that any of the foregoing Investments is proposed to be made, no Event of
Default or event that, after giving notice or lapse of time or both, would
become an Event of Default, will have occurred and be continuing, (ii)
Construction Financing provided by the Company (A) to any of its Restricted
Subsidiaries (other than an Eligible Joint Venture) up to 100% of the
Construction Financing required by such Restricted Subsidiary and (B) to any
Eligible Joint Venture a portion of the Construction Financing required by
such Eligible Joint Venture that does not exceed the ratio of the Capital
Stock in such Eligible Joint Venture that is owned directly or indirectly by
the Company to the total amount of the Capital Stock in such Eligible Joint
Venture that is owned directly and indirectly by the Company and Kiewit
together (provided that the Company may provide such Construction Financing
to such Eligible Joint Venture only if Kiewit provides the balance of such
Construction Financing or otherwise causes it to be provided), if, in either
case, (x) the aggregate proceeds of all the Construction Financing provided
is not more than 85% of the sum of the aggregate proceeds of all the
Construction Financing and the aggregate owners' equity investment in such
Restricted Subsidiary or such Eligible Joint Venture, as the case may be, (y)
the Company receives a pledge or assignment of all the Capital Stock of such
Restricted Subsidiary or such Eligible Joint Venture, as the case may be,
that is owned by a non-governmental Person (other than the Company, its
Subsidiaries or the Eligible Joint Ventures) that is permitted to be pledged
for such purpose under applicable law and (z) neither the Company nor Kiewit
reduces its beneficial ownership in such Restricted Subsidiary or such
Eligible Joint Venture, as the case may be, prior to the repayment in full of
the Company's portion of the Construction Financing, (iii) any Cash
Equivalents, (iv) prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance and
other similar deposits in the ordinary course of business consistent with
past practice, (v) loans and advances to employees made in the ordinary
course of business and consistent with past practice, (vi) Debt incurred
pursuant to Currency Protection Agreements and Interest Rate Protection
Agreements as otherwise permitted by the Indenture, (vii) bonds, notes,
debentures or other debt securities and instruments received as a result of
Asset Dispositions to the extent permitted by the covenants described under
"Limitation on Dispositions" above and "Limitation on Business" above, (viii)
any Lien permitted under the provisions described under "Limitation on Liens"
above, (ix) bank deposits and other Investments (to the extent they do not
constitute Cash Equivalents) required by lenders in connection with any
Non-Recourse Debt, provided that the President or the Chief Financial Officer
of the Company determines in good faith, as evidenced by an Officers'
Certificate, that such bank deposits or Investments are required to effect
such financings and are not materially more restrictive, taken as a whole,
than comparable requirements, if any, in comparable financings in the
applicable jurisdiction or (x) any Person to the extent made with Capital
Stock (other than Redeemable Stock) of the Company (whether by way of
purchase, merger, consolidation or otherwise) to the extent permitted by the
covenants described under "Limitation on Business" above.
"Permitted Joint Venture" is defined to mean a Joint Venture (i) that is
or will be formed with respect to the construction, development, acquisition,
servicing, ownership, operation or management of one or more Permitted
Facilities and (ii) in which (A) the Company or (B) the Company and Kiewit
together, directly or indirectly, own at least 70% of the Capital Stock
therein (of which the Company must own at least half (in any event not less
than 35% of the total outstanding Capital Stock)), provided that if
applicable non-U.S. law restricts the amount of Capital Stock that the
Company may own, the Company must own at least 70% of the amount of Capital
Stock that it may own pursuant to such law, which in any event must be not
less than 35% of the total outstanding Capital Stock therein and (iii) in
respect of which the Company alone or in combination with Kiewit, directly or
indirectly, (a) controls, by voting power, board or management committee
membership, or through the provisions of any applicable partnership,
shareholder or other similar agreement or under an operating, maintenance or
management agreement or otherwise, the management and operation of the Joint
Venture or any Permitted Facilities of the Joint
95
<PAGE>
Venture or (b) otherwise has significant influence over the management or
operation of the Joint Venture or any Permitted Facility of the Joint Venture
in all material respects (significant influence includes, without limitation,
the right to control or veto any material act or decision) in connection with
such management or operation. Any Joint Venture that is a Permitted Joint
Venture pursuant to this definition because of the ownership of Capital Stock
therein by Kiewit will cease to be a Permitted Joint Venture if (x) Kiewit
disposes of any securities issued by the Company and, as a result of such
disposition, Kiewit becomes the beneficial owner (as such term is defined
under Rule 13d-3 or any successor rule or regulation promulgated under the
Exchange Act) of less than 25% of the outstanding shares of Voting Stock of
the Company or (y) (I) as a result of any action other than a disposition of
securities by Kiewit, Kiewit becomes the beneficial owner of less than 25% of
the outstanding shares of Voting Stock of the Company and (II) thereafter
Kiewit disposes of any securities issued by the Company as a result of which
the beneficial ownership by Kiewit of the outstanding Voting Stock of the
Company is further reduced, provided that thereafter such Joint Venture may
become a Permitted Joint Venture if Kiewit becomes the beneficial owner of at
least 25% of the outstanding shares of Voting Stock of the Company and the
other conditions set forth in this definition are fulfilled.
"Permitted Payments" is defined to mean, with respect to the Company, any
of its Restricted Subsidiaries or any Eligible Joint Venture, (i) any
dividend on shares of Capital Stock of the Company payable (or to the extent
paid) solely in Capital Stock (other than Redeemable Stock) or in options,
warrants or other rights to purchase Capital Stock (other than Redeemable
Stock) of the Company and any distribution of Capital Stock (other than
Redeemable Capital Stock) of the Company in respect of the exercise of any
right to convert or exchange any instrument (whether Debt or equity and
including Redeemable Capital Stock) into Capital Stock (other than Redeemable
Capital Stock) of the Company, (ii) the purchase or other acquisition or
retirement for value of any shares of the Company's Capital Stock, or any
option, warrant or other right to purchase shares of the Company's Capital
Stock with additional shares of, or out of the proceeds of a substantially
contemporaneous issuance of, Capital Stock other than Redeemable Stock, (iii)
any defeasance, redemption, purchase or other acquisition for value of any
Debt that by its terms ranks subordinate in right of payment to the Notes
with the proceeds from the issuance of (x) Debt that is subordinate to the
Notes at least to the extent and in the manner as the Debt to be defeased,
redeemed, purchased or otherwise acquired is subordinate in right of payment
to the Notes, provided that such subordinated Debt provides for no mandatory
payments of principal by way of sinking fund, mandatory redemption or
otherwise (including defeasance) by the Company (including, without
limitation at the option of the holder thereof other than an option given to
a holder pursuant to a "change of control" or an "asset disposition" covenant
that is no more favorable to the holders of such Debt than comparable
covenants for the Debt being defeased, redeemed, purchased or acquired or, if
none, the covenants described under "Limitation on Dispositions" and
"Purchase of Notes Upon a Change of Control" above and such Debt is not in an
amount (net of any original issue discount) greater than, any Stated Maturity
of the Debt being replaced and the proceeds of such subordinated Debt are
utilized for such purpose within 45 days of issuance or (y) Capital Stock
(other than Redeemable Stock), (iv) Restricted Payments in an amount not to
exceed $75 million in the aggregate provided that no payment may be made
pursuant to this clause (iv) if an Event of Default, or an event that, after
giving notice or lapse of time or both, would become an Event of Default, has
occurred and is continuing, (v) any payment or Investment required by
applicable law in order to conduct business operations in the ordinary
course, (vi) a Permitted Investment and (vii) Investments in Unrestricted
Subsidiaries and other Persons that are not Restricted Subsidiaries or
Eligible Joint Ventures in an amount not to exceed $100 million in the
aggregate, provided that no payment or Investment may be made pursuant to
this clause (vii) if an Event of Default, or an event that, after giving
notice or lapse of time or both, would become an Event of Default, has
occurred and is continuing. Notwithstanding the foregoing, the amount of
Investments that may be made pursuant to clauses (iv) or (vii), as the case
may be, may be increased by the net reduction in Investments of the type made
previously pursuant to clauses (iv) or (vii), as the case may be, that result
from payments of interest on Debt, dividends, or repayment of loans or
advances, the proceeds of the sale or disposition of the Investment or other
return of the amount of the original Investment to the Company, the
Restricted Subsidiary or the Eligible Joint Venture that made the original
Investment from the Person in which such Investment was made or any
distribution or payment of such
96
<PAGE>
Investment to the extent that such distribution or payment constituted either
a Restricted Payment or a Permitted Payment, provided that (x) the aggregate
amount of such payments will not exceed the amount of the original Investment
by the Company, such Restricted Subsidiary or Eligible Joint Venture that
reduced the amount available pursuant to clause (iv) or clause (vii), as the
case may be, for making Restricted Payments and (y) such payments may be
added pursuant to this proviso only to the extent such payments are not
included in the calculation of Adjusted Consolidated Net Income.
"Permitted Working Capital Facilities" is defined to mean one or more loan
or credit agreements providing for the extension of credit to the Company for
the Company's working capital purposes, which credit agreements will be
ranked pari passu with or subordinate to the Notes in right of payment and
may be secured or unsecured.
"Person" is defined to mean an individual, a corporation, a partnership,
an association, a trust or any other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"Preferred Stock" is defined to mean, with respect to any Person, any and
all shares, interests, participations or other equivalents (however
designated, whether voting or non-voting) or preferred or preference stock of
such Person that is outstanding or issued on or after the date of original
issuance of the Notes.
"Property" of any Person is defined to mean all types of real, personal,
tangible or mixed property owned by such Person whether or not included in
the most recent consolidated balance sheet of such Person under GAAP.
"Purchase Money Debt" means Debt representing, or Incurred to finance, the
cost of acquiring any Property, provided that (i) any Lien securing such Debt
does not extend to or cover any other Property other than the Property being
acquired and (ii) such Debt is Incurred, and any Lien with respect thereto is
granted, within 18 months of the acquisition of such Property.
"Rating Agencies" is defined to mean (i) S&P and (ii) Moody's or (iii) if
S&P or Moody's or both do not make a rating of the Notes publicly available,
a nationally recognized securities rating agency or agencies, as the case may
be, selected by the Company, which will be substituted for S&P, Moody's or
both, as the case may be.
"Rating Category" is defined to mean (i) with respect to S&P, any of the
following categories: BB, B, CCC, CC, C and D (or equivalent successor
categories), (ii) with respect to Moody's, any of the following categories:
Ba, B, Caa, Ca, C and D (or equivalent successor categories) and (iii) the
equivalent of any such category of S&P or Moody's used by another Rating
Agency. In determining whether the rating of the Notes has decreased by one
or more gradations, gradations within Rating Categories (+ and -for S&P, 1, 2
and 3 for Moody's or the equivalent gradations for another Rating Agency)
will be taken into account (e.g., with respect to S&P, a decline in a rating
from BB+ to BB, as well as from BB-to B+, will constitute a decrease of one
gradation).
"Rating Decline" is defined to mean the occurrence of the following on, or
within 90 days after, the earlier of (i) the occurrence of a Change of
Control and (ii) the date of public notice of the occurrence of a Change of
Control or of the public notice of the intention of the Company to effect a
Change of Control (the "Rating Date") which period will be extended so long
as the rating of the Notes is under publicly announced consideration for
possible downgrading by any of the Rating Agencies: (a) in the event that the
Notes are rated by either Rating Agency on the Rating Date as Investment
Grade, the rating of the Notes by both such Rating Agencies will be reduced
below Investment Grade, or (b) in the event the Notes are rated below
Investment Grade by both such Rating Agencies on the Rating Date, the rating
of the Notes by either Rating Agency will be decreased by one or more
gradations (including gradations within Rating Categories as well as between
Rating Categories).
"Redeemable Stock" is defined to mean any class or series of Capital Stock
of any Person that by its terms or otherwise is (i) required to be redeemed
prior to the Stated Maturity of the Notes, (ii) redeemable at the option of
the holder of such class or series of Capital Stock at any time prior to the
97
<PAGE>
Stated Maturity of the Notes or (iii) convertible into or exchangeable for
Capital Stock referred to in clause (i) or (ii) above or Debt having a
scheduled maturity prior to the Stated Maturity of the Notes, provided that
any Capital Stock that would not constitute Redeemable Stock but for
provisions thereof giving holders thereof the right to require the Company to
purchase or redeem such Capital Stock upon the occurrence of an "asset sale"
or a "change of control" occurring prior to the Stated Maturity of the Notes
will not constitute Redeemable Stock if the "asset sale" or "change of
control" provision applicable to such Capital Stock is no more favorable to
the holders of such Capital Stock than the provisions contained in the
covenants described under "Limitation on Dispositions" and "Purchase of Notes
Upon a Change of Control" above and such Capital Stock specifically provides
that the Company will not purchase or redeem any such Capital Stock pursuant
to such covenants prior to the Company's purchase of Notes required to be
purchased by the Company under the covenants described under "Limitation on
Dispositions" and "Purchase of Notes Upon a Change of Control" above.
"Reference Period" is defined to mean the four most recently completed
fiscal quarters for which financial information is available preceding the
date of a transaction giving rise to the need to make a financial
calculation.
"Restricted Payment" is defined to mean (i) any dividend or other
distribution on any shares of the Company's Capital Stock, provided that a
dividend or other distribution consisting of the Capital Stock of an
Unrestricted Subsidiary will not constitute a Restricted Payment except to
the extent of the portion thereof that is equal to the portion of the total
Investment in such Unrestricted Subsidiary that is represented by the
Investment that was made pursuant to clause (vii) of the definition of
"Permitted Payment," (ii) any payment on account of the purchase, redemption,
retirement or acquisition for value of the Company's Capital Stock, (iii) any
defeasance, redemption, purchase or other acquisition or retirement for value
prior to the scheduled maturity of any Debt ranked subordinate in right of
payment to the Notes other than repayment of Debt of the Company to a
Restricted Subsidiary or an Eligible Joint Venture, (iv) any Investment made
in a Person (other than the Company or any Restricted Subsidiary or any
Eligible Joint Venture) and (v) designating a Restricted Subsidiary as an
Unrestricted Subsidiary (the Restricted Payment made upon such a designation
to be determined as the fair market value of the Capital Stock of such
Restricted Subsidiary owned directly or indirectly by the Company at the time
of the designation). Notwithstanding the foregoing, "Restricted Payment" will
not include any Permitted Payment, except that any payment made pursuant to
clauses (iv) and (v) of the definition of "Permitted Payment" will be counted
in the calculation set forth in clause (c) of the covenant described under
"Limitation on Restricted Payments."
"Restricted Subsidiary" is defined to mean any Subsidiary of the Company
that is not an Unrestricted Subsidiary.
"Senior Debt" is defined to mean the principal of and interest on all Debt
of the Company whether created, Incurred or assumed before, on or after the
date of original issuance of the Notes (other than the Notes), provided that
Senior Debt will not include (i) Debt that, when Incurred and without respect
to any election under Section 1111(b) of Title 11, United States Code, was
without recourse to the Company, (ii) Debt of the Company to any Affiliate
and (iii) any Debt of the Company that, by the terms of the instrument
creating or evidencing the same, is specifically designated as being junior
in right of payment to the Notes or any other Debt of the Company.
"Significant Subsidiary" is defined to mean a Restricted Subsidiary that
is a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X
under the Securities Act and the Exchange Act.
"Stated Maturity" is defined to mean, with respect to any debt security or
any installment of interest thereon, the date specified in such debt security
as the fixed date on which any principal of such debt security or any such
installment of interest is due and payable.
"Subsidiary" is defined to mean, with respect to any Person including,
without limitation, the Company and its Subsidiaries, (i) any corporation or
other entity of which such Person owns, directly or indirectly, a majority of
the Capital Stock or other ownership interests and has ordinary voting power
to elect a majority of the board of directors or other persons performing
similar functions, and (ii) with
98
<PAGE>
respect to the Company and, as appropriate, its Subsidiaries, any Permitted
Joint Venture, including, without limitation, Coso Land Company Joint
Venture, Coso Finance Partners, Coso Energy Developers and Coso Power
Developers, provided that in respect of any Subsidiary that is not a
Permitted Joint Venture, the Company must exercise control over such
Subsidiary and its Property to the same extent as a Permitted Joint Venture.
"Subsidiary Refinancing Debt" is defined to mean Debt issued in exchange
for, or the proceeds of which are used to refinance (including to purchase),
outstanding Debt of a Restricted Subsidiary or an Eligible Joint Venture,
including, without limitation, Construction Financing, in an amount (or, if
such new Debt provides for an amount less than the principal amount thereof
to be due and payable upon a declaration of acceleration thereof, with an
original issue price) not to exceed the amount so exchanged or refinanced
(plus accrued interest or dividends and all fees, premiums (in excess of
accreted value) and expenses related to such exchange or refinancing), for
which purpose the amount so exchanged or refinanced will not exceed, in the
case of Debt, the lesser of (x) the principal amount of the Debt so exchanged
or refinanced and (y) if the Debt being exchanged or refinanced was issued
with an original issue discount, the accreted value thereof (as determined in
accordance with GAAP) at the time of such exchange or refinancing, and, in
the case of an equity investment made in lieu of or as part of Construction
Financing, Debt, in an amount not to exceed the capital and surplus shown on
the balance sheet of such Restricted Subsidiary or Eligible Joint Venture,
provided that (A) such Debt will be Non-Recourse if the Debt so exchanged or
refinanced is Non-Recourse and (B) the Average Life of the new Debt will be
equal to or greater than the Average Life of the Debt to be exchanged or
refinanced, provided further that upon the first refinancing of any
Construction Financing of a Restricted Subsidiary or an Eligible Joint
Venture, (i) the amount of the Subsidiary Refinancing Debt issued in exchange
for or to refinance such Construction Financing will not be limited by this
provision and (ii) the Subsidiary Refinancing Debt issued in exchange for or
to refinance such Construction Financing will not be subject to the
provisions of the foregoing clause (B) of this provision.
"Trade Payables" is defined to mean, with respect to any Person, any
accounts payable or any other indebtedness or monetary obligation to trade
creditors Incurred, created, assumed or Guaranteed by such Person or any of
its Subsidiaries or Joint Ventures arising in the ordinary course of
business.
"Unrestricted Subsidiary" is defined to mean any Subsidiary of the Company
that becomes an Unrestricted Subsidiary in accordance with the requirements
set forth in the next sentence. The Company may designate any Restricted
Subsidiary as an Unrestricted Subsidiary if (a) such designation is in
compliance with the first paragraph of the covenant described under
"Limitation on Restricted Payments" above and (b) after giving effect to such
designation, such Subsidiary does not own, directly or indirectly, a majority
of the Capital Stock or the Voting Stock of any other Restricted Subsidiary
unless such other Restricted Subsidiary is designated as an Unrestricted
Subsidiary at the same time. Any such designation will be effected by filing
with the Trustee an Officers' Certificate certifying that such designation
complies with the requirements of the immediately preceding sentence. No Debt
or other obligation of an Unrestricted Subsidiary may be with recourse to the
Company, any of its Restricted Subsidiaries, any Eligible Joint Venture or
any of their respective Property except to the extent otherwise permitted by
the provisions of the Indenture. An Unrestricted Subsidiary may be designated
as a Restricted Subsidiary if (i) all the Debt of such Unrestricted
Subsidiary could be Incurred under the provision described under "Limitation
on Subsidiary Debt" above or (ii) any portion of such Debt could not be
Incurred under such provision, if the Company could borrow all such remaining
Debt under the provision described in the first paragraph under "Limitation
on Debt" above.
"U.S. Government Obligations" is defined to mean securities that are (i)
direct obligations of the U.S. for the payment of which its full faith and
credit is pledged or (ii) obligations of a Person controlled or supervised by
and acting as an agency or instrumentality of the U.S., the payment of which
is unconditionally guaranteed as a full faith and credit obligation by the
U.S., that, in either case are not callable or redeemable at the option of
the issuer thereof, and will also include a depository receipt issued by a
bank or trust company as custodian with respect to any such U.S. Government
Obligations or a specific payment of interest on or principal of any such
U.S. Government Obligation held by such custodian for the account of the
holder of a depository receipt, provided that (except as required by law)
99
<PAGE>
such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by
the custodian in respect of the U.S. Government Obligation or the specific
payment of interest on or principal of the U.S. Government Obligation
evidenced by such depository receipt.
"Voting Stock" is defined to mean, with respect to any Person, Capital
Stock of any class or kind ordinarily having the power to vote for the
election of directors (or persons fulfilling similar responsibilities) of
such Person.
BOOK-ENTRY-ONLY ISSUANCE--THE DEPOSITORY TRUST COMPANY
The description of book-entry procedures in this Prospectus includes
summaries of certain rules and operating procedures of DTC that affect
transfers of interests in the global certificate or certificates issued in
connection with the Exchange Notes. The Exchange Notes will be issued only as
fully registered securities registered in the name of Cede & Co. (as nominee
for DTC). One or more fully registered global Notes certificates (the "Global
Certificates") will be issued, representing, in the aggregate, the Exchange
Notes, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC holds securities that its participants ("Participants") deposit with
DTC. DTC also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in Participants' accounts, thereby
eliminating the need for physical movement of securities certificates.
Participants in DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. DTC is
owned by a number of its Participants and by the NYSE, the American Stock
Exchange, Inc., and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to others such as securities
brokers and dealers, banks and trust companies that clear through or maintain
a custodial relationship with a Participant, either directly or indirectly
("Indirect Participants"). The rules applicable to DTC and its Participants
are on file with the Commission.
Purchases of Notes within the DTC system must be made by or through
Participants, which will receive a credit for the Notes on DTC's records. The
ownership interest of each actual purchaser of Notes ("Beneficial Owner") is
in turn to be recorded on the Participants' and Indirect Participants'
records. Beneficial Owners will not receive written confirmation from DTC of
their purchases, but Beneficial Owners are expected to receive written
confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the Participants or Indirect Participants
through which the Beneficial Owners purchased Notes. Transfers of ownership
interests in the Notes are to be accomplished by entries made on the books of
Participants and Indirect Participants acting on behalf of Beneficial Owners.
Beneficial Owners will not receive certificates representing their ownership
interests in Notes, except in the event that use of the book-entry system for
the Notes is discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Notes; DTC's
records reflect only the identity of the Participants to whose accounts such
Notes are credited, which may or may not be the Beneficial Owners. The
Participants and Indirect Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Participants, by
Participants to Indirect Participants, and by Participants and Indirect
Participants to Beneficial Owners will be governed by arrangements among
them, subject to any statutory or regulatory requirements as may be in effect
from time to time.
Redemption notices in respect of the Notes held in book-entry form shall
be sent to Cede & Co. If less than all of the Notes are being redeemed, DTC
will determine the amount of the interest of each Participant to be redeemed
in accordance with its procedures.
100
<PAGE>
Distributions on the Notes held in book-entry form will be made to DTC in
immediately available funds. DTC's practice is to credit Direct Participants'
accounts on the relevant payment date in accordance with their respective
holdings shown on DTC's records unless DTC has reason to believe that it will
not receive payments on such payment date. Payments by Participants and
Indirect Participants to Beneficial Owners will be governed by standing
instructions and customary practices and will be the responsibility of such
Participants and Indirect Participants and not of DTC or the Company, subject
to any statutory or regulatory requirements as may be in effect from time to
time. Payment of distributions to DTC is the responsibility of the Company,
disbursement of such payments to Participants is the responsibility of DTC,
and disbursement of such payments to the Beneficial Owners is the
responsibility of Participants and Indirect Participants.
Except as provided herein, a Beneficial Owner of an interest in a Global
Certificate will not be entitled to receive physical delivery of Notes.
Accordingly, each Beneficial Owner must rely on the procedures of DTC to
exercise any rights under the Notes.
DTC may discontinue providing its services as securities depository with
respect to the Notes at any time by giving notice to the Company. Under such
circumstances, in the event that a successor securities depository is not
obtained, certificates for the Notes are required to be printed and
delivered. Additionally, the Company may decide to discontinue use of the
system of book-entry transfers through DTC (or a successor depository). In
that event, certificates for the Notes will be printed and delivered. In each
of the above circumstances, the Company will appoint a paying agent with
respect to the Notes.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but
the Company takes no responsibility for the accuracy thereof.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the global Notes
as represented by a Global Certificate.
101
<PAGE>
REGISTRATION RIGHTS AGREEMENT
In connection with the sale of the Old Notes to the Initial Purchaser, the
Company executed and delivered for the benefit of the holders of the Old
Notes the Registration Rights Agreement, which provided that the Company will
file and cause to become effective, at its cost, the Exchange Offer
Registration Statement with respect to a registered offer to exchange the Old
Notes for the Exchange Notes which are in all material respects identical to
the Old Notes, except the Exchange Notes will not contain terms with respect
to transfer restrictions or increases in interest rate due to a Registration
Default. Upon such Exchange Offer Registration Statement being declared
effective, the Company agreed to offer the Exchange Notes in return for
surrender of the Old Notes. The Exchange Offer will be made by the Company to
satisfy its obligations pursuant to the Registration Rights Agreement, which
also requires the Company to use its reasonable best efforts to (i) cause the
Exchange Offer Registration Statement to be declared effective by the
Commission prior to the 270th day from the Issue Date, (ii) keep the Exchange
Offer open for a period of not less than the shorter of (a) the period ending
when the last of the remaining Old Notes is tendered in the Exchange Offer
and (B) 30 days from the date notice is mailed to holders of the Old Notes,
and (iii) maintain the Exchange Offer Registration Statement continuously
effective for a period of not less than the longer of (a) the period until
consummation of the Exchange Offer and (b) 120 days after effectiveness of
the Exchange Offer Registration Statement (subject to extension under certain
limited circumstances), provided that in the event that all exchanges of Old
Notes for Exchange Notes covered by the Exchange Offer Registration Statement
has been made, the Exchange Offer Registration Statement need not remain
continuously effective. For each Old Note surrendered to the Company under
the Exchange Offer, the Holder will receive Exchange Notes aggregating an
equal principal amount. Interest on each Exchange Note shall accrue from the
last Interest Payment Date on which interest was paid on the Note so
surrendered or, if no interest has been paid, since the Issue Date.
Under existing Commission interpretations, the Exchange Notes would be
freely transferable by holders other than affiliates of the Company after the
Exchange Offer without further registration under the Securities Act if the
holder of the Exchange Notes represents that it is acquiring the Exchange
Notes in the ordinary course of its business, that it has no arrangement or
understanding with any person to participate in the distribution of the
Exchange Notes and that it is not an affiliate of the Company, as such terms
are interpreted by the Commission; provided, however, that broker-dealers
("Participating Broker-Dealers") receiving Exchange Notes in the Exchange
Offer will have a prospectus delivery requirement with respect to resales of
such Exchange Notes. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with
respect to Exchange Notes (other than a resale of an unsold allotment from
the original sale of the Old Notes) with the prospectus contained in the
Exchange Offer Registration Statement. Under the Registration Rights
Agreement, the Company is required to allow Participating Broker-Dealers and
other persons, if any, with similar prospectus delivery requirements to use
the prospectus contained in the Exchange Offer Registration Statement in
connection with the resale of such Exchange Notes.
A holder of Old Notes (other than certain specified holders) who wishes to
exchange such Old Notes for Exchange Notes in the Exchange Offer will be
required to represent that any Exchange Notes to be received by it will be
acquired in the ordinary course of its business and that at the time of the
commencement of the Exchange Offer it has no arrangement or understanding
with any person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Notes and that it is not an "affiliate" of
the Company, as defined in Rule 405 of the Securities Act, or if it is an
affiliate, it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
Any Old Notes that remain outstanding after consummation of the Exchange
Offer, together with the Exchange Notes issued in connection with the
Exchange Offer, will be treated as a single class of securities under the
Indenture.
In the event that the Company determines in good faith that applicable
interpretations of the Staff of the Commission or other circumstances
specified in the Registration Rights Agreement do not permit
102
<PAGE>
the Company to effect the Exchange Offer, the Company has agreed to use its
reasonable best efforts (subject to customary representations and agreements
of the Holders) to have a shelf registration statement covering resale of the
Old Notes declared effective and kept effective until three years after the
Issue Date, subject to certain exceptions. In addition, the Company may
postpone or suspend the filing or the effectiveness of any registration
statement if such action is taken by the Company in good faith and for valid
business reasons, including the acquisition or divestiture of assets, other
pending corporate developments, public filings with the Commission or other
similar events. The Company has agreed, in the event of such a shelf
registration, to provide to each Holder copies of the prospectus, notify each
such Holder when a registration statement for the Old Notes had become
effective and take certain other actions as are appropriate to permit such
resales of the Old Notes.
In the event that the Exchange Offer is not commenced or such registration
statement has not been declared effective within 270 days following the Issue
Date, the interest rate on the Old Notes shall increase by one-half of one
percent per annum (50 basis points) effective on the 271st day following the
Issue Date until the date on which the Exchange Offer is commenced or such
registration statement shall have become effective. If a registration
statement has not been declared effective within two years after the Issue
Date, such increase in interest rate will become permanent.
A Holder that sells Old Notes pursuant to a shelf registration generally
would be required to be named as a selling security holder in the related
prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in
connection with such sale and will be required to agree in writing to be
bound by the provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations).
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all provisions of the Registration Rights
Agreement, a copy of which is available upon request from the Company.
103
<PAGE>
UNITED STATES TAXATION
GENERAL
The following summary of certain United States federal income tax
consequences of the purchase, ownership and disposition of the Notes has been
prepared by Willkie Farr & Gallagher, counsel to the Company, and is, in the
opinion of Willkie Farr & Gallagher, an accurate summary of such consequences
to the typical purchaser of Notes. The summary deals only with Notes held as
capital assets by initial purchasers who are United States holders, and not
with subsequent holders of the Notes or with special classes of holders, such
as dealers in securities or currencies, life insurance companies, persons
holding Notes as a hedge or hedged against currency risks or as part of a
straddle, or tax-exempt organizations. For this purpose, a "United States
holder" is a person who is, for United States federal income tax purposes,
(i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof, or (iii) an estate or
trust the income of which is subject to United States federal income taxation
regardless of its source. The summary is based on the Internal Revenue Code
of 1986, as amended (the "Code"), the regulations thereunder, and other
relevant sources of authority. All such sources of authority may be amended
or otherwise changed at any time, and these amendments or other changes may
be given retroactive effect.
PROSPECTIVE PURCHASERS OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE PARTICULAR CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF NOTES UNDER THE CODE AND THE LAWS OF ANY OTHER TAXING
JURISDICTION.
INTEREST INCOME
The fixed portion of interest on the Notes, i.e., 9.1/2% interest that
will be paid whether or not an effective Registration Statement is filed with
respect to the Notes, will be includible in the income of a Holder under the
Holder's regular method of accounting.
The proper tax treatment of the additional interest (the "Contingent
Interest") in the event of a Registration Default (as described in
"Registration Rights Agreement") is uncertain under existing law. The
Treasury has, from time to time, proposed regulations governing contingent
payments of interest, but the currently proposed regulations would not, under
their applicable effective date, apply to the Notes, and previously proposed
regulations have been withdrawn. Absent applicable regulations, the Company
intends to deduct the Contingent Interest and report it to Holders of the
Notes based on a daily accrual method only with respect to periods for which
there is a Registration Default.
PURCHASE, SALE, RETIREMENT AND EXCHANGE OF THE NOTES
A Holder's tax basis in a Note will initially be its U.S. dollar cost. A
Holder will generally recognize gain or loss on the sale or retirement of a
Note equal to the difference between the amount realized on the sale or
retirement and the tax basis of the Note. Except to the extent attributable
to accrued but unpaid interest (which will be includible in income, as
described above, and will not be includible in income a second time upon the
sale or retirement), gain or loss recognized on the sale or retirement of a
Note will be capital gain or loss and will be long-term capital gain or loss
if the Note was held for more than one year.
An exchange of an Old Note for an Exchange Note pursuant to the Exchange
Offer should not be a taxable event to Holders for federal income tax
purposes. The exchange of an Old Note for an Exchange Note should not be
considered a taxable "exchange" for federal income tax purposes because an
Exchange Note should not be considered to differ materially in kind or extent
from an Old Note. If, however, the exchange of an Old Note for an Exchange
Note were treated as an "exchange" for federal income tax purposes, such an
exchange should constitute a tax-free recapitalization for federal income tax
purposes. Accordingly, an Exchange Note should have the same issue price as
an Old Note and a Holder should have the same adjusted basis and holding
period in the Exchange Note as it had in an Old Note immediately before the
exchange.
104
<PAGE>
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to payments of
principal and interest made on a Note and the proceeds of the sale of a Note
before maturity within the United States to non-corporate United States
holders, and "backup withholding" at a rate of 31% will apply to such
payments if the United States holder fails to provide an accurate taxpayer
identification number or to report all interest and dividends required to be
shown on its federal income tax returns.
Any amount paid as backup withholding will be creditable against the
United States holder's U.S. federal income tax liability.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING
UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES
IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account as a
result of market-making activities or other trading activities in connection
with the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by Participating
Broker-Dealers during the period referred to below in connection with resales
of Exchange Notes received in exchange for Old Notes if such Old Notes were
acquired by such Participating Broker-Dealers for their own accounts as a
result of such activities. The Company has agreed that this Prospectus, as it
may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of such Exchange Notes
for a period ending 120 days after the Registration Statement of which this
Prospectus is a part has been declared effective (subject to extension under
certain limited circumstances) or, if earlier, when all such Exchange Notes
have been disposed of by the Participating Broker-Dealer. See "The Exchange
Offer--Resales of Exchange Notes."
The Company will not receive any proceeds from the issuance of the
Exchange Notes offered hereby. Exchange Notes received by broker-dealers for
their own accounts in connection with the Exchange Offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes
or a combination of such methods of resale, at market prices prevailing at
the time of resale, at prices related to such prevailing market prices or at
negotiated prices. Any such resale may be made directly to purchasers or to
or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers
of any such Exchange Notes. Any broker-dealer that resells Exchange Notes
that were received by it for its own account in connection with the Exchange
Offer and any broker or dealer that participates in a distribution of such
Exchange Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the Exchange Notes will be passed
upon for the Company by Willkie Farr & Gallagher, One Citicorp Center, 153
East 53rd Street, New York, New York.
105
<PAGE>
EXPERTS
The consolidated financial statements and financial statement schedule of
CalEnergy Company, Inc. and subsidiaries as of December 31, 1995 and 1994 and
each of the three years in the period ended December 31, 1995 included or
incorporated by reference in this Prospectus and the consolidated financial
statements of Magma Power Company and subsidiaries, a wholly-owned subsidiary
of CalEnergy Company, Inc., for the year ended December 31, 1995 incorporated
by reference in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing in this Prospectus
and incorporated herein by reference in this Prospectus.
The balance sheets of Falcon Seaboard Resources, Inc. as of December 31,
1995 and 1994 and the related statements of operations, retained earnings
(deficit) and cash flows for each of the three years in the period ended
December 31, 1995 incorporated in this Prospectus by reference to the
Company's Form 8-K/A dated August 27, 1996 have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports which are
incorporated herein by reference.
With respect to the Company's unaudited interim financial information for
the three and six month periods ended June 30, 1996 and 1995, included
herein, Deloitte & Touche LLP have applied limited procedures in accordance
with professional standards for a review of such information. However, as
stated in their report included in the Company's report on Form 10-Q for the
quarter ended June 30, 1996 and included herewith, they did not audit and
they do not express an opinion on that interim financial information.
Accordingly, the degree of reliance on their reports on such information
should be restricted in light of the limited nature of the review procedures
applied.
The balance sheets of BN Geothermal Inc., Conejo Energy Company, San
Felipe Energy Company and Niguel Energy Company as of December 31, 1995 and
1994 and the related statements of operations, shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1995,
incorporated by reference into this Prospectus by reference to the Company's
Form 8-K/A dated July 1, 1996, have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their report.
The consolidated balance sheet of Magma Power Company, and subsidiaries as
of December 31, 1994 and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1994, incorporated by reference to the
Company's Form 10-K dated December 31, 1995 in this Prospectus, have been
incorporated herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
106
<PAGE>
CALENERGY COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and 1994 ............................. F-2
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994, and
1993 ..................................................................................... F-3
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995,
1994 and 1993 ........................................................................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
1994 and 1993 ........................................................................... F-5
Notes to Consolidated Financial Statements ............................................... F-6
Independent Auditors' Report ............................................................. F-28
Interim Consolidated Financial Statements:
Report of Independent Accountants ........................................................ F-29
Consolidated Balance Sheets, June 30, 1996 and December 31, 1995 ......................... F-30
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1996
and 1995 ................................................................................ F-31
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995 ... F-32
Notes to Consolidated Financial Statements ............................................... F-33
INDEX TO PRO FORMA FINANCIAL STATEMENTS
Pro Forma Condensed Combined Unaudited Financial Data:
Condensed Combined Unaudited Balance Sheet as of June 30, 1996 ........................... P-3
Condensed Combined Unaudited Statement of Earnings for the year ended December 31, 1995 . P-4
Condensed Combined Unaudited Statement of Earnings for the year ended December 31, 1995 . P-5
Notes to Pro Forma Condensed Combined Unaudited Financial Data ........................... P-6
</TABLE>
F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND DECEMBER 31, 1994
DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
ASSETS 1995 1994
---- ----
<S> <C> <C>
Cash and investments ................................................... $ 72,114 $ 254,004
Joint venture cash and investments (Note 9) ............................ 77,590 54,087
Restricted cash (Notes 3, 7, 9 and 10) ................................. 149,227 131,775
Short-term investments ................................................. 34,190 50,000
Accounts receivable .................................................... 57,909 28,272
Due from Joint Ventures ................................................ 27,273 --
Properties, plants, contracts and equipment, net (Notes 5, 7, 9 and 10) 1,778,589 561,643
Notes receivable--Joint Ventures (Note 19) ............................. 14,254 12,627
Excess of cost over fair value of net assets acquired, net (Note 3) ... 302,288 --
Equity investment in Casecnan (Note 8) ................................. 60,815 --
Deferred charges and other assets ...................................... 79,789 38,737
------------- -------------
Total assets ......................................................... $2,654,038 $1,131,145
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable ....................................................... $ 6,638 $ 1,679
Other accrued liabilities .............................................. 87,892 42,658
Project finance loans (Note 9) ......................................... 257,933 233,080
Construction loans (Note 10) ........................................... 211,198 31,503
Senior discount notes (Note 11) ........................................ 477,355 431,946
Salton Sea notes and bonds (Note 5) .................................... 452,088 --
Limited recourse senior secured notes (Note 5) ......................... 200,000 --
Convertible subordinated debentures (Note 12) .......................... 100,000 100,000
Convertible debt (Note 13) ............................................. 64,850 --
Deferred income taxes (Note 14) ........................................ 226,520 26,568
Due to Joint Ventures .................................................. -- 269
------------- -------------
Total liabilities .................................................... 2,084,474 867,703
------------- -------------
Deferred income (Note 7) ............................................... 26,032 19,851
------------- -------------
Commitments and contingencies (Notes 6 and 18) .........................
Redeemable preferred stock (Note 13) ................................... -- 63,600
------------- -------------
Stockholders' equity (Notes 13, 15, 16 and 17):
Preferred stock--authorized 2,000 shares, no par value (Note 15) ...... -- --
Common stock--par value $0.0675 per share, authorized 80,000 and
60,000 shares, issued 50,680 and 35,649 shares, outstanding 50,593 and
31,849 shares ......................................................... 3,421 2,407
Additional paid in capital ............................................. 343,406 100,421
Retained earnings ...................................................... 205,059 142,937
Treasury stock--87 and 3,800 common shares at cost ..................... (1,348) (65,774)
Unearned compensation--restricted stock (Note 16) ...................... (7,006) --
------------- -------------
Total stockholders' equity ........................................... 543,532 179,991
------------- -------------
Total liabilities and stockholders' equity ........................... $2,654,038 $1,131,145
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenue:
Sales of electricity .................................. $ 335,630 $ 154,562 $ 132,059
Royalty income ........................................ 19,482 -- --
Interest and other income ............................. 43,611 31,292 17,194
----------- ----------- -----------
Total revenues ...................................... 398,723 185,854 149,253
----------- ----------- -----------
Cost and expenses:
Plant operations ...................................... 79,294 33,015 25,362
General and administration ............................ 23,376 13,012 13,158
Royalties ............................................. 24,308 9,888 8,274
Depreciation and amortization ......................... 72,249 21,197 17,812
Loss on equity investment in Casecnan ................. 362 -- --
Interest .............................................. 134,637 62,837 30,205
Less interest capitalized ............................. (32,554) (9,931) (6,816)
----------- ----------- -----------
Total expenses ...................................... 301,672 130,018 87,995
----------- ----------- -----------
Income before provision for income taxes .............. 97,051 55,836 61,258
Provision for income taxes (Note 14) .................. 30,631 17,002 18,184
----------- ----------- -----------
Income before change in accounting principle and
extraordinary item ................................... 66,420 38,834 43,074
Cumulative effect of change in accounting principle
(Note 14) ............................................ -- -- 4,100
Extraordinary item (Note 20) .......................... -- (2,007) --
----------- ----------- -----------
Income before minority interest and preferred
dividends ............................................ 66,420 36,827 47,174
Minority interest ..................................... 3,005 -- --
----------- ----------- -----------
Net income ............................................ 63,415 36,827 47,174
Preferred dividends ................................... 1,080 5,010 4,630
----------- ----------- -----------
Net income available to common stockholders .......... $ 62,335 $ 31,817 $ 42,544
=========== =========== ===========
Income per share before change in accounting principle
and extraordinary item ............................... $ 1.25 $ .95 $ 1.00
Cumulative effect of change in accounting principle
(Note 14) ............................................ -- -- .11
Extraordinary item (Note 20) .......................... -- (.06) --
----------- ----------- -----------
Net income per share--primary ......................... $ 1.25 $ .89 $ 1.11
=========== =========== ===========
Net income per share--fully diluted ................... $ 1.18 $ .88 $ 1.09
=========== =========== ===========
Average number of shares outstanding--primary ........ 49,971 35,721 38,485
=========== =========== ===========
Fully diluted shares .................................. 57,742 40,166 40,781
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended December 31, 1995
Dollars and Shares in Thousands, Except Per Share Amounts
<TABLE>
<CAPTION>
OUTSTANDING ADDITIONAL
COMMON COMMON PAID-IN
SHARES STOCK CAPITAL
------------- --------- ------------
<S> <C> <C> <C>
Balance December 31, 1992 ............ 35,258 $ 2,380 $ 97,977
Exercise of stock options ............ 258 18 937
Issuance of stock for purchase of
The Ben Holt Co. .................... 87 6 1,551
Purchase of treasury stock ........... (157) -- --
Preferred stock dividends, Series C,
including cash distributions of $100 -- -- --
Tax benefit from stock plan .......... -- -- 500
Net income before preferred dividends -- -- --
------------- --------- ------------
Balance December 31, 1993 ............ 35,446 2,404 100,965
Exercise of stock options ............ 46 3 379
Purchase of treasury stock ........... (3,765) -- --
Exercise of stock options from
treasury stock ...................... 96 -- (1,473)
Employee stock purchase plan issues
from treasury stock ................. 26 -- (122)
Preferred stock dividends, Series C,
including cash distribution of $121 -- -- --
Tax benefit from stock plan .......... -- -- 672
Net income before preferred dividends -- -- --
------------- --------- ------------
Balance December 31, 1994 ............ 31,849 2,407 100,421
Equity offering ...................... 18,170 1,004 240,825
Exercise of stock options ............ 102 7 303
Restricted stock ..................... 500 -- 848
Amortization of unearned compensation -- -- --
Employee stock purchase plan issues . 41 3 559
Exercise of stock options from
treasury stock ...................... 33 -- (416)
Purchase of treasury stock ........... (102) -- --
Preferred stock dividends, Series C,
including cash distribution of $43 . -- -- --
Tax benefit from stock plan .......... -- -- 866
Net income before preferred dividends -- -- --
------------- --------- ------------
Balance December 31, 1995 ............ 50,593 $ 3,421 $ 343,406
============= ========= ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
RETAINED TREASURY UNEARNED
EARNINGS STOCK COMPENSATION TOTAL
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Balance December 31, 1992 ............ $ 68,407 $ -- $ -- $ 168,764
Exercise of stock options ............ -- -- -- 955
Issuance of stock for purchase of
The Ben Holt Co. .................... -- -- -- 1,557
Purchase of treasury stock ........... -- (2,897) -- (2,897)
Preferred stock dividends, Series C,
including cash distributions of $100 (4,550) -- -- (4,550)
Tax benefit from stock plan .......... -- -- -- 500
Net income before preferred dividends 47,174 -- -- 47,174
----------- ----------- -------------- -----------
Balance December 31, 1993 ............ 111,031 (2,897) -- 211,503
Exercise of stock options ............ -- -- -- 382
Purchase of treasury stock ........... -- (65,119) -- (65,119)
Exercise of stock options from
treasury stock ...................... -- 1,772 -- 299
Employee stock purchase plan issues
from treasury stock ................. -- 470 -- 348
Preferred stock dividends, Series C,
including cash distribution of $121 (4,921) -- -- (4,921)
Tax benefit from stock plan .......... -- -- -- 672
Net income before preferred dividends 36,827 -- -- 36,827
----------- ----------- -------------- -----------
Balance December 31, 1994 ............ 142,937 (65,774) -- 179,991
Equity offering ...................... -- 56,801 -- 298,630
Exercise of stock options ............ -- -- -- 310
Restricted stock ..................... -- 8,652 (9,500) --
Amortization of unearned compensation -- -- 2,494 2,494
Employee stock purchase plan issues . -- -- -- 562
Exercise of stock options from
treasury stock ...................... -- 563 -- 147
Purchase of treasury stock ........... -- (1,590) -- (1,590)
Preferred stock dividends, Series C,
including cash distribution of $43 . (1,293) -- -- (1,293)
Tax benefit from stock plan .......... -- -- -- 866
Net income before preferred dividends 63,415 -- -- 63,415
----------- ----------- -------------- -----------
Balance December 31, 1995 ............ $ 205,059 $ (1,348) $ (7,006) $ 543,532
=========== =========== ============== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended December 31, 1995
Dollars in Thousands
<TABLE>
<CAPTION>
1995 1994 1993
------------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 63,415 $ 36,827 $ 47,174
Adjustments to reconcile net cash flow from operating activities:
Depreciation and amortization .................................. 65,244 21,197 17,812
Amortization of excess of cost over fair value
of net assets acquired ........................................ 7,005 -- --
Amortization of original issue discount ........................ 45,409 31,946 --
Amortization of deferred financing costs ....................... 8,979 1,687 1,013
Amortization of unearned compensation .......................... 2,494 -- --
Provision for deferred income taxes ............................ 13,983 8,258 3,098
Loss on equity investment in Casecnan .......................... 362 -- --
Expense of previously deferred financing costs ................. -- 198 --
Changes in other items:
Accounts receivable ........................................... 213 (6,614) (5,486)
Accounts payable and other accrued liabilities ................ 3,838 23,864 (784)
Deferred income ............................................... 6,181 (437) (876)
Income tax payable ............................................ 2,084 (4,500) 4,000
Other assets .................................................. -- -- (177)
------------- ----------- -----------
Net cash flows from operating activities ....................... 219,207 112,426 65,774
------------- ----------- -----------
Cash flows from investing activities:
Capital expenditures relating to power plants and
development of existing projects ............................... (25,884) (37,717) (26,860)
Acquisition of equipment ........................................ (1,236) (361) (1,104)
Purchase of Magma, net of cash acquired ......................... (907,614) (3,043) --
Upper Mahiao--construction in progress .......................... (140,350) (48,554) --
Mahanagdong--construction in progress ........................... (55,117) (21,443) --
Malitbog--construction in progress .............................. (94,188) -- --
Investment in Casecnan .......................................... (61,177) -- --
Other International development ................................. (8,973) (2,445) --
Salton Sea Expansion ............................................ (62,430) -- --
Pacific Northwest, Nevada, and Utah exploration costs .......... (10,445) (8,493) (19,060)
Decrease (increase) in short-term investments ................... 80,565 (50,000) --
Decrease (increase) in restricted cash .......................... (17,452) (83,670) 14,409
Decrease in other investments and assets ........................ 14,519 1,847 941
Yuma--construction in progress .................................. -- -- (40,167)
Transmission line deposit ....................................... -- -- 7,684
------------- ----------- -----------
Net cash flows from investing activities ....................... (1,289,782) (253,879) (64,157)
------------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common and treasury stock and
exercise of stock options ...................................... 299,649 1,580 2,912
Proceeds from Salton Sea notes and bonds ........................ 475,000 -- --
Proceeds from limited recourse senior secured notes ............ 200,000 -- --
Proceeds from merger facility ................................... 500,000 -- --
Recapitalization of merger facility ............................. (500,000) -- --
Repayment of project loans ...................................... (153,752) (13,800) (16,724)
Construction loans .............................................. 179,695 31,503 --
Repayment of Salton Sea notes and bonds ......................... (22,912) -- --
Deferred charges relating to debt financing ..................... (34,733) (11,905) (2,582)
Decrease (increase) in amounts due from Joint Ventures ......... (29,169) 316 (3,146)
Purchase of treasury stock ...................................... (1,590) (65,119) (2,897)
Proceeds from issue of Senior Discount Note ..................... -- 400,000 --
Proceeds from issue of convertible subordinated debentures ..... -- -- 100,000
Defeasance of senior notes ...................................... -- (35,730) --
------------- ----------- -----------
Net cash flows from financing activities ....................... 912,188 306,845 77,563
------------- ----------- -----------
Net increase (decrease) in cash and investments ................. (158,387) 165,392 79,180
------------- ----------- -----------
Cash and investments at beginning of period ..................... 308,091 142,699 63,519
------------- ----------- -----------
Cash and investments at end of period ........................... $ 149,704 $ 308,091 $ 142,699
============= =========== ===========
Interest paid (net of amounts capitalized) ...................... $ 50,840 $ 12,624 $ 20,136
============= =========== ===========
Income taxes paid ............................................... $ 14,812 $ 4,926 $ 6,819
============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
Dollars and Shares in Thousands, Except Per Share Amounts
1. BUSINESS
CalEnergy Company, Inc. (the "Company"), formerly California Energy
Company, Inc., was formed in 1971. It is primarily engaged in the development
of geothermal resources and conversion of such resources into electrical power
and steam for sale to electric utilities, and the development and operation 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 developing geothermal
resources in Northern California 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 7). 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 commenced in late May 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. In addition, in January 1995, the Company acquired approximately
51% of Magma Power Company ("Magma") and completed the acquisition in February
1995 by acquiring the remaining percentage of approximately 49% of Magma
Common Stock. Magma's operating assets include four projects referred to as
the Partnership Project of which Magma has a 50% interest, the Salton Sea
Project of which Magma owns 100% and certain royalties received from the
Partnership Project and other non related projects (See Note 3).
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 joint
ventures in which it has invested. All significant inter-enterprise
transactions and accounts have been eliminated.
INVESTMENTS AND RESTRICTED CASH
Investments other than restricted cash are primarily commercial paper and
money market securities. The restricted cash balance includes such securities
and mortgage backed securities, and is mainly composed of amounts deposited in
restricted accounts from which the Company will source its equity contribution
requirements relating to the Upper Mahiao, Mahanagdong, Malitbog, Salton Sea
Unit IV projects and of the Coso Joint Ventures' and Partnership Project's
debt service reserve funds. The debt service reserve funds are legally
restricted to their use and require the maintenance of specific minimum
balances.
Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 115 ("SFAS 115") "Accounting for Certain
Investments in Debt and Equity Securities." Adoption of SFAS 115 had no
material effect on the Company's individual or combined financial position or
results of operations. In accordance with the provisions of SFAS 115, the
Company classifies its investments, and accounts for changes in fair value, as
follows:
o Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.
o Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
o Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of
stockholders' equity.
At December 31, 1995, all of the Company's investments are classified as
held-to-maturity and are accounted for at their amortized cost basis. The
carrying amount of the investments approximates the fair value based on quoted
market prices as provided by the financial institution which holds the
investments.
WELL, RESOURCE DEVELOPMENT AND EXPLORATION COSTS
The Company follows the full cost method of accounting for costs incurred
in connection with the exploration and development of geothermal resources.
All such costs, which include dry hole costs and the cost of drilling and
equipping production wells and 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 to twenty years depending on the characteristics of the
underlying resource; exploration costs and development costs, other than
production wells, are generally amortized over the weighted average remaining
term of the Company's power and steam purchase contracts. For purposes of
current period visibility and disclosure, all such costs are identified in the
Consolidated Statements of Cash Flows as they are incurred.
DEFERRED WELL AND REWORK COSTS
Well rework costs are deferred and amortized over the estimated period
between reworks. These deferred costs of $7,086 and $733 at December 31, 1995
and 1994, respectively, are included in other assets.
PROPERTIES, PLANTS, CONTRACTS, EQUIPMENT 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 plant costs, net of salvage value, 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.
The Magma acquisition by the Company has been accounted for as a purchase
business combination pursuant to the principles of APB Opinion No. 16
"Business Combinations." In applying APB No. 16, all identifiable assets
acquired and liabilities assumed were assigned a portion of the cost of
acquiring Magma, equal to their fair values at the date of the acquisition and
include the following:
Power sales agreements are amortized separately over (1) the remaining
portion (1 to 5 years) of the scheduled price periods of the power sales
agreements and (2) the 20 year avoided cost periods of the power sales
agreements using the straight-line method.
Mineral reserves are amortized on the units of production method.
Process licenses and related technologies are amortized using the
straight-line method over the estimated useful life of the license.
Total acquisition costs in excess of the fair values assigned to the net
assets acquired are amortized over a 40 year period using the straight
line method.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
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.
REVENUE RECOGNITION
Revenues are recorded based upon service rendered and electricity and steam
delivered to the end of the month. See Note 7 for contractual terms of power
sales agreements. Royalties contractually payable to the Company by the
Partnership Project are recorded on an accrual basis, net of the Company's 50%
share of the corresponding partnership project expense. Royalties earned from
providing geothermal resources to power plants operated by other geothermal
power producers are recorded on an accrual basis.
DEFERRED INCOME TAXES
On January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." The adoption of
SFAS 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.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments as discussed herein. Fair
values have been estimated based on quoted market prices for debt issues
listed on exchanges. Fair values of financial instruments that are not
actively traded are based on market prices of similar instruments and/or
valuation techniques using market assumptions. Although management uses its
best judgement in estimating the fair value of these financial instruments,
there are inherent limitations in any estimation technique. Therefore, the
fair value estimates presented herein are not necessarily indicative of the
amounts which the Company could realize in a current transaction.
The Company assumes that the carrying amount of short-term financial
instruments approximates their fair value. For these purposes, short-term is
defined as any item that matures, reprices, or represents a cash transaction
between willing parties within six months or less of the measurement date.
NET INCOME PER COMMON SHARE
Primary and fully diluted 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. Fully
diluted earnings per share also assumes the conversion of the Convertible
Subordinated Debentures into 4,444 common shares at a conversion price of
$22.50 per share (even though the common share price was $19.50 at December
31, 1995) and the exercise of all dilutive stock options outstanding at their
option prices, with the option exercise proceeds used to repurchase shares of
common stock at the ending market price for fully diluted earnings per share.
For primary earnings per share, shares of common stock are assumed to be
repurchased at the average price for the period.
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,
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
wells, resource development, and exploration costs. The Company considers all
investment instruments purchased with a maturity of three months or less to be
cash equivalents. Restricted cash is not considered a cash equivalent.
RECLASSIFICATION
Certain amounts in the fiscal 1994 and 1993 financial statements and
supporting footnote disclosures have been reclassified to conform to the
fiscal 1995 presentation. Such reclassification did not impact previously
reported net income or retained earnings.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. PURCHASE OF MAGMA POWER COMPANY
On January 10, 1995, the Company acquired approximately 51% of the
outstanding shares of common stock of Magma Power Company (the "Magma Common
Stock") through a cash tender offer (the "Magma Tender Offer") and completed
the Magma acquisition on February 24, 1995 by acquiring the approximately 49%
of the outstanding shares of Magma Common Stock not owned by the Company
through a merger. Magma is engaged in independent power operations similar to
those of the Company. The results of operations of the Company include the
results of operations of Magma from January 10, 1995, to December 31, 1995
adjusted for the Company's percentage ownership during that time period.
The Magma acquisition has been accounted for as a purchase business
combination pursuant to the principles of APB Opinion No. 16 "Business
Combinations." In applying APB No. 16, all identifiable assets acquired and
liabilities assumed were assigned a portion of the cost of acquiring Magma,
equal to their fair values at the date of the acquisition. The total cost of
the acquisition was allocated as follows:
Cash ................................................................. $ 62,116
Operating facilities and project cash ................................ 291,365
Power sales agreements ............................................... 173,730
Mineral reserves ..................................................... 160,768
Construction in progress ............................................. 93,174
Process license and other ............................................ 39,304
Excess of cost over fair value of net assets acquired, net of deferred
taxes of $168,914 .................................................. 137,455
--------
$957,912
========
The fair value of operating facilities, net of salvage value, and
exploration and development cost is depreciated using the straight-line method
over the remaining portion (approximately 24 years) of the original 30 year
life.
Power sales agreements have been assigned values separately for each of (1)
the remaining portion (1 to 5 years) of the scheduled price periods of the
power sales agreements; (2) the 20 year avoided cost periods of the power
sales agreements, and are being amortized separately over such periods using
the straight line method; and (3) the 163 net MW BRPU Award for which the
related plants will either be constructed or the contract rights will be
bought out; amortization of such values has been deferred until the plants
have been constructed and production commences or the buyout proceeds have
been applied against such values.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
The Salton Sea reservoir contains commercial quantities of extractable
minerals. The fair value has been allocated to mineral reserves which was
based on the estimated net cash flows generated from producing such minerals.
The fair value assigned to the mineral reserves will be amortized on the units
of production method upon commencement of commercial production.
Fair value has been assigned to contracts for which the plants are
presently under construction and energy production is not expected to commence
before 1996. Accordingly, revenues, period operating costs, depreciation of
the remaining capital costs to be incurred for the completion of such
facilities and amortization of this acquisition cost are not presently
included in the Company's statements of operations.
A process license was allocated fair value which represents the economic
benefits expected to be realized from the installation of the license and
related technology at the Imperial Valley. The fair value assigned to the
process license is being amortized using the straight-line method over the
remaining estimated useful life of the license. Deferred finance costs are
being amortized using the level yield method over the term of the related
debt.
Total acquisition costs in excess of the fair values assigned to the net
assets acquired is amortized over a 40 year period using the straight-line
method.
The Magma Tender Offer was financed with a $245,600 facility from Credit
Suisse (the "Tender Facility"). Loans under the Tender Facility were made to
the Company on a nonrecourse basis, secured by the Magma stock acquired, and
the Company lent the proceeds of such loans to Magma in exchange for a secured
term note from Magma (the "Tender Note"). The loans under the Tender Facility
were repaid from funds received from the Merger Facilities, described below.
Secured bank financing in the amount of $500,000 was provided by Credit
Suisse (the "Merger Facilities") on specified terms and subject to customary
conditions. Such funds, together with the net proceeds of a public equity
offering (see Note 4) and general corporate funds of the Company, were used to
complete the Magma acquisition.
In July 1995, the Company recapitalized Magma and the related Merger
Facilities from proceeds received through the issuance of notes and bonds as
described in Note 5.
Unaudited proforma combined revenue, net income and primary earnings per
share of the Company and Magma for the twelve months ended December 31, 1995
and 1994, as if the acquisition had occurred at the beginning of 1994 after
giving effect to certain proforma adjustments related to the acquisition were
$400,648, $62,367 and $1.18, compared to $368,276, $30,978 and $.57,
respectively.
4. EQUITY OFFERING
Simultaneous with the acquisition of the remaining equity interest of Magma
on February 24, 1995, the Company completed a public offering (the "Offering")
of 18,170 shares of common stock, which amount included a direct sale by the
Company to Peter Kiewit Sons, Inc. of 1,500 shares and the exercise of
underwriter over-allotment options for 1,500 shares, at a price of $17.00 per
share. The Company received net proceeds of $300,388 from the Offering.
5. DEBT OFFERINGS
On July 21, 1995 the Company issued $200,000 of 9 7/8% Limited Recourse
Senior Secured Notes Due 2003 (the "Notes"). Interest on the Notes is payable
on June 30 and December 30 of each year, commencing December 1995. The Notes
are secured by an assignment and pledge of 100% of the outstanding capital
stock of Magma and are recourse only to such Magma capital stock, the
Company's interest in a secured Magma note and general assets of the Company
equal to the Restricted Payment Recourse Amount (as defined in the Note
Indenture).
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
At any time or from time to time on or prior to June 30, 1998, the Company
may, at its option, use all or a portion of the net cash proceeds of a Company
equity offering (as defined in the Note Indenture) and shall at any time use
all of the net cash proceeds of any Magma equity offering (as defined in the
Note Indenture) to redeem up to an aggregate of 35% of the principal amount of
the Notes originally issued at a redemption price equal to 109.875% of the
principal amount thereof plus accrued interest to the redemption date. On or
after June 30, 2000, the Notes are redeemable at the option of the Company, in
whole or in part, initially at a redemption price of 104.9375% declining to
100% on June 30, 2002 and thereafter, plus accrued interest to the date of
redemption.
Concurrent with the issuance of the Notes, the Company through its wholly
owned subsidiary, Salton Sea Funding Corporation ("Funding Corporation"),
completed a sale to institutional buyers of $475,000 principal amount of
Salton Sea Notes and Bonds, which are nonrecourse to the Company. These debt
securities were rated Baa3 by Moody's and BBB-by Standard & Poor's. The
Funding Corporation debt securities were offered in three tranches as follows:
$232,750 6.69% Senior Secured Series A Notes Due May 30, 2000
$133,000 7.37% Senior Secured Series B Bonds Due May 30, 2005
$109,250 7.84% Senior Secured Series C Bonds Due May 30, 2010
The Salton Sea Notes and Bonds are secured by the Company's three existing
Salton Sea plants, the 40 net MW Salton Sea Unit IV plant as well as an
assignment of the right to receive various royalties payable to Magma in
connection with its Imperial Valley properties and distributions from the
Partnership Project. In connection with the Salton Sea debt issuance, the
Company has, subject to certain conditions, committed to fund any costs of
construction in connection with the construction of the Salton Sea Unit IV
project over and above the initial budgeted amount of $135,000 in the event
such budgeted amount is insufficient to cause substantial completion of the
expansion project prior to January 1, 1998.
Each of the Company's direct or indirect subsidiaries is organized as a
legal entity separate and apart from the Company and its other subsidiaries.
It should not be assumed that any asset of any such subsidiary will be
available to satisfy the obligations of the Company or any of its other such
subsidiaries; provided, however, that unrestricted cash or other assets which
are available for distribution may, subject to applicable law and the terms of
financing arrangements of such parties, be advanced, loaned, paid as dividends
or otherwise distributed or contributed to the Company or affiliates thereof.
Substantially all of the assets of each subsidiary listed below (except
Vulcan/BN Geothermal Power Company and certain other subsidiaries involved in
project financing activities) have been encumbered to secure obligations owed
to the creditors of such subsidiary:
Fish Lake Power Company
Salton Sea Brine Processing L.P.
Salton Sea Power Generation L.P.
Vulcan Power Company
CalEnergy Operating Company
Salton Sea Funding Corporation
Salton Sea Power Company
Salton Sea Royalty Company
Vulcan/BN Geothermal Power Company
Del Ranch, L.P.
Elmore, L.P.
Leathers, L.P.
The net proceeds of the Notes and the Salton Sea Notes and Bonds were used
to (a) recapitalize Magma and the related Merger Facilities (b) refinance
approximately $102,000 of existing indebtedness
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
of the Salton Sea Projects, and (c) provide funding for the Salton Sea Unit IV
in the amount of $115,000. Pursuant to the Depositary Agreement, Funding
Corporation established a debt service reserve fund in the form of a letter of
credit in the initial amount of $50,000 from which scheduled interest and
principal payments can be made. Annual repayment of the Notes and the Salton
Sea Notes and Bonds for the years beginning January 1, 1996 are as follows:
1996 .......................................... $ 48,106
1997 .......................................... 64,378
1998 .......................................... 74,938
1999 .......................................... 35,108
2000 .......................................... 19,572
Thereafter ................................... 409,986
---------
$652,088
=========
6. INTEREST RATE SWAP AGREEMENTS
In January 1993, the Coso Joint Ventures entered into five year deposit
interest rate swap agreements. The subject deposits represent debt service
reserves established in conjunction with refinancing the Coso Joint Ventures
loans through Coso Funding Corp. The deposit interest rate swaps effectively
convert interest earned on the debt service reserve deposits from a variable
rate to a fixed rate, in order to match the nature of the interest rate on the
borrowings used to fund the debt service reserve deposits. The Company's
proportion of the deposit amount of $25,056 included in restricted cash and
investments accretes annually to a maximum amount of approximately $29,300 in
1997. Under the agreements, which mature on January 11, 1998, the Coso Joint
Ventures make semi-annual 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
5.6875% to 6.375% during 1995 and was 5.9375% at December 31, 1995. The
counter party to these agreements is a large multi-national financial
institution.
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 semi-annual
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.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
7. PROPERTIES, PLANTS, CONTRACTS AND EQUIPMENT
Properties, plants, contracts and equipment comprise the following at
December 31:
1995 1994
---------- ----------
Operating project costs:
Power plants .................................... $ 623,778 $314,027
Wells and resource development .................. 271,242 174,651
Power sales agreements .......................... 185,749 --
Licenses, equipment and other ................... 58,052 9,674
Wells and resource development in progress ..... 465 434
---------- ----------
Total operating facilities ..................... 1,139,286 498,786
Less accumulated depreciation and amortization (162,970) (95,480)
---------- ----------
Net operating facilities ........................ 976,316 403,306
---------- ----------
Mineral reserves ................................ 211,576 39,275
Construction in progress:
Upper Mahiao ................................... 188,904 48,554
Malitbog ....................................... 146,735 --
Mahanagdong .................................... 76,560 21,443
Salton Sea Unit IV ............................. 108,769 --
Pacific Northwest geothermal development costs 58,311 46,620
Other international development ................ 11,418 2,445
---------- ----------
Total ........................................ $1,778,589 $561,643
========== ==========
COSO PROJECT OPERATING FACILITIES
The Coso Project 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).
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 net MW Plant is located on land owned by and leased from
the U.S. Navy to 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. As of December 31, 1994, payout had been
reached on Units 2 and 3 of the Navy I Plant.
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. The BLM Plant reached payout in June 1994.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
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. The 80
net MW Plant is located 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.
IMPERIAL VALLEY PROJECT OPERATING FACILITIES
Magma currently operates seven geothermal power plants in the Imperial
Valley in California. Four of these plants were developed by Magma and are
owned by the partnerships in which Magma is the managing general partner and
operator and owns 50% interests. The Partnership Project consists of the
Vulcan, Hoch (Del Ranch), Elmore, and Leather Partnerships. The remaining
three plants which comprise the Salton Sea Project are wholly owned by
subsidiaries of Magma and were purchased on March 31, 1993 from Union Oil
Company of California. These geothermal power plants consist of the Salton Sea
I, Salton Sea II and the Salton Sea III. The Partnership Project and the
Salton Sea Project are collectively referred to as the Imperial Valley
Project. The Imperial Valley Project commencement dates and contract
nameplates are as follows:
IMPERIAL VALLEY PLANTS COMMENCEMENT DATE CONTRACT NAMEPLATE
- ---------------------- ----------------- ------------------
Vulcan .................... February 10, 1986 34 MW
Hoch (Del Ranch) .......... January 2, 1989 38 MW
Elmore .................... January 1, 1989 38 MW
Leathers .................. January 1, 1990 38 MW
Salton Sea I .............. July 1, 1987 10 MW
Salton Sea II ............. April 5, 1990 20 MW
Salton Sea III ............ February 13, 1989 49.8 MW
SIGNIFICANT CUSTOMER
All of the Company's sales of electricity from the Coso Project and
Imperial Valley Project, which comprise approximately 93% of 1995 electricity
and steam revenues, are to Edison and are under long-term power purchase
contracts.
The Coso Project and the Partnership Project sell all electricity generated
by the respective plants pursuant to seven long-term SO4 Agreements between
the project and Edison. These SO4 Agreements provide for capacity payments,
capacity bonus payments and energy payments. Edison makes fixed annual
capacity payments to the projects, and to the extent that capacity factors
exceed certain benchmarks is required to make capacity bonus payments. The
price for capacity and capacity bonus payments is fixed for the life of the
SO4 Agreements. Energy is sold at increasing fixed rates for the first ten
years of each contract and thereafter at Edison's Avoided Cost of Energy.
The fixed price periods of the Coso Project SO4 Agreements extend until at
least August 1997, March 1999 and January 2000 for each of the units operated
by the Navy I, BLM and Navy II Partnerships, respectively.
The fixed price periods of the Partnership Project SO4 Agreements extend
until February 1996, December 1998, December 1998, and December 1999 for each
of the Vulcan, Hoch (Del Ranch), Elmore and Leathers Partnerships,
respectively.
The Company's SO4 Agreements provide for rates ranging from 11.4 cents per
kWh in 1995 to 15.6 cents per kWh in 1999.
Salton Sea I sells electricity to Edison pursuant to a 30-year negotiated
power purchase agreement, as amended (the "Salton Sea I PPA"), which provides
for capacity and energy payments. The energy
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
payment is calculated using a Base Price which is subject to quarterly
adjustments based on a basket of indices. The time period weighted average
energy payment for Unit 1 was 4.99 cents per kWh during 1995. As the Salton
Sea I PPA is not an SO4 Agreement, the energy payments do not revert to
Edison's Avoided Cost of Energy.
Salton Sea II and Salton Sea III sell electricity to Edison pursuant to
30-year modified SO4 Agreements that provide for 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
Agreements. The energy payments for the first ten year period, which period
expires in April 2000 and February 1999 are levelized at a time period
weighted average of 10.6 cents per kWh and 9.8 cents per kWh for Salton Sea II
and Salton Sea III, respectively. Thereafter, the monthly energy payments will
be Edison's Avoided Cost of Energy. For Salton Sea II only, Edison is entitled
to receive, at no cost, 5% of all energy delivered in excess of 80% of
contract capacity through March 31, 2004.
For the year ended December 31, 1995, Edison's average Avoided Cost of
Energy was 2.1 cents per kWh which is substantially below the contract energy
prices earned for the year ended December 31, 1995. Estimates of Edison's
future Avoided Cost of Energy vary substantially from year to year. The
Company cannot predict the likely level of Avoided Cost of Energy prices under
the SO4 Agreements and the modified SO4 Agreements at the expiration of the
scheduled payment periods. The revenues generated by each of the projects
operating under SO4 Agreements could decline significantly after the
expiration of the respective scheduled payment periods.
ROYALTY EXPENSE
Royalty expense comprises the following for the years ended:
1995 1994 1993
---- ---- ----
Navy I, Unit 1 ........ $ 1,622 $1,641 $1,556
Navy I, Units 2 and 3 3,394 3,174 2,924
BLM ................... 3,036 2,842 1,868
Navy II ............... 5,571 1,963 1,717
WSG ................... 287 268 209
Vulcan ................ 1,207 -- --
Leathers .............. 1,968 -- --
Elmore ................ 1,713 -- --
Hoch (Del Ranch) ...... 1,932 -- --
Salton Sea 1 & 2 ...... 1,147 -- --
Salton Sea 3 .......... 2,431 -- --
-------- -------- --------
Total ............. $24,308 $9,888 $8,274
======== ======== ========
The amount of royalties paid by Navy I 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 Edison for specified quantities of
electricity and the price as determined under the contract (which currently
approximates 73% of that paid by the Navy to Edison), and (ii) $25,000 payable
in December 2009, of which the Company's share is $11,600. The $25,000 payment
is secured by funds placed on deposit monthly, which funds, plus accrued
interest, will aggregate $25,000. The monthly deposit is currently $50. As of
December 31, 1995, the balance of funds deposited approximated $4,457, 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, for
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.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
The Partnership Project pays royalties based on both energy revenues and
total electricity revenues. Hoch (Del Ranch) and Leathers pay royalties of 5%
of energy revenues and 1% of total electricity revenue. Elmore pays royalties
of 5% of energy revenues. Vulcan pays royalties of 4.167% of energy revenues.
The Salton Sea Project's weighted average royalty expense in 1995 was
approximately 3.4%. The royalties are paid to numerous recipients based on
varying percentages of electrical revenue or steam production multiplied by
published indices.
YUMA PROJECT
During 1992, the Company acquired a development stage 50 net MW natural
gas-fired cogeneration project in Yuma, Arizona (the "Yuma Project"). The Yuma
Project is designed to be a Qualifying Facility ("QF") under PURPA and to
provide 50 net MW of electricity to San Diego Gas & Electric Company ("SDG&E")
under an existing 30-year power purchase contract. The electricity is sold at
SDG&E's Avoided Cost of Energy. The power is wheeled to SDG&E over
transmission lines constructed and owned by Arizona Public Service Company
("APS"). An agreement for interconnection and a firm transmission service
agreement have been executed between APS and the Yuma Project entity and have
been accepted for filing by the Federal Energy Regulatory Commission.
The Yuma Project commenced commercial operation in May 1994. The project
entity has executed steam sales contracts with an adjacent industrial entity
to act as its thermal host in order to maintain its status as a QF, which is a
requirement of its SDG&E contract. Since the industrial entity has the right
under its contract to terminate the agreement upon one year's notice if a
change in its technology eliminates its need for steam, and in any case to
terminate the agreement at any time upon three years notice, there can be no
assurance that the Yuma Project will maintain its status as a QF. However, if
the industrial entity terminates the agreement, the Company anticipates that
it will be able to locate an alternative thermal host in order to maintain its
status as a QF or build a greenhouse at the site for which the Company
believes it would obtain QF status. A natural gas supply and transportation
agreement has been executed with Southwest Gas Corporation, terminable under
certain circumstances by the Company and Southwest Gas Corporation.
MINERAL RESERVES--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:
Roosevelt Hot Springs. The Company operates and owns an approximately 70%
interest in a geothermal steam field which supplies geothermal steam to a
23 net MW 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 $20,317 cash under a pre-sale
agreement with UP&L whereby UP&L paid in advance for the steam produced by
the steam field. The Company must make certain penalty payments to UP&L if
the steam produced does not meet certain quantity and quality
requirements.
Desert Peak. The Company is the owner and operator of a 10 net MW
geothermal plant at Desert Peak, Nevada that is currently selling
electricity to Sierra Pacific Power Company ("Sierra") under a power sales
agreement that expires December 31, 1995 and that may be extended on a
year-to-year basis as agreed by the parties. The December 31, 1995 price
for electricity under this
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
contract was 6.6 cents per kWh, comprising an energy payment of 2.1 cents
per kWh (which is adjustable pursuant to an inflation-based index) and a
capacity payment of 4.5 cents per kWh. The Company is currently selling
power to Sierra at Sierra's Avoided Cost.
PACIFIC NORTHWEST GEOTHERMAL DEVELOPMENT COSTS
In the Pacific Northwest, the Company has acquired leasehold rights and has
performed certain geological evaluations to determine the resource potential
of the underlying properties. Recovery of those costs is ultimately dependent
upon the Company's ability to prove geothermal reserves and sell geothermal
steam, or to obtain financing, build power plants, gain access to high voltage
transmission lines, and sell the resultant electricity at favorable prices or,
sell its leaseholds. In the opinion of management, the Company will be able to
recover its development costs through the generation of electricity for sale.
In September 1994, the Company executed the final Power Purchase Agreements
with Bonneville Power Administration ("BPA") and Eugene Water and Electric
Board ("EWEB") for a 30 MW geothermal pilot project planned to be constructed
at the Newberry site near Bend, Oregon. The Company agreed to sell 20 net MW
to BPA and 10 net MW to Eugene Water and Electric Board ("EWEB") from the
Newberry Project. In addition, BPA and EWEB together have an option to
purchase up to an additional 100 net MW of production from the Newberry
Project under certain circumstances. In a public-private development effort,
the Company is responsible for development, permitting, financing,
construction and operation of the project (which will be 100% owned by the
Company), while EWEB will cooperate in the development efforts by providing
assistance with government and community affairs and sharing in the
development costs (up to 30%). The Newberry Project is currently expected to
commence commercial operation in 1998. The power sales agreements 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.
SFAS 121
On January 1, 1996, the Company intends to adopt Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Management
anticipates that the adoption of SFAS 121 will not have a material effect on
the Company's financial statements.
8. EQUITY INVESTMENT IN CASECNAN
The Company has a 35% ownership interest in the Casecnan Project, a
multipurpose irrigation and hydroelectric power facility with a rated capacity
of approximately 150 net MW located on the island of Luzon in the Philippines.
The assets and liabilities of the Casecnan Project as of December 31, 1995
were $500,672 and $378,299 respectively.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
9. PROJECT LOANS
Project loans, which are nonrecourse to the Company, comprise the following
at December 31:
1995 1994
--------- ---------
Coso Funding Corp. project loans with fixed
interest rates (weighted average interest rates
of 8.29% and 8.13% at December 31, 1995 and
1994, respectively) with scheduled repayments
through December 2001 ......................... $203,226 $233,080
Partnership Project loans with variable interest
rates (weighted average interest rates of
6.44% at December 31, 1995) and scheduled
repayments through September 2002 .. ........... 54,707 --
--------- ---------
Total Project Loans ......................... $257,933 $233,080
========= =========
The Coso Funding Corp. 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 the Coso Project. On
December 16, 1992, pursuant to separate credit agreements executed between
Funding Corp. and each Coso Joint Venture the proceeds from Funding Corp.'s
note offering were loaned to the Coso Project. The proceeds of $560,245 were
used by the Coso Project 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 Project to third
parties to discharge all liens of record and other contract claims encumbering
the Coso Project's plants at the time of the project loans. 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 Project's 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 Edison Corp., and the Coso Project 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 Project agreed to make a net
payment of $20,000 to MPE from the cash reserves of the Coso Project
contingency fund and MPE agreed to release its mechanics' liens on the Coso
Project. After making the $20,000 payment, the remaining balance of the Coso
Project contingency fund (approximately $49,300) was used to increase the Coso
Project debt reserve fund from approximately $43,000 to its maximum
fully-funded requirement of $67,900. The remaining $24,400 balance of
contingency fund was retained within the Coso Project for future capital
expenditures and for Coso Project debt service payments. Since the Coso
Project debt service reserve is fully funded in advance, Coso Project cash
flows otherwise intended to fund the Coso Project debt service reserve fund,
subject to satisfaction of certain covenants and conditions contained in the
Coso Joint Ventures' refinancing documents, may be available for distribution
to the Company in its proportionate share.
The Funding Corp. project 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 Project's
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 nonrecourse to any partner in the Coso Joint Ventures
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
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.
Partnership Project loans include the Company's pro-rata share of the debt
of the Del Ranch, Elmore, and Leathers partnerships and is nonrecourse to the
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 the Company. The partnerships had no direct bank borrowings at
December 31, 1995. The loans of each partnership are reduced by semiannual
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.
The annual repayments of the project loans for the years beginning January
1, 1996 and thereafter are as follows:
COSO FUNDING CORP PARTNERSHIP PROJECT TOTAL
----------------- ------------------- ---------
1996 ......... $ 54,881 $12,831 $ 67,712
1997 ......... 41,729 13,347 55,076
1998 ......... 38,912 13,347 52,259
1999 ......... 31,717 8,578 40,295
2000 ......... 4,080 2,953 7,033
Thereafter .. 31,907 3,651 35,558
----------------- ------------------- ---------
$203,226 $54,707 $257,933
================= =================== =========
10. CONSTRUCTION LOANS
The Construction Loans which are nonrecourse to the Company, comprise the
following at December 31:
1995 1994
---------- ---------
Upper Mahiao Construction Loan with variable
interest rates (weighted average interest rate
of 8.31%) with scheduled project term
repayments through 2006 ........................ $134,619 $24,508
Mahanagdong Construction Loan with variable
interest rates (weighted average interest rate
of 8.02%) with scheduled project term
repayments through 2007 ........................ 39,716 6,995
Malitbog Construction Loan with variable
interest rates (weighted average interest
rate of 8.42%) with scheduled project term
repayments through 2005 ........................ 36,863 --
---------- ---------
$211,198 $31,503
========== =========
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
Draws on the construction loan and accrued liabilities for the Upper
Mahiao geothermal power project at December 31, 1995 totalled $134,619 and
$2,313, respectively. A syndicate of international commercial banks is
providing the construction financing with interest rates at LIBOR or "Prime"
with interest payments due every quarter and at LIBOR maturity. The weighted
average interest rate at December 31, 1995 is approximately 8.31%. The
Export-Import Bank of the U.S. ("Ex-Im Bank") is providing political risk
insurance to commercial banks on the construction loan and will provide the
majority of the project term financing of approximately $162,000 upon
satisfaction of the conditions associated with commercial operation. The term
financing for the Ex-Im Bank loan will be for a ten-year term at a fixed
interest rate of 5.95%. The accrued liabilities represent invoices which were
received, but not paid, by December 31, 1995 and retention on the construction
and supply contracts.
The Company's share of draws on the construction loan and accrued
liabilities for the Mahanagdong geothermal power project at December 31, 1995
totalled $39,716 and $6,592 respectively. The construction debt financing is
provided by the Overseas Private Investment Corporation ("OPIC") and a
consortium of commercial lenders led by Bank of America NT&SA. The
construction loan interest rates are at LIBOR or "Prime" with interest
payments due quarterly and at LIBOR maturity. The debt provided by the
commercial lenders will be insured by Ex-Im Bank against political risks.
Ten-year project term debt financing of approximately $120,000 will be
provided by Ex-Im Bank (which will replace the bank construction debt) and by
OPIC. The majority of the term financing is expected to be provided by the
Ex-Im Bank at a fixed interest rate of 6.92%. The accrued liabilities
represent invoices which were received, but not paid, by December 31, 1995 and
retention on the construction and supply contracts.
Draws on the construction loan and accrued liabilities for the Malitbog
Geothermal Power Project at December 31, 1995 totalled $36,863 and $18,678,
respectively. Credit Suisse and OPIC have provided the construction and term
loan facilities. The eight year project term loan facilities will be at
variable interest rates. The international bank portion of the debt will be
insured by OPIC against political risks and the Company's equity contribution
to Visayas Geothermal Power Company ("VGPC") is covered by political risk
insurance from the Multilateral Investment Guarantee Agency and OPIC.
11. 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.
The Senior Discount Notes prohibit payment of cash dividends unless certain
financial ratios are met and the dividends do not exceed 50% of the Company's
accumulated adjusted consolidated net income as defined, subsequent to April
1, 1994, plus the proceeds of any stock issuance.
12. 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 semi-annually in arrears on July 31 and January 31 of
each year, commencing on July 31, 1993. The debentures are
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
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.
13. EXCHANGE OF PREFERRED STOCK TO CONVERTIBLE DEBT
On November 19, 1991, the Company sold one thousand shares of convertible
preferred stock, Series C, at $50,000 per share to Kiewit Energy Company, in a
private placement. Each share of the Series C preferred stock was convertible
at any time at $18.375 per common share into two thousand seven hundred and
twenty-one shares of common stock subject to customary adjustments. The Series
C preferred stock had a dividend rate of 8.125%, commencing March 15, 1992
through conversion date or December 15, 2003. The dividends, which were
cumulative, were payable quarterly in convertible preferred stock, Series C,
through March 15, 1995 and in cash on subsequent dividend dates.
Pursuant to the terms of the Securities Purchase Agreement, the Company
exercised its rights to exchange the preferred stock, Series C, on March 15,
1995 for $64,850 principal amount 9.5% convertible subordinated debenture of
the Company due 2003, with the same conversion features of the preferred
stock, Series C.
The Company is obligated to redeem 20% of the outstanding debt each
December 15, commencing 1999 through 2003, plus accrued interest.
At any time after March 15, 1995, upon 20 days notice, the Company may
redeem all, or any portion consisting of at least $5,000, of the convertible
debt, 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.
14. INCOME TAXES
On January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." The adoption of
SFAS 109 changed 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 SFAS 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 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 SFAS 109. Under SFAS 109, the effective tax rate
increased to approximately 30% in 1993 from 23.5% in 1992. This increase was
due to the Company's tax credit carryforward being recognized as an asset and
unavailable to reduce the current period's effective tax rate for computing
the Company's provision for income taxes.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
Provision for income tax is comprised of the following at December 31:
1995 1994 1993
-------- -------- --------
Currently payable:
State ......................................... $ 5,510 $ 1,970 $ 3,300
Federal ....................................... 11,138 5,829 7,686
-------- -------- --------
16,648 7,799 10,986
-------- -------- --------
Deferred:
State ......................................... 921 1,017 385
Federal ....................................... 13,062 7,241 6,813
-------- -------- --------
13,983 8,258 7,198
-------- -------- --------
Total after benefit of extraordinary item ..... 30,631 16,057 18,184
Tax benefit attributable to extraordinary item -- 945 --
-------- -------- --------
Total before benefit of extraordinary item .. $30,631 $17,002 $18,184
======== ======== ========
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:
1995 1994 1993
------- ------- -------
Federal statutory rate .......................... 35.00% 35.00% 35.00%
Percentage depletion in excess of cost depletion (7.38) (6.85) (6.70)
Investment and energy tax credits ............... (1.80) (3.04) (4.62)
State taxes, net of federal tax effect ......... 4.09 4.48 3.90
Cumulative effect of change in federal tax rate -- -- 1.90
Goodwill amortization ........................... 2.53 -- --
Non-Deductible Expense .......................... 1.10 -- --
Lease investment ................................ (2.18) -- --
Other ........................................... .20 .86 .20
------- ------- -------
31.56% 30.45% 29.68%
======= ======= =======
Deferred tax liabilities (assets) are comprised of the following at
December 31:
1995 1994
---------- ---------
Depreciation and amortization, net $ 349,079 $119,947
Other .............................. 4,043 3,590
---------- ---------
353,122 123,537
---------- ---------
Deferred income .................... (7,709) (2,190)
Loss carryforwards ................. (3,050) (31,592)
Energy and investment tax credits . (52,857) (40,748)
Alternative minimum tax credits ... (52,480) (22,379)
Jr. SO4 royalty receivable ......... (5,865) --
Other .............................. (4,641) (60)
---------- ---------
(126,602) (96,969)
---------- ---------
Net deferred taxes ................. $ 226,520 $ 26,568
========== =========
As of December 31, 1995, the Company has an unused net operating loss (NOL)
carryover of approximately $8,714 for regular federal tax return purposes
which expires in 2007. In addition, the
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
Company has unused investment and geothermal energy tax credit carryforwards
of approximately $52,857 expiring between 2002 and 2010. The Company also has
approximately $52,480 of alternative minimum tax credit carryforwards which
have no expiration date.
15. PREFERRED STOCK
Series A: On December 1, 1988, the Company distributed a dividend of one
preferred share purchase right ("right") for each outstanding share of common
stock. The rights are not exercisable until ten days after a person or group
acquires or has the right to acquire, beneficial ownership of 20% or more of
the Company's common stock or announces a tender or exchange offer for 30% or
more of the Company's common stock. Each right entitles the holder to purchase
one one-hundredth of a share of Series A junior preferred stock for $52. The
rights may be redeemed by the Board of Directors up to ten days after an event
triggering the distribution of certificates for the rights. The rights plan
was amended in February 1991 so that the agreement with Kiewit Energy (see
Note 12) would not trigger the exercise of the rights. The rights will expire,
unless previously redeemed or exercised, on November 30, 1998. The rights are
automatically attached to, and trade with, each share of common stock.
16. STOCK OPTIONS AND RESTRICTED STOCK
The Company has issued various stock options. As of December 31, 1995, a
total of 9,552 shares are reserved for stock options, of which 9,291 shares
have been granted and remain outstanding at prices of $3.00 to $19.00 per
share.
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. 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 17.
On January 1, 1996, the Company intends to adopt the disclosure
requirements of Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation." Management anticipates that
adoption of SFAS 123 will not have a material effect on the Company's
financial statements.
The Company granted 500 shares of restricted common stock with an aggregate
market value of $9,500 in exchange for the relinquishment of 500 stock options
which were cancelled by the Company. The shares have all rights of a
shareholder, subject to certain restrictions on transferability and risk of
forfeiture. Unearned compensation equivalent to the market value of the shares
at the date of issuance was charged to Stockholders' equity. Such unearned
compensation is being amortized over the vesting period of which 125 shares
were immediately vested and the remaining 375 shares vest straight-line over
five years. Accordingly, $2,494 of unearned compensation was charged to
general and administrative expense in 1995.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
Transactions in Stock Options
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES AVAILABLE ----------------------------------------
FOR GRANT UNDER OPTION PRICE PER
1986 OPTION PLAN SHARES SHARE TOTAL
---------------- -------- ------------------ ----------
<S> <C> <C> <C> <C>
Balance December 31, 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 granted ......................... (954) 1,243 $ 16.00-$17.25 19,260
Options terminated ...................... 15 (15) $ 3.00-$15.938 (205)
Options exercised ....................... -- (141) $ 3.00-$15.938 (709)
Additional shares reserved under
1986 Option Plan ....................... 586 -- -- --
-------- -------- ------------------ ----------
Balance December 31, 1994 ............... 86 9,601* $ 3.00-$19.00 123,277
-------- -------- ------------------ ----------
Options granted ......................... (396) 396 $ 15.81-$19.00 7,188
Options terminated ...................... 571 (571) $14.875-$19.00 (10,673)
Options exercised ....................... -- (135) $ 3.00-$15.938 (460)
-------- -------- ------------------ ----------
Balance December 31, 1995 ............... 261 9,291* $ 3.00-$19.00 $119,332
-------- -------- ------------------ ----------
Options which became exercisable during:
Year ended December 31, 1995 ........... 985 $ 12.63-$19.00 $ 17,512
Year ended December 31, 1994 ........... 1,015 $11.625-$19.00 $ 15,776
Year ended December 31, 1993 ........... 592 $ 3.00-$19.00 $ 10,180
Options exercisable at:
December 31, 1995 ...................... 8,229* $ 3.00-$19.00 $100,886
December 31, 1994 ...................... 7,897* $ 3.00-$19.00 $ 93,705
December 31, 1993 ...................... 7,026* $ 3.00-$19.00 $ 78,644
-------- ------------------ ----------
</TABLE>
- ------------
* Includes Kiewit Enterprises. See Note 17.
17. COMMON STOCK SALES & RELATED OPTIONS
The Company and Kiewit Energy Company, Inc. ("Kiewit") signed a Stock
Purchase Agreement and related agreements, dated as of February 18, 1991.
Kiewit is a subsidiary of Peter Kiewit Sons', Inc. of Omaha, Nebraska, a large
construction, mining, and telecommunications company with diversified
operations. Under the terms of the agreements, Kiewit 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 May 1994, pursuant to a special antidilution provision of the 1991 Stock
Purchase Agreement between the Company and Kiewit, the Company increased
Kiewit's existing option (granted in 1991) to purchase 3,000 shares at $12 per
share by an additional 289 shares as a final adjustment under such provisions.
In connection with this initial stock purchase, the Company and Kiewit also
entered into certain other agreements pursuant to which (i) Kiewit 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 became
entitled to nominate at least three of the Company's directors, and (iii) the
Company and Kiewit agreed
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
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 the rights to develop the Nevada and Utah
properties, and Kiewit 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
an option to acquire an additional 1,000 shares of the 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 of one thousand shares of Series C preferred stock for $50,000, as
described in Note 13. In connection with the sale of the Series C preferred
stock to Kiewit, the Standstill Agreement was amended so that the 49%
Standstill Percentage restriction would apply to voting stock rather than just
common stock.
18. LITIGATION
As of December 31, 1995 there were no material outstanding lawsuits.
19. RELATED PARTY TRANSACTIONS
The Company charged and recognized a management fee and interest on
advances to its Coso Joint Ventures, which aggregated approximately $6,075,
$5,569 and $5,354 in the years ended December 31, 1995, 1994 and 1993. The
Company's note receivable from the Coso Joint Ventures bears a fixed interest
rate of 12.5% and is payable on or before March 19, 2002. This note is
subordinated to the senior project loan on the project.
The Company's wholly owned subsidiaries charge and recognize a management,
operator, guaranteed capacity and brine fee to its Partnership Project. A
management and operator fee is also charged to the Salton Sea Project. These
fees aggregated approximately $50,793 for the year ended December 31, 1995.
The Mahanagdong Project is being constructed by a consortium (the "EPC
Consortium") of Kiewit Construction Group, Inc. ("KCG") and the CE Holt
Company, a wholly owned subsidiary of the Company, pursuant to fixed-price,
date-certain, turnkey supply and construction contracts (collectively, the
"Mahanagdong EPC"). The obligations of the EPC Consortium under the
Mahanagdong EPC are supported by a guaranty of KCG at an aggregate amount
equal to approximately 50% of the Mahanagdong EPC price. The Mahanagdong EPC
provides for maximum liability for liquidated damages of up to $100,500 and
total liability of up to $201,000. KCG, a wholly owned subsidiary of Peter
Kiewit Sons', Inc. ("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. CE Holt Company will
provide design and engineering services for the EPC Consortium, and holds a
20% interest. The Company has provided a guaranty of CE Holt Company's
obligations under the Mahanagdong EPC Contract.
The Company participates in an international joint venture agreement with
PKS which the Company believes enhances its 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 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,
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
and equal equity participant and PKS will be 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.
20. EXTRAORDINARY ITEM
In conjunction with the Company's Senior Discount Note offering in 1994
(See Note 11), 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.
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
about Fair Value of Financial Instruments," requires disclosure of the
following information about the fair value of certain financial instruments
for which it is practicable to estimate that value. For purposes of the
following disclosure, the fair value of a financial instrument is the amount
at which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation. Although
management uses its best judgment in estimating the fair value of these
financial instruments, there are inherent limitations in any estimation
techniques. Therefore, the fair value estimates presented herein are not
necessarily indicative of the amounts which the Company could realize in a
current transaction.
The methods and assumptions used to estimate fair value are as follows:
Debt instruments--The fair value of all debt issues listed on exchanges has
been estimated based on the quoted market prices. The fair value of
convertible debt (see Note 13) is not practicable to estimate due to the
convertible features of the debt.
Interest rate swap agreements--The fair value of interest rate swap
agreements is estimated based on quotes from the counter party to these
instruments and represents the estimated amounts that the Company would expect
to receive or pay to terminate the agreements. It is the Company's intention
to hold the swap agreements to their intended maturity.
Other financial instruments--All other financial instruments of a material
nature fall into the definition of short-term and fair value is estimated as
the carrying amount.
The carrying amounts in the table below are included in the consolidated
balance sheets under the indicated captions except for the interest rate swaps
which are discussed in Note 6.
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Financial assets:
Interest rate swap receivable . $ 61 $ 561 $ 110 $ 1,281
Financial liabilities:
Project finance loans .......... 257,933 269,624 233,080 227,144
Construction loans ............. 211,198 211,198 31,503 31,503
Senior discount notes .......... 477,355 503,158 431,946 413,013
Salton Sea notes and bonds .... 452,088 459,629 -- --
Limited recourse senior secured
notes ......................... 200,000 210,500 -- --
Convertible subordinated
debentures .................... 100,000 100,500 100,000 100,000
Interest rate swap payable .... 226 672 453 5,347
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (Continued)
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of the Company's quarterly results of operations for
the years ended December 31, 1995 and December 31, 1994.
<TABLE>
<CAPTION>
THREE MONTHS ENDED*
1995:(1) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -------- ---------- --------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Sales of electricity and steam .... $72,978 $81,756 $102,423 $78,473
Royalties .......................... 3,917 4,912 5,372 5,281
Other income ....................... 9,790 10,428 11,922 11,471
---------- --------- -------------- -------------
Total revenue ...................... 86,685 97,096 119,717 95,225
Total costs and expenses ........... 68,527 76,957 79,898 76,290
---------- --------- -------------- -------------
Income before provision for income
taxes and minority interest ...... 18,158 20,139 39,819 18,935
Provision for income taxes ......... 5,540 6,248 12,457 6,386
---------- --------- -------------- -------------
Net income before minority interest 12,618 13,891 27,362 12,549
---------- --------- -------------- -------------
Minority interest .................. 3,005 -- -- --
Net income ......................... 9,613 13,891 27,362 12,549
Preferred dividends ................ 1,080 -- -- --
---------- --------- -------------- -------------
Net income attributable to common
shares ............................ $ 8,533 $13,891 $ 27,362 $12,549
========== ========= ============== =============
Net income per share--primary ..... $ .21 $ .27 $ .52 $ .24
========== ========= ============== =============
Net income per share--fully diluted $ .21 $ .27 $ .48 $ .18
========== ========= ============== =============
</TABLE>
<TABLE>
<CAPTION>
1994: MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Sales of electricity and steam ... $30,819 $36,850 $49,498 $37,395
Other income ...................... 4,591 8,404 9,026 9,271
--------- --------- -------------- -------------
Total revenue ..................... 35,410 45,254 58,524 46,666
Total costs and expenses .......... 22,753 33,198 37,771 36,296
--------- --------- -------------- -------------
Income before provision for income
taxes ............................ 12,657 12,056 20,753 10,370
Provision for income taxes ........ 4,050 3,677 6,340 2,935
--------- --------- -------------- -------------
Net income before extraordinary
item ............................. 8,607 8,379 14,413 7,435
Extraordinary item(2) ............. (2,007) -- -- --
--------- --------- -------------- -------------
Net income ........................ 6,600 8,379 14,413 7,435
Preferred dividends ............... 1,200 1,236 1,275 1,299
--------- --------- -------------- -------------
Net income attributable to common
shares ........................... $ 5,400 $ 7,143 $13,138 $ 6,136
========= ========= ============== =============
Net income per share before
extraordinary item ............... $ .20 $ .20 $ .38 $ .18
========= ========= ============== =============
Net income per
share--extraordinary item(2) .... (.06) -- -- --
--------- --------- -------------- -------------
Net income per share--primary .... $ .14 $ .20 $ .38 $ .18
========= ========= ============== =============
Net income per share--fully
diluted .......................... $ .14 $ .20 $ .36 $ .18
========= ========= ============== =============
</TABLE>
- ------------
* The Company's operations are seasonal in nature with a disproportionate
percentage of income earned in the second and third quarters.
(1) Reflects acquisition of Magma, see Note 3.
(2) See Note 20.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
CalEnergy Company, Inc.
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of CalEnergy
Company, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. 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 that 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 CalEnergy Company, Inc. and
subsidiaries at December 31, 1995 and 1994 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 14, 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."
Deloitte & Touche LLP
Omaha, Nebraska
January 26, 1996
F-28
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
CalEnergy Company, Inc.
Omaha, Nebraska
We have reviewed the accompanying consolidated balance sheet of CalEnergy
Company, Inc. and subsidiaries as of June 30, 1996, and the related
consolidated statements of operations for the three and six month periods
ended June 30, 1996 and 1995 and the related consolidated statements of cash
flows for the six month periods ended June 30, 1996 and 1995. 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 CalEnergy Company, Inc. and
subsidiaries as of December 31, 1995, 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 January 26, 1996, 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, 1995 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
July 17, 1996 (August 7, 1996 as to Note 9)
F-29
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1996 1995
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and investments .......................................... $ 253,661 $ 72,114
Joint venture cash and investments ............................ 55,828 77,590
Restricted cash ............................................... 79,237 149,227
Short-term investments ........................................ 3,295 34,190
Accounts receivable ........................................... 79,771 57,909
Due from joint ventures ....................................... 17,215 27,273
Properties, plants, contracts and equipment, net (Note 3) .... 2,028,624 1,781,255
Notes receivable--joint ventures .............................. 11,909 14,254
Excess of cost over fair value of net assets acquired, net ... 297,807 302,288
Equity investment in Casecnan ................................. 59,595 60,815
Deferred charges and other assets ............................. 88,185 77,123
------------ -------------
Total assets ................................................ $2,975,127 $2,654,038
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable .............................................. $ 6,753 $ 6,638
Other accrued liabilities ..................................... 91,575 87,892
Project loans ................................................. 187,172 257,933
Construction loans ............................................ 305,870 211,198
Senior discount notes ......................................... 501,798 477,355
Salton Sea notes and bonds .................................... 563,035 452,088
Limited recourse senior secured notes ......................... 200,000 200,000
Convertible subordinated debentures ........................... 100,000 100,000
Convertible debt .............................................. 64,850 64,850
Deferred income taxes ......................................... 235,995 226,520
------------ -------------
Total liabilities ........................................... 2,257,048 2,084,474
------------ -------------
Deferred income ............................................... 26,213 26,032
Convertible preferred securities of subsidiary ................ 103,930 --
Commitments and contingencies (Notes 6, 8 and 9) ..............
Stockholders' equity:
Preferred stock--authorized 2,000 shares, no par value ....... -- --
Common stock--par value $0.0675 per share, authorized 80,000
shares, issued 52,179 and 50,680 shares, outstanding 52,176
and 50,593 at June 30, 1996 and December 31, 1995,
respectively ................................................. 3,523 3,421
Additional paid in capital .................................... 351,976 343,406
Retained earnings ............................................. 238,792 205,059
Treasury stock--3 and 87 common shares at June 30, 1996 and
December 31, 1995, respectively, at cost ..................... (61) (1,348)
Unearned compensation--restricted stock ....................... (6,294) (7,006)
------------ -------------
Total stockholders' equity .................................. 587,936 543,532
------------ -------------
Total liabilities and stockholders' equity ................. $2,975,127 $2,654,038
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
CALENERGY COMPANY, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ----------------------
1996 1995 1996 1995
---------- --------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Sales of electricity and steam ...... $104,735 $81,756 $180,679 $154,734
Royalty income ....................... 1,122 4,912 5,015 8,829
Interest and other income ............ 9,937 10,428 20,456 20,218
---------- --------- ---------- ----------
Total revenues ..................... 115,794 97,096 206,150 183,781
---------- --------- ---------- ----------
Costs and expenses:
Plant operations ..................... 22,431 20,447 41,387 38,873
General and administration ........... 5,117 4,851 9,296 11,277
Royalty expense ...................... 5,896 5,922 10,271 10,336
Depreciation and amortization ....... 25,660 15,641 43,713 29,824
Loss on equity investment in Casecnan 1,812 -- 2,774 --
Interest expense ..................... 36,725 35,733 71,504 65,295
Less interest capitalized ............ (11,602) (5,637) (23,508) (10,121)
Dividends on convertible preferred
securities of subsidiary (Note 6) .. 1,443 -- 1,443 --
---------- --------- ---------- ----------
Total costs and expenses ........... 87,482 76,957 156,880 145,484
---------- --------- ---------- ----------
Income before income taxes ........... 28,312 20,139 49,270 38,297
Provision for income taxes ........... 9,040 6,248 15,537 11,788
---------- --------- ---------- ----------
Income before minority interest ..... 19,272 13,891 33,733 26,509
Minority interest .................... -- -- -- 3,005
---------- --------- ---------- ----------
Net income ........................... 19,272 13,891 33,733 23,504
Preferred dividends (paid in kind) .. -- -- -- 1,080
---------- --------- ---------- ----------
Net income available for common
shareholders ........................ $ 19,272 $13,891 $ 33,733 $ 22,424
========== ========= ========== ==========
Net income per share--primary ....... $ .35 $ .27 $ .62 $ .48
========== ========= ========== ==========
Net income per share--fully diluted
(Note 5) ............................ $ .33 $ .26 $ .59 $ .47
========== ========= ========== ==========
Average number of common and common
equivalent shares outstanding ...... 55,404 52,156 54,836 46,736
========== ========= ========== ==========
Fully diluted shares (Note 5) ....... 66,472 60,189 64,726 53,259
========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
CALENERGY COMPANY, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------------
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................ $ 33,733 $ 23,504
Adjustments to reconcile net cash flow from operating activities:
Depreciation and amortization ........................................ 39,849 26,652
Amortization of excess of cost over fair value of net assets acquired 3,864 3,172
Amortization of original issue discount .............................. 24,443 22,108
Amortization of deferred financing costs ............................. 4,253 5,377
Amortization of deferred compensation ................................ 712 --
Provision for deferred income taxes .................................. 6,275 4,594
Loss on equity investment in Casecnan ................................ 2,774 --
Changes in other items: ..............................................
Accounts receivable ................................................. (11,127) (17,794)
Accounts payable and accrued liabilities ............................ 646 (15,041)
Deferred income ..................................................... 181 (50)
Income tax payable .................................................. 2,091 --
----------- -----------
Net cash flows from operating activities ............................. 107,694 52,522
Cash flows from investing activities:
Malitbog construction ................................................. (64,353) (28,412)
Upper Mahiao construction ............................................. (23,734) (62,736)
Mahanagdong construction .............................................. (29,451) (16,873)
Salton Sea Unit IV construction ....................................... (49,223) (27,684)
Indonesian and other development ...................................... (30,597) (2,812)
Pacific Northwest, Nevada and Utah .................................... (2,716) (1,081)
Capital expenditures relating to existing operating projects ......... (18,630) (6,921)
Purchase of Partnership Interest, net of cash acquired ................ (58,044) --
Decrease in short-term investments .................................... 30,895 82,955
Decrease in restricted cash ........................................... 83,216 7,483
Decrease in other investments and assets .............................. 9,833 5,648
Purchase of Magma, net of cash acquired ............................... -- (906,226)
----------- -----------
Net cash flows from investing activities ............................. (152,804) (956,659)
----------- -----------
Cash flows from financing activities:
Proceeds from convertible preferred securities of subsidiary ......... 103,930 --
Proceeds from Salton Sea notes and bonds .............................. 135,000 --
Repayment of Salton Sea notes and bonds ............................... (24,053) --
Proceeds and net benefits from sale of common and treasury stock and
exercise of options .................................................. 13,183 298,987
Repayment of project finance loans .................................... (119,053) (54,924)
Construction loans .................................................... 94,672 57,367
Decrease (increase) in amounts due from joint ventures ................ 9,003 (2,854)
Purchase of treasury stock ............................................ (3,221) (1,590)
Proceeds from merger loan ............................................. -- 500,000
Repayment of merger loan .............................................. -- (8,000)
Deferred financing costs .............................................. (4,566) (22,782)
----------- -----------
Net cash flows from financing activities ............................. 204,895 766,204
----------- -----------
Net increase (decrease) in cash and cash equivalents .................. 159,785 (137,933)
Cash and cash equivalents at beginning of period ...................... 149,704 308,091
----------- -----------
Cash and cash equivalents at end of period ............................ $ 309,489 $ 170,158
=========== ===========
Supplemental disclosures: .............................................
Interest paid, net of amount capitalized .............................. $ 22,776 $ 34,886
=========== ===========
Income taxes paid ..................................................... $ 9,154 $ 6,380
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER KWH AMOUNTS)
----------------
1. General:
In the opinion of management of CalEnergy 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 June 30, 1996 and the results of
operations for the three and six months ended June 30, 1996 and 1995, and cash
flows for the six months ended June 30, 1996 and 1995.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, and its proportionate share of the accounts
of the partnerships and joint ventures in which it has invested except for
Casecnan which is accounted for under the equity method.
The results of operations for the three and six months ended June 30, 1996
and 1995 are not necessarily indicative of the results to be expected for the
full year.
Certain amounts in the 1995 financial statements and supporting footnote
disclosures have been reclassified to conform to the 1996 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, Plants, Contracts and Equipment:
Properties, plants, contracts and equipment comprise the following:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
--------------- -----------------
(UNAUDITED)
<S> <C> <C>
Operating project costs:
Power plants ................................... $ 843,570 $ 623,778
Wells, resource, and development ............... 382,009 329,414
Power sales agreements ......................... 184,258 188,415
Licenses, equipment and other .................. 58,133 58,052
Wells and resource development in progress .... 112 465
--------------- -----------------
Total operating facilities ..................... 1,468,082 1,200,124
Less accumulated depreciation and amortization (205,021) (164,184)
--------------- -----------------
Net operating facilities ................... 1,263,061 1,035,940
Mineral and resource reserves .................. 198,927 212,929
Construction in progress:
Upper Mahiao .................................. 212,638 188,904
Malitbog ...................................... 212,471 146,735
Salton Sea Unit IV ............................ -- 108,769
Mahanagdong ................................... 106,011 76,560
Indonesian and other development .............. 35,516 11,418
--------------- -----------------
Total ...................................... $2,028,624 $1,781,255
=============== =================
</TABLE>
F-33
<PAGE>
4. 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 1996. The significant components of the deferred tax liability are
the temporary differences between the financial reporting basis and income tax
basis of the power plants 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
six months ended June 30, 1996, is approximately 60% current tax expense and
40% deferred tax expense.
5. Net Income Per Common Share:
Fully diluted earnings per common share assumes the conversion of the
convertible debt into 3,529 common shares at a conversion price of $18.375 per
share, the conversion of the convertible subordinated debentures into 4,444
common shares at a conversion price of $22.50 per share, the conversion of the
convertible preferred securities of subsidiary into 3,477 common shares at a
conversion price of $29.89 per share and the exercise of all dilutive stock
options outstanding at their option prices, with the option exercise proceeds
used to repurchase shares of common stock at the ending market price.
6. Issuance of Convertible Preferred Securities:
On April 12, 1996, CalEnergy Capital Trust, a special purpose Delaware
business trust organized by the Company (the "Trust") completed a private
placement (with certain shelf registration rights) of $100,000 of convertible
preferred securities ("TIDES"). In addition, an option to purchase an
additional 78.6 TIDES, or $3,930, was exercised by the underwriters to cover
over-allotments.
The Trust has issued 2,078.6 of 6 1/4% TIDES with a liquidation preference
of fifty dollars each. The Company owns all of the common securities of the
Trust. The TIDES and the common securities represent undivided beneficial
ownership interests in the Trust. The assets of the Trust consist solely of
the Company's 6 1/4% Convertible Junior Subordinated Debentures due 2016 in an
outstanding aggregate principal amount of $103,930 ("Junior Debentures"). Each
TIDES will be convertible at the option of the holder thereof at any time into
1.6728 shares of CalEnergy Common Stock (equivalent to a conversion price of
$29.89 per share of the Company's Common Stock), subject to customary
anti-dilution adjustments.
Until converted into the Company's Common Stock, the TIDES will have no
voting rights with respect to the Company and, except under certain limited
circumstances, will have no voting rights with respect to the Trust.
Distributions on the TIDES (and Junior Debentures) are cumulative, accrue from
the date of initial issuance and are payable quarterly in arrears, commencing
June 15, 1996. The Junior Debentures are subordinated in right of payment to
all senior indebtedness of the Company and the Junior Debentures are subject
to certain covenants, events of default and optional and mandatory redemption
provisions, all as described in the Junior Debenture Indenture.
7. Purchase of Edison Mission Energy's Partnership Interest:
On April 17, 1996 the Company completed the acquisition of Edison Mission
Energy's partnership interests ("the Partnership Interest Acquisition") in
four geothermal operating facilities in California for a cash purchase price
of $70,000. The acquisition will be accounted for as a purchase.
The four projects, Vulcan, Hoch (Del Ranch), Leathers and Elmore, are
located in the Imperial Valley of California. The Company operates the
facilities and sells power to Southern California Edison ("Edison") under
long-term SO4 contracts. Prior to this transaction, the Company was a 50%
owner of these facilities. The Partnership Interest Acquisition results in
CalEnergy owning an additional 74 net MW of generating capacity.
Unaudited pro forma combined revenue, net income and primary earnings per
share of the Company and the Partnership Interest Acquisition (including the
issuance of Salton Sea Funding Corporation Senior Secured Series D Notes and
Series E Bonds described in Note 8) for the six months ended
F-34
<PAGE>
June 30, 1996 as if the acquisition had occurred at the beginning of the year
after giving effect to certain pro forma adjustments related to the
acquisition were $224,836, $34,825 and $.64, respectively, compared to
$228,576, $27,831 and $.53 for the same period last year.
8. Debt Offering:
On June 20, 1996 the Salton Sea Funding Corporation, a wholly owned
indirect subsidiary of the Company, (the "Funding Corporation"), completed a
sale to institutional investors of $135,000 aggregate amount of Senior Secured
Series D Notes and Series E Bonds which are nonrecourse to the Company.
The Funding Corporation Series D Notes and Series E Bonds which mature in
May 2000 and May 2011 respectively, bear an interest rate of 7.02% and 8.30%
respectively.
The proceeds of the offering were used by the Funding Corporation to
refinance $96,584 of existing project level indebtedness, to fund a portion of
the purchase price for certain acquired partnership interests described in
Note 7 and for certain capital improvements at the Imperial Valley Project.
9. Subsequent Events:
On July 8, 1996 the Company executed a definitive agreement for the
purchase of Falcon Seaboard Resources, Inc. for a cash price of $226,000.
Closing was completed August 7, 1996. Through the acquisition, the Company
will indirectly acquire significant ownership interest in three operating
gas-fired cogeneration facilities and a related natural-gas pipelines. The
acquisition will be accounted for as a purchase. The plants are located in
Texas, Pennsylvania and New York and total 520 MW in capacity.
Also on July 8, 1996 the Company obtained a $100,000 three year revolving
credit facility of which the Company has drawn $35,000 as of July 31, 1996.
The facility is unsecured and is available to fund general operating capital
requirements and finance future business opportunities.
F-35
<PAGE>
CALENERGY COMPANY, INC.
INDEX TO PRO FORMA FINANCIAL STATEMENTS
Pro Forma Condensed Combined Unaudited Financial Data:
Condensed Combined Unaudited Balance Sheet as of June 30, 1996 ......... P-3
Condensed Combined Unaudited Statement of Earnings for the year ended
December 31, 1995 ...................................................... P-4
Condensed Combined Unaudited Statement of Earnings for the six months
ended June 30, 1996 .................................................... P-5
Notes to Pro Forma Condensed Combined Unaudited Financial Data ......... P-6
P-1
<PAGE>
PRO FORMA CONDENSED COMBINED UNAUDITED FINANCIAL DATA
The following Pro Forma Condensed Combined Unaudited Balance Sheet as of
June 30, 1996 and the Pro Forma Condensed Combined Unaudited Statements of
Earnings for the year ended December 31, 1995 and the six months ended June
30, 1996 of CalEnergy Company, Inc. (the "Company") combine the historical
consolidated balance sheets of the Company, and (i) Falcon Seaboard Resources,
Inc. ("F.S.R.I.") and (ii) BN Geothermal, Inc., Niguel Energy Company, San
Felipe Energy Company and Conejo Energy Company (collectively referred to as
the "Acquired Companies") as if the acquisitions of F.S.R.I. and the Acquired
Companies had been effected on June 30, 1996 and the historical statements of
earnings as if the acquisitions of F.S.R.I. and the Acquired Companies had
been effected at the beginning of each of the periods presented. The
acquisitions of F.S.R.I. and the Acquired Companies are recorded under the
purchase method of accounting, after giving effect to the applicable pro forma
adjustments and assumptions described in the accompanying notes.
The Company has completed its preliminary assessment of the fair values of
F.S.R.I. and the Acquired Companies' assets and liabilities. The Company
expects to finalize its fair value assessment in 1996. Accordingly, the final
combined amounts may differ from the pro forma amounts set forth herein.
The pro forma financial data also reflects the effects of the call for
redemption by the Company of its convertible debt and the assumed conversion
thereof into common stock of the Company and the issuance of and application
of proceeds from the 9 1/2% Senior Notes being offered hereby.
The pro forma condensed combined unaudited financial data are intended for
informational purposes only and are not intended to present the results that
would have actually occurred if the acquisition of F.S.R.I. and the Acquired
Companies 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.
P-2
<PAGE>
PRO FORMA CONDENSED COMBINED UNAUDITED BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
(3B)
COMPANIES (3A, C AND 4)
F.S.R.I. NOT PRO FORMA PRO FORMA
THE COMPANY CONSOLIDATED ACQUIRED ADJUSTMENTS COMBINED
------------ -------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and Investments ............... $ 253,661 $ 18,797 $ (312) $ (10,208) $ 261,938
Joint venture cash and investments 55,828 -- -- -- 55,828
Restricted cash .................... 79,237 7,863 -- -- 87,100
Short-term investments ............. 3,295 -- -- -- 3,295
Accounts receivable ................ 79,771 7,157 (1,275) -- 85,653
Due from Joint Ventures ............ 17,215 1,661 (1,483) -- 17,393
Properties, plants, contracts and
equipment, net .................... 2,028,624 80,676 (17,423) 104,654 2,196,531
Notes receivable--partnerships .... 11,909 -- -- -- 11,909
Excess of cost over fair value of
net assets acquired, net .......... 297,807 2,184 (2,184) 99,206 397,013
Equity investments ................. 59,595 9,117 -- 136,375 205,087
Deferred income taxes .............. -- 2,393 1,607 (4,000) --
Deferred charges and other assets . 88,185 10,119 (4,849) 9,626 103,081
------------ -------------- ----------- ------------- ------------
Total assets ..................... $2,975,127 $139,967 $(25,919) $ 335,653 $3,424,828
============ ============== =========== ============= ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Accounts payable ................... $ 6,753 $ 718 $ (718) $ -- $ 6,753
Other accrued liabilities .......... 91,575 8,184 (1,167) 4,000 102,592
Revolving line of credit ........... -- -- -- -- --
Project finance loans .............. 187,172 119,493 (15) -- 306,650
Construction loans ................. 305,870 -- -- -- 305,870
Senior discount notes .............. 501,798 -- -- -- 501,798
9 1/2% Senior Notes ................ -- -- -- 225,000 225,000
Salton Sea notes and bonds ......... 563,035 -- -- -- 563,035
Limited recourse senior secured
notes ............................. 200,000 -- -- -- 200,000
Convertible subordinated debentures 100,000 -- -- (100,000) --
Convertible debt ................... 64,850 -- -- (64,850) --
Deferred income taxes .............. 235,995 -- -- 91,206 327,201
------------ -------------- ----------- ------------- ------------
Total liabilities ................ 2,257,048 128,395 (1,900) 155,356 2,538,899
Deferred income .................... 26,213 8,605 (15) (8,590) 26,213
Convertible preferred securities of
subsidiary ........................ 103,930 -- -- -- 103,930
Total stockholders' equity ......... 587,936 2,967 (24,004) 188,887 755,786
------------ -------------- ----------- ------------- ------------
Total liabilities and
stockholders' equity ........... $2,975,127 $139,967 $(25,919) $ 335,653 $3,424,828
============ ============== =========== ============= ============
</TABLE>
The accompanying notes are an integral part of these pro
forma unaudited condensed financial statements.
P-3
<PAGE>
PRO FORMA CONDENSED COMBINED UNAUDITED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(1,2C&D) PRO
THE ACQUIRED FORMA
COMPANY COMPANIES ADJUSTMENTS
---------- ----------- -------------
<S> <C> <C> <C>
Revenues:
Sales of electricity and steam .......... $335,630 $ -- $97,728
Royalty income .......................... 19,482 -- 980
Interest and other income ............... 43,611 -- (959)
---------- ----------- -------------
Total revenues ......................... 398,723 -- 97,749
---------- ----------- -------------
Cost and expenses:
Plant operations ........................ 79,294 -- 45,604
General and administration .............. 23,376 2,740 1,064
Royalties ............................... 24,308 -- --
Depreciation and amortization ........... 72,249 -- 24,994
Interest ................................ 134,637 -- 10,937
Less interest capitalized ............... (32,554) -- (1,347)
---------- ----------- -------------
Total costs and expenses ............... 301,310 2,740 81,252
---------- ----------- -------------
Income (loss) before provision for
income taxes ........................... 97,413 (2,740) 16,497
Equity in (earnings) loss of affiliates 362 -- --
Provision for income taxes .............. 30,631 (2,959) 5,363
---------- ----------- -------------
Income (loss) before minority interest
and preferred dividends ................ 66,420 219 11,134
Minority interest ....................... 3,005 -- (3,005)
---------- ----------- -------------
Net income (loss) ....................... 63,415 219 14,139
Preferred dividends ..................... 1,080 -- --
---------- ----------- -------------
Net income (loss) available to common
stockholders ........................... $ 62,335 $ 219 $14,139
========== =========== =============
Net income per share--primary ........... $ 1.25
----------
Net income per share--fully diluted .... $ 1.18
----------
Average number of shares
outstanding--primarily ................. 49,971
----------
Fully diluted shares .................... 57,742
----------
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
(3B)
COMPANIES (1,3D&4A) PRO
THE COMPANY F.S.R.I. NOT FORMA PRO FORMA
AS ADJUSTED CONSOLIDATED ACQUIRED ADJUSTMENTS COMBINED
------------- -------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales of electricity and steam .......... $433,358 $ 74,250 $ -- $ -- $507,608
Royalty income .......................... 20,462 -- -- -- 20,462
Interest and other income ............... 42,652 20,589 16,580 (9,700) 36,961
------------- -------------- ----------- ------------- -----------
Total revenues ......................... 496,472 94,839 16,580 (9,700) 565,031
------------- -------------- ----------- ------------- -----------
Cost and expenses:
Plant operations ........................ 124,898 48,782 6,366 -- 167,314
General and administration .............. 27,180 28,513 27,288 (375) 28,030
Royalties ............................... 24,308 -- -- -- 24,308
Depreciation and amortization ........... 97,243 7,889 1,486 13,717 117,363
Interest ................................ 145,574 14,980 198 (7,428) 152,928
Less interest capitalized ............... (33,901) -- -- -- (33,901)
------------- -------------- ----------- ------------- -----------
Total costs and expenses ............... 385,302 100,164 35,338 5,914 456,042
------------- -------------- ----------- ------------- -----------
Income (loss) before provision for
income taxes ........................... 111,170 (5,325) (18,758) (15,614) 108,989
Equity in (earnings) loss of affiliates 362 (16,776) -- 12,249 (4,165)
Provision for income taxes .............. 33,035 3,963 -- (2,111) 34,887
------------- -------------- ----------- ------------- -----------
Income (loss) before minority interest
and preferred dividends ................ 77,773 7,488 (18,758) (25,752) 78,267
Minority interest ....................... -- -- -- -- --
------------- -------------- ----------- ------------- -----------
Net income (loss) ....................... 77,773 7,488 (18,758) (25,752) 78,267
Preferred dividends ..................... 1,080 -- -- -- 1,080
------------- -------------- ----------- ------------- -----------
Net income (loss) available to common
stockholders ........................... $ 76,693 $ 7,488 $(18,758) $(25,752) $ 77,187
============= ============== =========== ============= ===========
Net income per share--primary ........... $ 1.45 $ 1.29
------------- -----------
Net income per share--fully diluted .... $ 1.37 $ 1.29
------------- -----------
Average number of shares
outstanding--primarily ................. 52,772 60,010
------------- -----------
Fully diluted shares .................... 60,543 60,543
------------- -----------
</TABLE>
The accompanying notes are an integral part of these pro forma unaudited
condensed financial statements.
P-4
<PAGE>
PRO FORMA CONDENSED COMBINED UNAUDITED STATEMENT OF EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(1,2C&D) PRO
THE ACQUIRED FORMA
COMPANY COMPANIES ADJUSTMENTS
---------- ----------- -------------
<S> <C> <C> <C>
Revenues:
Sales of electricity and steam .......... $180,679 $ -- $18,250
Royalty income .......................... 5,015 -- --
Interest and other income ............... 20,456 -- 436
---------- ----------- -------------
Total revenues ......................... 206,150 -- 18,686
---------- ----------- -------------
Cost and expenses:
Plant operations ........................ 41,387 -- 9,911
General and administration .............. 10,739 684 --
Royalties ............................... 10,271 -- --
Depreciation and amortization ........... 43,713 -- 5,259
Interest ................................ 71,504 -- 1,700
Less interest capitalized .............. (23,508) -- --
---------- ----------- -------------
Total costs and expenses ............... 154,106 684 16,870
---------- ----------- -------------
Income (loss) before provision for
income taxes ........................... 52,044 (684) 1,816
Equity in (earnings) loss of affiliates 2,774 -- --
Provision for income taxes .............. 15,537 (644) 683
---------- ----------- -------------
Net income (loss) ....................... $ 33,733 $ (40) $ 1,133
========== =========== =============
Net income per share--primary ........... $ 0.62
----------
Net income per share--fully diluted .... $ 0.59
----------
Average number of shares
outstanding--primarily ................. 54,836
----------
Fully diluted shares .................... 64,726
----------
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
(3B)
COMPANIES (1,3D&4A) PRO
THE COMPANY F.S.R.I. NOT FORMA PRO FORMA
AS ADJUSTED CONSOLIDATED ACQUIRED ADJUSTMENTS COMBINED
------------- -------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales of electricity and steam .......... $198,929 $ 39,986 $ -- $ -- $238,915
Royalty income .......................... 5,015 -- -- -- 5,015
Interest and other income ............... 20,892 6,291 4,327 (4,850) 18,006
------------- -------------- ----------- ------------- -----------
Total revenues ......................... 224,836 46,277 4,327 (4,850) 261,936
------------- -------------- ----------- ------------- -----------
Cost and expenses:
Plant operations ........................ 51,298 23,886 1,146 -- 74,038
General and administration .............. 11,423 13,511 12,860 (226) 11,848
Royalties ............................... 10,271 -- -- -- 10,271
Depreciation and amortization ........... 48,972 15,316 12,052 6,859 59,095
Interest ................................ 73,204 7,099 25 (4,355) 75,923
Less interest capitalized .............. (23,508) -- -- -- (23,508)
------------- -------------- ----------- ------------- -----------
Total costs and expenses ............... 171,660 59,812 26,083 2,278 207,667
------------- -------------- ----------- ------------- -----------
Income (loss) before provision for
income taxes ........................... 53,176 (13,535) (21,756) (7,128) 54,269
Equity in (earnings) loss of affiliates 2,774 (13,162) -- 6,125 (4,263)
Provision for income taxes .............. 15,576 (129) -- 3,481 18,928
------------- -------------- ----------- ------------- -----------
Net income (loss) ....................... $ 34,826 $ (244) $(21,756) $(16,734) $ 39,604
============= ============== =========== ============= ===========
Net income per share--primary ........... $ 0.64 $ 0.63
------------- -----------
Net income per share--fully diluted .... $ 0.60 $ 0.63
------------- -----------
Average number of shares
outstanding--primarily ................. 54,836 62,810
------------- -----------
Fully diluted shares .................... 64,726 64,726
------------- -----------
</TABLE>
The accompanying notes are an integral part of these pro
forma unaudited condensed financial statements.
P-5
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED UNAUDITED
FINANCIAL DATA
(TABLE IN THOUSANDS)
On August 7, 1996, CalEnergy Company, Inc. (the "Company") acquired all of
the stock of Falcon Seaboard Resources, Inc. ("F.S.R.I."), including its
ownership interests in three operating gas-fired cogeneration plants, Saranac
Power Partners, L.P., Power Resources, Inc. and Norcon Power Partners, L.P.,
for $226 million in cash. Certain assets, liabilities and subsidiaries of
F.S.R.I. were distributed out of F.S.R.I. prior to the Company's acquisition
of F.S.R.I. stock.
On April 17, 1996, a subsidiary of the Company acquired all of the stock of
BN Geothermal, Inc. ("BNG"), Niguel Energy Company ("Niguel"), San Felipe
Energy Company ("San Felipe") and Conejo Energy Company (collectively referred
to as the "Acquired Companies") from Edison Mission Energy for $70 million.
The Acquired Companies own 50% partnership interests in each of the Imperial
Valley partnership projects (the "Partnership Projects") in which the Company
had an existing 50% ownership interest resulting from the acquisition of Magma
Power Company ("Magma"). During the first quarter of 1995, the Company
acquired the stock of Magma.
The acquisitions of F.S.R.I., the Acquired Companies and Magma have been
accounted for as purchase business combinations pursuant to the principles of
APB Opinion No. 16, "Business Combinations." In applying APB No. 16, all
identifiable assets acquired and liabilities assumed are assigned a portion of
the cost of acquiring F.S.R.I., the Acquired Companies and Magma, equal to
their fair values at the date of the acquisitions. The net cash flow
projections used for determining the fair values in the purchase accounting
were those used for the acquisitions as prepared by the Company and reflect
estimated cost reductions. The resulting purchase accounting adjustments are
based on the fair values determined in purchase accounting and the historical
financial statements of F.S.R.I., the Acquired Companies and the Partnership
Projects in which the Acquired Companies have invested and Magma.
The Pro Forma Condensed Combined Unaudited Financial Data are based on the
following assumptions:
1. The acquisition of F.S.R.I., the Acquired Companies and Magma occurred
at the beginning of the periods presented for statements of earnings
purposes.
2. The acquisition on April 17, 1996 of the Acquired Companies is
reflected in the Company's historical June 30, 1996, consolidated
historical financial statements beginning April 1, 1996. The pro forma
adjustments to reflect the effect of the acquisition of the Acquired
Companies are as follows:
A. The adjustments which have been made to the assets and liabilities
of the Acquired Companies to reflect the effect of the acquisitions
accounted for as a purchase business combination follow:
Property and plant ...................... $(101,999)
Power sale agreements ................... 44,797
Other assets and liabilities ............ (4,882)
------------
Net decrease in assets and liabilities $ (62,084)
============
B. The Salton Sea Funding Corporation Series D notes and Series E bonds
were issued and all existing project level debt of the Partnership
Projects was paid off at the beginning of the period presented.
P-6
<PAGE>
C. The pro forma adjustments to the Pro Forma Condensed Combined
Unaudited Statements of Earnings are as follows:
i. Provide depreciation and amortization of the fair values
assigned to all identifiable assets as described below and
capitalize interest on costs allocated to projects under
development and construction. The Company's policy is to
provide depreciation and amortization expense upon the
commencement of revenue production over the estimated
remaining useful life of the identifiable assets and to
periodically assess the carrying value of such assets for
possible impairment in accordance with the provisions of
Statement of Financial Accounting Standards No. 121.
The fair value of property and equipment, net of salvage
value, and exploration and development cost is depreciated
using the straight line method over the remaining portion
(approximately 23 years) of the original 30-year life.
Power sales agreements have been assigned values separately
for each of (1) the remaining portion of the scheduled
price periods of the power sales agreements and (2) the 20
year avoided cost periods of the power sales agreements and
are being amortized separately over such periods using the
straight line method.
ii. Adjust interest relating to (1) the issuance of the Salton
Sea Funding Corporation Series D notes and Series E bonds
net of the repayment of all project level debt at the
Partnership Projects and (2) the use of existing funds.
iii. Change in income tax expense as a result of pro forma
adjustments which affect taxable income.
D. For the year ended December 31, 1995, reflect the Magma Acquisition
as a purchase business combination beginning January 1, 1995.
3. The pro forma adjustments to reflect the effect of the F.S.R.I.
acquisition are as follows:
A. The adjustments which have been made to the assets and liabilities
of F.S.R.I. to reflect the effect of the acquisition accounted for
as a purchase business combination follow:
Property and plant ....................... $ 58,050
Power sale agreements .................... 46,604
Goodwill ................................. 99,206
Equity investments ....................... 136,375
Other assets and liabilities ............. 8,008
Deferred taxes ........................... (95,206)
----------
Net increase in assets and liabilities $253,037
==========
B. The F.S.R.I. historical statements have been adjusted to reflect
the exclusion of F.S.R.I. assets, liabilities and subsidiaries not
acquired by the Company and eliminate historical general and
administrative expenses and project development expenses of
F.S.R.I. which will no longer be incurred by F.S.R.I. These
F.S.R.I. assets, liabilities and subsidiaries were distributed out
of F.S.R.I. prior to the acquisition of F.S.R.I.'s stock by the
Company.
C. The cash which the Company used to acquire F.S.R.I., including
estimated transaction costs, has been provided for in the pro forma
adjustments as follows:
Reduce cash on hand ............ $194,000
Increase short-term borrowings 35,000
----------
Total sources of cash ........ $229,000
==========
P-7
<PAGE>
D. The pro forma adjustments to the Pro Forma Condensed Combined
Unaudited Statements of Earnings are as follows:
i. Provide depreciation and amortization of the fair values
assigned to all identifiable assets as described below. The
Company's policy is to provide depreciation and amortization
expense upon the commencement of revenue production over the
estimated remaining useful life of the identifiable assets
and to periodically assess the carrying value of such assets
for possible impairment in accordance with the provisions of
Statement of Financial Accounting Standards No. 121.
The fair value of property and equipment is depreciated using
the straight line method over the remaining portion (between
22-28 years) of the original 30-year life.
Power sales agreements have been assigned values for the
remaining contract period and are being amortized over such
period using the straight line method.
The fair values assigned to F.S.R.I.'s equity investments are
being amortized over the remaining contract periods using the
straight line method.
ii. Record amortization of the excess of the purchase price over
the net assets acquired using the straight line method over
the remaining weighted average useful life of the facilities
acquired (25 years).
iii. Record anticipated incremental general and administrative
expenses of CECI of $850,000 per year and reclassify
historical state franchise taxes from general and
administrative expenses to income tax expense.
iv. Adjust interest relating to (1) the borrowings under the
Company's revolving line of credit and (2) the use of existing
funds.
v. Change in income tax expense as a result of pro forma
adjustments which affect taxable income.
4. The pro forma adjustments also include the effect of:
A. The call for redemption of $164.85 million of convertible debt and
the assumed conversion thereof into common stock of the Company.
B. The issuance by the Company of $225 million of Notes being offered
hereby and the use of a portion of the proceeds therefrom to pay off
the $35 million balance on the revolving line of credit.
P-8
<PAGE>
CALENERGY COMPANY, INC.
All tendered Senior Notes, executed Letters of Transmittal, and other
related documents should be directed to the Exchange Agent. Requests for
assistance and for additional copies of the Prospectus, the Letter of
Transmittal and other related documents should be directed to the Exchange
Agent or to the Information Agent listed below.
The Exchange Agent for the Exchange Offer is:
IBJ SCHRODER BANK & TRUST COMPANY
By Facsimile:
(212) 858-2611
Confirm By Telephone:
(212) 858-2103
Attention: Reorganization Department
By Hand/Overnight Delivery:
IBJ Schroder Bank & Trust Company
One State Street
Securities Processing Window
Floor SC-1
New York, New York 10004
Attention: Reorganization Department
By Registered or Certified Mail:
IBJ Schroder Bank & Trust Company
Attention: Reorganization Department
P.O. Box 84
Bowling Green Station
New York, New York 10274-0084
The Information Agent for the Exchange Offer is:
[MacKenzie Partners, Inc. LOGO]
156 Fifth Avenue
New York, New York 10010
(212) 929-5500
or
(800) 322-2885 (Toll Free)
