<PAGE>
Filed Pursuant to Rule 424(b)(2)
Registration File Nos.: 333-62697 and 333-32821
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 9, 1998)
$1,400,000,000
CALENERGY COMPANY, INC.
-----------------------
6.96% SENIOR NOTES DUE 2003
7.23% SENIOR NOTES DUE 2005
7.52% SENIOR NOTES DUE 2008
8.48% SENIOR BONDS DUE 2028
Interest Payable March 15 and September 15
CALENERGY LOGO
CalEnergy Company, Inc. (the "Company") is offering (the "Securities Offering")
$215,000,000 aggregate principal amount of the Company's 6.96% Senior Notes due
2003, $260,000,000 aggregate principal amount of the Company's 7.23% Senior
Notes due 2005, $450,000,000 aggregate principal amount of the Company's 7.52%
Senior Notes due 2008 and $475,000,000 aggregate principal amount of the
Company's 8.48% Senior Bonds due 2028 (collectively, the "Securities").
Interest on the Securities will be payable semiannually on March 15 and
September 15 of each year, commencing March 15, 1999. The Securities will not
be subject to any mandatory sinking fund. The Securities are subject to
optional redemption at any time at par plus a make whole premium as described
herein.
The Securities will be senior unsecured obligations of the Company and will
rank pari passu in right of payment with all other senior unsecured
obligations of the Company and senior in right of payment to all existing and
future subordinated indebtedness of the Company. The Securities will be
effectively subordinated to all existing and, to the extent permitted under
the Indenture (as defined herein), future secured indebtedness of the Company
and to all indebtedness and other liabilities of the Company's subsidiaries,
projects and joint ventures to the extent of the assets of such entities. The
Indenture permits the Company to incur additional indebtedness, subject to
certain limitations.
Approximately $830 million in net proceeds of the Securities Offering, together
with approximately $600 million in net proceeds from the Equity Offering (as
defined herein) and approximately $740 million in net proceeds from the
Non-Recourse Financing (as defined herein), is expected to be used to fund the
MidAmerican Merger (as defined herein). The closing of the Securities Offering
will occur prior to, and is not conditioned upon, the closing of the
MidAmerican Merger, the Equity Offering or the Non-Recourse Financing.
Approximately $543 million of the net proceeds of the Securities Offering is
expected to be used to refinance the Company's outstanding 10 1/4% Senior
Discount Notes, which become callable on January 15, 1999.
-----------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT PROSPECTIVE INVESTORS SHOULD CONSIDER PRIOR
TO AN INVESTMENT IN THE SECURITIES.
-----------------------
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 SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC (1) COMMISSIONS (2) COMPANY (1)(3)
-------------- --------------- ---------------
<S> <C> <C> <C>
Per 2003 Note . 100.00% 1.50% 98.50%
Per 2005 Note 100.00% 1.50% 98.50%
Per 2008 Note 100.00% 1.50% 98.50%
Per Bond ...... 100.00% 1.50% 98.50%
Total.......... $1,400,000,000 $21,000,000 $1,379,000,000
</TABLE>
- ------------
(1) Plus accrued interest, if any, from September 22, 1998.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at
$1,250,000.
-----------------------
The Securities offered by this Prospectus Supplement are offered by the
Underwriters subject to prior sale, withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the
Underwriters and to certain further conditions. It is expected that delivery
of the Securities will be made in book-entry form only through the facilities
of The Depository Trust Company on or about September 22, 1998, against
payment therefor in immediately available funds.
-----------------------
Joint Book Running Managers
CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS
-----------------------
GOLDMAN, SACHS & CO.
September 17, 1998
<PAGE>
Key statistics regarding Northern Electric's distribution and supply business,
except as noted, as of and for the year ended March 31, 1998:
o Operating Revenue: $1,600,000,000
o Number of Customers (current): 2,000,000
o Kilometers of Distribution Lines: 43,000
o Square Kilometers of Authorized Area: 14,400
Key statistics regarding MidAmerican's distribution and supply business as of
and for the 12 months ended June 30, 1998:
o Operating Revenue: $1,821,810,000
o Number of Customers: 1,267,000
o Miles of Electric Transmission Lines: 4,226
o Square Miles of Authorized Area: 10,600
o Miles of Gas Pipeline: 19,161
[GRAPHIC MATERIAL DEPICTING MAPS OF NORTHERN ELECTRIC'S SERVICE TERRITORY AND
MIDAMERICAN ENERGY'S SERVICE TERRITORY HAS BEEN OMITTED FROM THE ELECTRONIC
VERSION OF THIS PROSPECTUS SUPPLEMENT. OTHER GRAPHIC MATERIAL IS DEPICTED BELOW
IN TABULAR FORMAT.]
NUMBER OF CUSTOMERS
Electric Gas Total
CE 1,400,000 600,000 2,000,000
MEC 648,000 619,000 1,267,000
--------- --------- ---------
Combined 2,048,000 1,219,000 3,267,000
========= ========= =========
COMBINED CALENERGY/MIDAMERICAN
GENERATING CAPACITY: 6,007MW
Coal 47%
Nuclear 6%
Gas 26%
Hydro 2%
Geothermal 19%
----
100%
====
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERAGE TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUPPLEMENT 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 or incorporated by reference
in this Prospectus Supplement and accompanying Prospectus. Certain
capitalized terms used but not defined in this summary are used herein as
defined elsewhere in this Prospectus Supplement. As hereinafter used in this
Prospectus Supplement, the term "Company" refers to CalEnergy Company, Inc.
("CalEnergy") and its operating subsidiaries (including Northern) and joint
ventures, and "Northern" refers to Northern Electric plc and its operating
subsidiaries, unless the context otherwise requires.
This Prospectus Supplement contains forward-looking statements which
involve risks and uncertainties. The Company's actual results in the future
could differ significantly from the results discussed or implied in this
Prospectus Supplement or incorporated by reference herein. Factors that could
cause or contribute to such differences include, but are not limited to,
those discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" which is incorporated by reference
herein, "The Business of the Company" in this Prospectus Supplement and "Risk
Factors" in the accompanying Prospectus, as well as those discussed elsewhere
in this Prospectus Supplement and accompanying Prospectus or incorporated by
reference herein or therein.
In this Prospectus Supplement, references to "U.S. dollars," "dollars,"
"U.S. $," "$" or "cents" are to the currency of the United States and
references to "pounds," "sterling," "pounds sterling,"
"pence" or "p" are to the currency of the United Kingdom.
THE COMPANY
OVERVIEW
CalEnergy Company, Inc. is a fast-growing global energy company with an
increasingly diversified portfolio of regulated and non-regulated assets. The
focus of the Company has evolved over time from development and acquisition
activities in the domestic and international power generation market to
strategic electric and gas utility acquisitions, with a particular emphasis
on investment-grade countries such as the U.S., U.K., Australia, Canada, New
Zealand and the countries of Western Europe. This focus has provided the
Company with increased scale, skill and revenue diversity and enhanced credit
quality of cash flows and additional growth opportunities associated with
each of the acquired businesses. The MidAmerican Merger is being implemented
in furtherance of this strategy. The Company's investments in related
activities (e.g., producing gas fields and gas reserves and advanced utility
information systems) are primarily intended to support and augment the
profitability of its existing core businesses.
CalEnergy was founded in 1971 and, through its subsidiaries, manages and
currently owns interests in over 5,000 megawatts ("MW") of power generation
facilities in operation, construction and development worldwide, including 20
generating facilities which it currently operates. (This will increase to
approximately 9,000 MW and 30 operating facilities following the MidAmerican
Merger.) Since both the demand for electric power and the pace of electric
industry privatization continues to increase on a global basis, the power
generation segment will remain a significant investment and growth
opportunity for the Company in addition to its core utility operations. The
Company's utility operations are currently conducted through its subsidiary,
Northern Electric plc ("Northern"), which engages in the supply and
distribution of electricity and gas to approximately 2 million customers in
the U.K., as well as other related utility business activities.
During the past five years, the Company has achieved significant growth in
earnings and assets while diversifying the underlying revenue base and
improving the associated credit quality of that base through: (i) strategic
acquisitions that broaden the geographic and business scope of the Company's
overall
S-1
<PAGE>
activities and that expand the Company's core competencies; (ii) enhancement
of the financial and technical performance of existing and acquired business
operations; and (iii) development, construction and acquisition of
incremental energy-related assets to support and expand the scope of existing
operations within focused geographic regions.
The Company's management team has a proven track record of project
development, operation, acquisition integration and portfolio
diversification. Since 1991, the Company's operating and financial results
have improved significantly through the employment of a disciplined
acquisition, development and management philosophy. In 1991, the Company's
EBITDA was derived largely from non-regulated, domestic power generation
activities. After giving effect to the Securities Offering, the MidAmerican
Merger, the Equity Offering and the Non-Recourse Financing, the Company's
adjusted pro forma EBITDA for the year ended December 31, 1997 is $1,307
million and the Company's total assets as of June 30, 1998 are approximately
$12.9 billion.
The Company's goal is to continue to foster long-term sustained growth
built upon a solid foundation of diversified and high quality assets and
skill sets. As part of this strategy, the Company recently agreed to acquire
(the "MidAmerican Merger") MidAmerican Energy Holdings Company ("MidAmerican"
or "MEC"), which provides the Company with an attractive integrated U.S.
utility growth platform. Following the MidAmerican Merger, the Company
expects that approximately 80% of the Company's cash flows will be derived
from highly stable, investment-grade credit quality sources, of which
approximately 60% will be contributed from regulated U.S. and U.K. utility
operations. There can be no assurance that the MidAmerican Merger, the Equity
Offering or the Non-Recourse Financing will be consummated.
A condensed financial structure overview reflecting the current ratings of
the principal senior debt securities issued by CalEnergy and its subsidiaries
(including MidAmerican as though the MidAmerican Merger had been consummated)
is presented below.(1)
[A DESCRIPTION OF GRAPHIC MATERIAL IS SET FORTH BELOW. UPPER TIER ENTITIES
APPEAR TO LEFT AND SUBSIDIARIES TO RIGHT.]
MIDAMERICAN ----------------- MIDAMERICAN
ENERGY ENERGY COMPANY
HOLDINGS A2/AA-(2)
COMPANY
CE ELECTRIC ----------------- NORTHERN
U.K. FUNDING ELECTRIC PLC
BAA1/BBB+/A- A3/BBB+/A
COSO FUNDING
CORP.
BAA2/BBB/BBB
(COSO PROJECTS)
CALENERGY
COMPANY,INC. SALTON SEA
BA1/BB+/BB+ FUNDING CORP.
BAA3/BBB-
(IMPERIAL VALLEY PROJECTS)
CE CASECNAN
PROJECT
BA2/BB+
OTHER
SUBSIDIARIES AND
PROJECTS
(U.S., PHILIPPINES, AUSTRALIA, POLAND, AND INDONESIA)
------------
(1) The debt ratings reflected above have been published by Moody's
Investors Services, Inc. ("Moody's") and Standard & Poor's Ratings
Group ("S&P"), respectively, and, in the case of CalEnergy Company,
Inc., CE Electric, Northern and Coso, by Duff & Phelps Credit Rating
Co., in respect of certain senior indebtedness of the respective
issuers shown. These ratings may be changed from time to time by the
ratings agencies. On August 12, 1998, each of Moody's and S&P, and on
August 18, 1998, Duff & Phelps Credit Rating Co., announced that they
had placed the Company's long-term senior debt rating on Credit Watch,
with positive implications for a possible upgrade following the
MidAmerican Merger.
(2) MidAmerican Energy Company's long-term secured debt is currently rated
A2 and AA-, by Moody's and S&P, respectively. On August 12, 1998, each
of S&P and Moody's announced that it had placed these debt ratings on
Credit Watch, with negative implications for a possible downgrade
following the MidAmerican Merger.
S-2
<PAGE>
NORTHERN
In February 1997, the Company acquired Northern, one of the twelve U.K.
regional electric companies (each, a "REC") which came into existence as a
result of the restructuring and subsequent privatization of the electricity
industry that occurred in the U.K. in 1990. Northern's principal business is
the distribution of electricity in its authorized area located in northeast
England which covers approximately 14,400 square kilometers and has a
population of approximately 3.2 million people. As a regional platform,
Northern's related activities also include: (i) the supply of electricity and
gas inside and outside its authorized area, and (ii) ownership interests in
producing gas fields in the North Sea and gas, transmission and storage
operations. Consistent with the Company's goals, these related activities
serve to support the operations and growth of the Northern electric and gas
supply business. In addition, based on the skills and experience developed in
the U.K. deregulated energy market, the Company has developed proprietary and
advanced information systems ("Aurora/IT") which are currently being utilized
in the supply business in the U.K., and are expected to be directly
applicable to the Company's other utility operations, such as MidAmerican's
utility operations.
The Northern acquisition was financed with $586 million contributed by the
Company, and approximately $700 million of non-recourse debt at a new holding
company for Northern ("CE Electric UK Funding Company") to be serviced solely
from Northern's cash flow. Following the acquisition, Northern's ratings were
affirmed by Moody's and reduced from A-to BBB+ by S&P. The ratings for CE
Electric UK Funding Company are Baa1 and BBB+ from Moody's and S&P,
respectively.
Since the Northern acquisition, the Company has focused the goals and
objectives for Northern's key business units (Distribution, Utility Services,
Supply and Aurora/IT) as follows:
o Maintain the strength and stability of the core electric distribution
business;
o Grow the electricity and gas supply business prudently and profitably;
o Be a low-cost provider while maintaining reliable, high-quality
service; and
o Increase the profitability of and grow Northern's other regulated
businesses in a disciplined manner and within the financial means of
the Northern organization.
The results to date have exceeded the Company's original expectations.
Accomplishments for and attributes of the respective U.K. business units
include:
Distribution and Utility Services
o Improved reliability and customer service, as measured by the Office
for Electricity Regulation; and
o Lower staff levels and reduced overtime.
Supply
o 1.5 million electricity customers;
o Added 600,000 new gas customers in past year;
o Dual fuel offering (a first time innovation for the U.K. market);
o A tripling of business gas sales; and
o An increase in over 100kW electricity sales by 30%, 45% and 50% in the
last three contract rounds (now the third largest U.K. supplier in this
sector).
Aurora/IT
o System handles an average of 3,800 new gas and electricity customer
applications per day, with peak volume of 10,000 new applications per day;
o Facilitates supply and billing to new gas and electricity customers;
and
o Increase in customer satisfaction through flexible pricing and payment
options.
S-3
<PAGE>
OVERVIEW OF PENDING MIDAMERICAN MERGER
On August 11, 1998, the Company entered into an Agreement and Plan of
Merger pursuant to which it has agreed to acquire, subject to the conditions
set forth therein, MidAmerican for approximately $2.6 billion in cash, in a
transaction in which approximately $1.6 billion in debt and preferred stock
of MidAmerican will remain outstanding (the "MidAmerican Merger"). Pursuant
to the MidAmerican Merger, CalEnergy will reincorporate in Iowa and will be
renamed MidAmerican Energy Holdings Company. The Securities will remain
senior debt of CalEnergy, and MidAmerican's existing debt and preferred stock
will remain debt and preferred stock of such utility subsidiary following the
MidAmerican Merger.
MidAmerican is the largest combined electric and gas utility in Iowa with
648,000 electric and 619,000 gas customers. It has gas and electric
operations in Iowa, Illinois and South Dakota and gas operations in Nebraska.
The regulated service area is comprised of 10,600 square miles with a total
population of 1.7 million. MidAmerican has an installed generation capacity
of approximately 4,000 MW, comprised of 71% coal, 19% natural gas and 10%
nuclear fuel sources. Due to its geographic location and fuel sources,
MidAmerican is a low cost producer of electricity in the Mid-Continent Area
Power Pool. Mid-American supplies from time to time electricity to other
major energy markets in the midwestern U.S. such as the Chicago area, St.
Louis, Kansas City, Milwaukee and Minneapolis. MidAmerican's gas operations
are served by at least four major gas pipelines.
The Company believes that the electric power industry within the U.S. will
continue its current pace of deregulation, with regulated distribution
operations expected to follow the established U.K. regulatory model (with
incentive-based rates or price caps). As a result, the Company believes that
the MidAmerican Merger will provide the opportunity to apply the knowledge,
skills and systems gained at Northern and, with the addition of a strong and
complementary management team, to establish a platform from which a domestic
energy distribution and supply business can be profitably managed and
expanded over time.
The consummation of the MidAmerican Merger is conditioned upon receipt of
approvals of the shareholders of the Company and MidAmerican, as well as the
Nuclear Regulatory Commission, the Federal Energy Regulatory Commission, the
Iowa Utilities Board and the expiration or termination of the applicable
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended. In addition, the partial disposition of interests in
certain of the Company's power generating facilities will be required prior
to the consummation of the MidAmerican Merger in order to maintain the
qualifying facilities status of such independent power generating facilities.
There can be no assurance as to the timing of the required regulatory
approvals, the ability to obtain regulatory and shareholder approvals, that
such approvals will contain satisfactory terms and conditions or that the
MidAmerican Merger will be consummated. See "Risk Factors--Acquisition
Uncertainties" in the accompanying Prospectus.
Closing of the MidAmerican Merger is expected to occur by the end of the
first quarter of 1999.
BENEFITS OF PENDING MIDAMERICAN MERGER
The Company believes the following economic and strategic benefits will be
realized from the MidAmerican Merger:
o Continues CalEnergy's transformation to an integrated global energy
company with the increased scale and skill base required to efficiently
compete as energy markets continue to deregulate throughout the world;
o Combines existing CalEnergy competitive supply expertise with
MidAmerican's approximately 4,000 MW of efficient low cost, primarily
coal-fired generating capacity having access to high-priced markets
(e.g., Chicago);
o Provides a platform for continued U.S. growth through the addition of a
strong and complementary management team able to identify midwest
regional development and expansion opportunities in both assets and
supply, as well as to apply the Aurora/IT technology to MEC's
operations;
S-4
<PAGE>
o Enhances CalEnergy's financial position through cash flow and earnings
accretion beginning with the first full year of operations following
the consummation of the transaction; and
o Improves CalEnergy's consolidated credit profile through increased
diversification of cash flow and earnings sources derived principally
from the investment-grade regulated utility operations.
FINANCING PLAN
The Company proposes to fund the MidAmerican Merger utilizing a financing
plan substantially similar in nature to that previously employed for the
Northern acquisition, as illustrated below.
[DESCRIPTION OF GRAPHIC MATERIAL IS SET FORTH BELOW]
STRUCTURE
---------
CalEnergy-------------------------------- $450 Million of Equity/Asset Sales
$150 Million of Preferred Stock
$830 Million of Debt
$420 Million of Cash
MidAmerican------------------------------ $750 Million of Non-recourse Debt
FinCo
MidAmerican
Holdings
MidAmerican MidAmerican
Unregulated Energy
$1,600 Million of existing debt and
preferred (remains outstanding)
SOURCES & USES
--------------
SOURCES: IN MILLIONS
-----------
MidAmerican FinCo Debt $750
Cash $420
Debt $830
Equity/Asset Sales $450
Preferred Stock $150
TOTAL SOURCES $2,600
======
USES:
Purchase Price $2,600
(including transaction costs) ------
TOTAL USES $2,600
======
CalEnergy proposes to establish a wholly-owned, special-purpose entity
("MidAmerican FinCo") which will issue approximately $750 million of debt
financing (the "Non-Recourse Financing") that will partially fund the
MidAmerican Merger, and that will be non-recourse to CalEnergy and solely
serviced with operating cash flow from MEC. The remaining acquisition
financing of approximately $1,430 million will be raised through common
and/or preferred securities and/or other equity-linked securities of
CalEnergy (the "Equity Offering") and varying levels of senior debt of
CalEnergy and MidAmerican FinCo. Certain of the proceeds of the Equity
Offering may be replaced by proceeds from non-core asset sales by the
Company. The timing and composition of such financing elements are flexible
and subject to optimization and refinement as financing market conditions
change. There can be no assurance that the Non-Recourse Financing or the
Equity Offering will be consummated.
S-5
<PAGE>
STRATEGY
The Company's diversification and growth strategy remains focused upon
strategic utility acquisitions and other investment opportunities created by
the continuing deregulation and privatization in energy sectors throughout
the world, particularly within investment-grade countries such as the U.S.,
U.K., Australia, Canada, New Zealand and the countries of Western Europe.
In each market, the Company's strategy is principally comprised of the
following key elements:
o DIVERSIFICATION AND GROWTH THROUGH INTERNATIONAL AND DOMESTIC
ACQUISITIONS. The Company has successfully completed five acquisitions
in the past four years, each of which was accretive to earnings and
cash flow, and reflective of the Company's disciplined investment
philosophy. The Company believes that several of these acquisitions
have provided it with specialized skills and an expertise base which
enhances its competitive position in those areas that it has targeted
for future growth. For example, the Company's acquisition of Northern
was the first step in its planned expansion into the distribution and
supply (electricity and gas) business segments in the U.S. which will
be achieved, in part, through the MidAmerican Merger. As a direct
result of the competitive experience afforded by progressive U.K.
energy deregulation, the Company believes that it possesses the
demonstrated knowledge and skill base required to effectively compete
in open supply markets as such markets develop in the U.S. An
additional benefit of the Northern acquisition was the opportunity to
develop Aurora/IT, a proprietary array of sophisticated billing and
information systems, which the Company believes to be a critically
important component of effective operations in a deregulated utility
environment. The Company further believes that there will be immediate
opportunities to apply Aurora/IT at MEC and elsewhere in the U.S. as
such markets progressively deregulate.
o DIVERSIFICATION AND GROWTH THROUGH GREENFIELD DEVELOPMENT OF ENERGY
PROJECTS. The Company continues to view the domestic and international
power generation, transmission and distribution markets, particularly
when integrated with upstream natural gas operations, as an attractive
market for the selected development of new greenfield energy
opportunities, an area in which it has substantial expertise.
In addition, the price volatility recently experienced in tight summer
U.S. markets has highlighted the need for additional capacity in certain
regions such as the Midwest. Based on forecasts for those Midwest
markets as well as the regional market knowledge and experience at MEC,
the Company has announced plans to jointly develop with MEC a
non-regulated gas-fired plant with a generating capacity of up to
approximately 500 MW. The Company plans to continue a focused
development effort on power and integrated gas projects with a
particular emphasis on investment-grade countries such as the U.S.,
U.K., Australia, Canada, New Zealand and the countries of Western
Europe.
o CONTINUED ENHANCEMENT OF CREDIT QUALITY AND DIVERSIFICATION OF REVENUE
BASE, EARNINGS AND CASH FLOWS. The Company currently has a diversified
revenue base including its long-term contract-based power generation
activities and its regulated utility operations. The MidAmerican Merger
will provide for further complementary and beneficial diversification
of both the Company's business profile (through an increased weighting
on regulated utility operations) and revenue base (through an increase
of investment-grade revenues generated from stable, regulated sources).
Following the MidAmerican Merger, the Company expects that
approximately 80% of the Company's cash flows will be derived from
highly stable, investment-grade credit quality sources, of which
approximately 60% will be contributed from regulated U.S. and U.K.
utility operations.
o MAINTENANCE OF PRUDENT FINANCIAL AND RISK MANAGEMENT PRACTICES. The
Company has and will continue to consistently maintain what it believes
to be prudent financial and risk management practices. A primary
component of the Company's financing philosophy is the demonstrated
S-6
<PAGE>
employment of investment-grade, non-recourse financing at subsidiary
levels. Such a financing strategy provides for fundamental protection
of the Company's other assets since the non-recourse structures
utilized by the Company require that (with certain minimal exceptions)
the funds borrowed for the purposes of financing such investments are
serviced solely from the cash flow generated by, and the assets of,
that discrete investment. As discussed previously, the MidAmerican
Merger financing plan calls for a MidAmerican FinCo financing structure
that is similar to the structure successfully employed at Northern.
This financing philosophy then permits the Company to act, in part, as a
holding company which utilizes portfolio management investment
practices. The Company is able to efficiently raise capital from a
variety of sources to contribute as equity into the non-recourse
investment vehicles, typically in amounts sufficient to achieve
investment-grade levels at those vehicles. The Company's continued
adherence to its strict investment criteria has resulted in a continued
upward trend in the Company's credit profile as evidenced by the
historical improvement in its credit ratings.
In addition, the Company plans to optimize its capital structure by
refinancing debt when market conditions permit. Approximately $543
million of the net proceeds of the Securities Offering will be used, in
part, to prefund the Company's retirement of the outstanding
$529,640,000 10 1/4% Senior Discount Notes due 2004 (the "Senior
Discount Notes"), which become callable on January 15, 1999.
-----------------------
o CONTINUED PROFIT ENHANCEMENT THROUGH OPERATING EFFICIENCIES WHILE
MAINTAINING QUALITY AND RELIABILITY OF SERVICE.
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.
S-7
<PAGE>
THE SECURITIES OFFERING
Securities Offered ............ $215,000,000 aggregate principal amount of
6.96% Senior Notes due 2003 (the "2003
Notes"), $260,000,000 aggregate principal
amount of 7.23% Senior Notes due 2005 (the
"2005 Notes"), $450,000,000 aggregate
principal amount of 7.52% Senior Notes due
2008 (the "2008 Notes") and $475,000,000
aggregate principal amount of 8.48% Senior
Bonds due 2028 (the "Bonds" and, together
with the 2003 Notes, the 2005 Notes and the
2008 Notes, the "Securities").
Maturity Dates ................ September 15, 2003 in the case of the 2003
Notes, September 15, 2005 in the case of the
2005 Notes, September 15, 2008 in the case
of the 2008 Notes and September 15, 2028 in
the case of the Bonds.
Interest Payment Dates ........ Interest on the Securities will be payable
in cash semi-annually on March 15 and
September 15, commencing on March 15, 1999,
to holders of record on the immediately
preceding March 1 and September 1. See
"Description of the Securities--General."
Form and Registration ......... The Securities will 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, Securities in certificated
form will not be issued. See "Description of
Debt Securities--Book-Entry-System" in the
accompanying Prospectus.
Optional Redemption ........... The Securities are subject to optional
redemption, in whole or in part, pro rata at
par plus accrued interest to the redemption
date plus a premium calculated to "make
whole" to comparable U.S. Treasury
securities plus (i) 25 basis points in the
case of the 2003 Notes, (ii) 37.5 basis
points in the case of the 2005 Notes, (iii)
37.5 basis points in the case of the 2008
Notes and (iv) 50 basis points in the case
of the Bonds.
Sinking Fund .................. None.
Change of Control ............. Upon the occurrence of a Change of Control,
each holder of the Securities will have the
right, at such holder's option, to require
CalEnergy to repurchase all or any part of
such holder's notes at a purchase price in
cash equal to 101% of the principal thereof,
plus accrued and unpaid interest, if any, to
the date of such purchase in accordance with
the procedures set forth in the Indenture.
See "Description of Debt Securities--Certain
Covenants--Purchase of Debt Securities Upon
a Change of Control" in the accompanying
Prospectus.
S-8
<PAGE>
Ranking ...................... The Securities will be senior unsecured
obligations of CalEnergy ranking pari passu
in right of payment of principal and
interest with all other existing and future
senior unsecured obligations of CalEnergy.
The Securities will rank senior to all
existing and future subordinated
indebtedness of CalEnergy. The Securities
will be effectively subordinated to all
existing and, to the extent permitted under
the Indenture, future secured indebtedness
of CalEnergy and to all indebtedness and
other liabilities of CalEnergy's
subsidiaries, projects and joint ventures to
the extent of the assets of such entities.
As of June 30, 1998, on a pro forma basis,
after giving effect to the MidAmerican
Merger, the Equity Offering, the
Non-Recourse Financing and the Securities
Offering and the use of the net proceeds
therefrom, CalEnergy would have had $200
million of secured limited recourse parent
company indebtedness (of which $0 is
currently recourse to CalEnergy) and
approximately $5,033 million of indebtedness
that represented the Company's proportionate
share of project and joint venture and
subsidiary debt, all of which would be
effectively senior to the Securities, and
approximately $575 million of indebtedness
that would be pari passu with the
Securities. See "Capitalization."
Certain Covenants ............. The indenture governing the Securities (the
"Indenture") contains certain covenants
which, among other things, will restrict the
ability of CalEnergy, 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 or into any other person or to transfer
or lease assets. These covenants are
described in detail under the caption
"Description of Debt Securities -- Certain
Covenants" in the accompanying Prospectus.
Change in Covenants When
Securities Rated Investment
Grade ......................... Following the first date upon which the
Securities are rated Baa3 or better by
Moody's Investors Service, Inc., BBB-or
better by Standard & Poor's Corporation and
BBB-or better by Duff & Phelps Credit Rating
Co. (or, in any case, if such person ceases
to rate the Securities for reasons outside
the control of the Company, the equivalent
investment grade credit rating from any
other "nationally recognized statistical
rating organization" (within the meaning of
Rule 15c3-1(c)(2)(vi)(F) under the
Securities Exchange Act of 1934) selected by
the Company as a replacement rating agency)
(the "Rating Event Date") (and provided no
Event of Default or event which with notice
or passage of time would constitute an Event
of Default shall exist on the Rating Event
Date), substantially all the covenants
contained in the Indenture will no longer be
applicable to the Securities. In their
place, certain other covenants,
S-9
<PAGE>
including covenants regarding restrictions
on liens on assets directly owned by
CalEnergy and the ability of CalEnergy to
merge or consolidate with or into any other
person or to transfer or lease its
consolidated assets will apply. In the event
that subsequent to a Rating Event Date an
Event of Default or event which with notice
or passage of time would constitute an Event
of Default shall exist with respect to the
Securities or the Securities shall
thereafter be rated less than Baa3 by
Moody's Investor Service, Inc., less than
BBB-by Standard & Poor's Corporation and
less than BBB-by Duff & Phelps Credit Rating
Co. (or such other rating agency selected by
the Company as aforesaid), the provisions
and covenants contained in the Indenture at
the time of the issuance of the Securities
that cease to be applicable after the Rating
Event Date will not be reinstated. See
"Description of the Securities--Change in
Covenants When Securities Rated Investment
Grade."
Events of Default ............. Events of Default under the Indenture
include, among other things, (i) default in
the payment of any interest on the
Securities 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 CalEnergy to perform
any covenant contained in the Indenture,
which breach continues for 30 days after
written notice thereof, (iv) the failure of
CalEnergy 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 CalEnergy 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 Debt
Securities--Events of Default" in the
accompanying Prospecus.
Use of Proceeds ............... The Company expects to use approximately
$830 million of the net proceeds from the
Securities Offering, together with
approximately $600 million of the net
proceeds from the Equity Offering and
approximately $740 million of the net
proceeds from the Non-Recourse Financing and
available cash on hand from the general
corporate funds of the Company, to complete
the MidAmerican Merger. The closing of the
Securities Offering will occur in advance
of, and is not conditioned upon, the closing
of the MidAmerican Merger, the Equity
Offering or the Non-Recourse Financing.
The Company expects to use approximately
$543 million of the net proceeds of the
Securities Offering to refinance the Senior
Discount Notes, which become callable on
January 15, 1999.
S-10
<PAGE>
SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
CALENERGY COMPANY, INC.
(ALL DATA IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
The following table presents summary historical consolidated financial and
operating data of the Company as of and for the years ended December 31,
1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998. The
unaudited consolidated financial statements of the Company as of and for the
six months ended June 30, 1997 and 1998 reflect all adjustments necessary in
the opinion of the Company's management (consisting of normal recurring
accruals) for a fair presentation of such data. The financial data set forth
below should be read in conjunction with the historical consolidated
financial statements of the Company and the notes thereto appearing elsewhere
or incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, (2)
------------------------------------------------------------------
1995 1996(1) 1997 1997 1998(3)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues ............................... $ 398,723 $ 576,195 $2,270,911 $1,090,970 $1,264,829
Operating revenues ........................... 335,630 518,934 2,166,338 1,048,511 1,212,440
Income before income taxes.................... 97,051 140,404 196,860 124,682 120,467
Interest expense, net of capitalized interest 102,083 126,038 251,305 119,506 159,729
Net income (loss)(4) ......................... 63,415 92,461 (84,027) 58,337 59,761
Net income (loss) per share--basic(4)(5) .... $ 1.32 $ 1.69 $ (1.25) $ .92 $ 0.99
Net income (loss) per share--diluted(4)(5) .. $ 1.22 $ 1.54 $ (1.22) $ .88 $ 0.95
BALANCE SHEET DATA:
Properties, plants, contracts and equipment,
net ......................................... $1,781,255 $3,225,496 $3,528,910 $3,531,427 $4,358,649
Total assets ................................. 2,654,038 5,630,156 7,487,626 6,186,435 7,481,881
Subsidiary and project debt .................. 921,219 1,678,392 2,189,007 2,193,118 2,850,240
Total indebtedness ........................... 1,763,424 2,825,077 3,492,852 3,146,935 4,154,115
Convertible preferred securities of
subsidiary trusts ........................... -- 103,930 553,930 283,930 553,930
Stockholders' equity ......................... 543,532 880,790 765,326 917,912 779,604
OTHER FINANCIAL DATA:
Depreciation and amortization ................ $ 72,249 $ 118,586 $ 276,041 $ 137,912 $ 165,584
Capital expenditures ......................... 398,623 341,706 380,649 182,190 304,140
EBITDA(6)(7) ................................. 271,383 385,028 811,206 382,100 445,780
Ratio of EBITDA to fixed charges(7)(8) ...... 2.0 2.3 2.5 2.5 2.1
Ratio of earnings to fixed charges(8) ....... 1.5 1.6 1.4 1.7 1.4
</TABLE>
- ------------
(1) Reflects the acquisition of the remaining 50% of the Partnership
Projects (as defined herein) on April 17, 1996, the acquisition of
Falcon Seaboard on August 7, 1996 and the acquisition of majority
ownership of Northern by CE Electric U.K. plc ("CE Electric") on
December 24, 1996. In March 1997, the Company completed the acquisition
of Northern.
(2) The Company's operations have historically been seasonal in nature;
therefore, operating results and ratios for interim periods are not
indicative of the results for the full year.
(3) Reflects the KDG Acquisition (as defined herein) on January 2, 1998.
(4) Reflects a 1997 non-recurring charge of $87 million, or $1.29 per
share, and extraordinary item of $135,850, or $2.02 per share.
(5) The weighted average number of basic common shares outstanding was 47.2
million, 54.7 million, 67.3 million, 63.5 million and 60.7 million,
respectively, for the years ended December 31, 1995, 1996 and 1997 and
the six months ended June 30, 1997 and 1998. The number of diluted
shares outstanding was 56.2 million, 65.1 million, 68.7 million, 71.4
million and 74.6 million, respectively, for the years ended December
31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and
1998.
(6) EBITDA means earnings before interest, taxes, depreciation,
amortization, and 1997 non-recurring item.
(7) 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 GAAP) or
(ii) cash flow from operating activities (determined in accordance with
GAAP).
(8) 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 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) and
preferred stock dividend requirements of majority-owned subsidiaries.
S-11
<PAGE>
SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
MIDAMERICAN ENERGY HOLDINGS COMPANY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary selected historical financial data of MidAmerican for the
years ended December 31, 1995, 1996 and 1997 set forth below have been
derived from audited financial statements. The summary selected historical
financial data of MidAmerican for the six months ended June 30, 1997 and June
30, 1998 set forth below have been derived from unaudited financial
statements. The financial data set forth below should be read in conjunction
with the historical consolidated financial statements of MidAmerican and
related notes thereto appearing elsewhere or incorporated by reference in
this Prospectus Supplement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................... $1,649,341 $1,872,612 $1,922,281 $965,422 $864,951
Operating income (1)................... 292,354 343,638 270,506 132,628 130,983
Income from continuing operations (2) . 119,705 143,761 139,332 58,350 59,733
Average common shares outstanding ..... 100,401 100,752 98,058 99,534 94,675
Earnings per average common share from
continuing operations................. $ 1.19 $ 1.43 $ 1.42 $ 0.59 $ 0.63
Cash dividends declared per share ..... $ 1.18 $ 1.20 $ 1.20 $ 0.60 $ 0.60
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
------------------------------------------------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets......................... $4,470,097 $4,521,848 $4,278,091 $4,135,705 $4,407,497
Long-term debt (3)................... 1,468,617 1,474,701 1,178,769 1,239,287 1,263,169
Power purchase obligation (3) ....... 125,729 111,222 97,504 111,221 97,504
Short-term borrowings................ 184,800 161,990 138,054 146,185 167,429
Preferred stock:
Not subject to mandatory
redemption......................... 89,945 31,769 31,763 31,765 31,760
Subject to mandatory redemption (4). 50,000 150,000 150,000 150,000 150,000
Common stock equity (5).............. 1,225,715 1,239,946 1,301,286 1,186,313 1,311,583
Book value per common share (5) ..... $ 12.17 $ 12.31 $ 13.65 $ 12.15 $ 13.94
</TABLE>
- ------------
(1) MidAmerican 1995 operating income includes $33,400 of costs related to
a restructuring and workforce reduction plan implemented and completed
in 1995.
(2) In 1997, MidAmerican recorded after-tax gains totaling $11,200 for
sales of assets of certain railcar businesses and portion of a common
stock investment that had appreciated significantly. MidAmerican
recorded after-tax losses of approximately $10,200 and $9,400 for the
write-down of certain nonregulated assets during 1995 and 1996,
respectively. In 1996, MidAmerican incurred $8,700 of costs in
connection with its merger proposal to IES Industries, Inc.
(3) Includes amounts due within one year.
(4) Post-1995 years include MidAmerican-obligated mandatorily redeemable
preferred securities of a subsidiary trust holding solely MidAmerican
junior subordinated debentures.
(5) Common equity increased in 1997 primarily due to recording at market
value an investment in McLeodUSA, Inc. common stock.
S-12
<PAGE>
SUMMARY SELECTED PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
The following pro forma information reflects the Securities Offering and
expected retirement of the Senior Discount Notes. The following pro forma as
adjusted information gives effect to those transactions and to the
MidAmerican Merger, the Equity Offering and the Non-Recourse Financing as
described in the notes to the Unaudited Pro Forma Combined Condensed
Financial Data included elsewhere in this Prospectus Supplement. In each
case, the information is presented as if such transactions had occurred on
June 30, 1998 with respect to the balance sheet data and on January 1, 1997
with respect to the statement of operations data and other financial data.
The pro forma financial information set forth below should be read in
conjunction with the historical consolidated financial statements and
Unaudited Pro Forma Combined Condensed Financial Data of the Company and the
notes thereto appearing elsewhere or incorporated by reference in this
Prospectus Supplement and the accompanying Prospectus. The Securities
Offering is not conditioned on the closing of the MidAmerican Merger, the
Equity Offering or the Non-Recourse Financing. See "--Overview of Pending
MidAmerican Merger," "Use of Proceeds" and "Selected Pro Forma Financial
Data."
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998(1) DECEMBER 31, 1997
--------------------------- ---------------------------
PRO FORMA PRO FORMA
PRO FORMA AS ADJUSTED PRO FORMA AS ADJUSTED
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues ...................................... $1,264,829 $ 2,148,463 $2,270,911 $4,242,504
Operating revenues .................................. 1,212,440 2,077,391 2,166,338 4,088,619
Income before income taxes .......................... 94,385 159,061 144,696 288,318
Interest expense, net of capitalized interest ...... 185,811 256,747 303,469 451,554
Net income available to common shareholders ........ 44,112 69,472 20,525 91,109
Net income per share ................................ $ .73 $ .90 $ .31 $ 1.09
Net income per share diluted ........................ $ .71 $ .88 $ .30 $ 1.07
Average number of basic shares ...................... 60,658 77,228 67,268 83,838
Average number of diluted shares .................... 64,791 85,557 68,686 85,256
BALANCE SHEET DATA:
Properties, plants, contracts and equipment, net ... $4,358,649 $ 7,132,598 N/A N/A
Total assets ........................................ 8,332,265 12,861,148 N/A N/A
Subsidiary and project debt ......................... 2,850,240 5,033,260 N/A N/A
Total indebtedness .................................. 5,024,475 7,207,495 N/A N/A
Convertible preferred securities of subsidiary
trusts ............................................. 553,930 553,930 N/A N/A
Stockholders' equity ................................ 759,628 1,209,628 N/A N/A
OTHER FINANCIAL DATA:
Depreciation and amortization ....................... $ 165,584 $ 270,952 $ 276,041 $ 480,555
EBITDA(2)(3) ........................................ 445,780 686,760 811,206 1,307,427
Ratio of EBITDA to fixed charges(3)(4) .............. 1.9 2.2 2.1 2.4
Ratio of earnings to fixed charges(4) ............... 1.2 1.3 1.2 1.4
</TABLE>
- ------------
(1) The Company's operations have historically been seasonal in nature;
therefore, operating results and ratios for interim periods are not
indicative of the results for the full year.
(2) EBITDA means earnings before interest, taxes, depreciation,
amortization, and 1997 non-recurring item.
(3) 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 GAAP) or
(ii) cash flow from operating activities (determined in accordance with
GAAP).
(4) 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, 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) and
preferred stock dividend requirements of majority-owned subsidiaries.
S-13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company of the Securities Offering are estimated
to be approximately $1,373 million. The Company expects to use approximately
$830 million of the net proceeds from the Securities Offering, together with
approximately $600 million of the net proceeds from the Equity Offering and
approximately $740 million of net proceeds from the Non-Recourse Financing
and available cash on hand, to complete the MidAmerican Merger. The closing
of the Securities Offering will occur in advance of, and is not conditioned
upon, the closing of the MidAmerican Merger. If for any reason the
MidAmerican Merger was not consummated, the net proceeds of the Securities
Offering would be used to make equity investments in future domestic or
international energy projects, to fund possible future stock or asset
acquisitions, for the possible repayment of debt and for other general
corporate purposes.
The Company expects to use approximately $543 million of the net proceeds
of the Securities Offering to refinance the Senior Discount Notes, which
become callable on January 15, 1999.
S-14
<PAGE>
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of the
Company at June 30, 1998, (ii) the pro forma consolidated capitalization of
the Company as if the Securities Offering and the expected retirement of the
Senior Discount Notes had occurred on June 30, 1998, and (iii) the pro forma
consolidated capitalization of the Company as adjusted for the transactions
described in clause (ii) and the consummation of the MidAmerican Merger, the
Equity Offering and the Non-Recourse Financing as described in the notes to
the Unaudited Pro Forma Combined Condensed Financial Data included elsewhere
in this Prospectus Supplement. The table should be read in conjunction with
the Company's historical consolidated financial statements and the notes
thereto, and the pro forma financial statements and the notes thereto,
appearing elsewhere or incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus. The Securities Offering is not
conditioned upon the closing of the MidAmerican Merger, the Equity Offering
or the Non-Recourse Offering. See "Prospectus Summary--Overview of Pending
MidAmerican Merger," "Use of Proceeds" and "Selected Pro Forma Financial
Data."
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Indebtedness:
Parent company debt:
Senior discount notes .................................... $ 529,640 -- --
Limited recourse senior secured notes (1) ................ 200,000 $ 200,000 $ 200,000
Senior notes ............................................. 574,235 574,235 574,235
Securities Offering ...................................... -- 1,400,000 1,400,000
Subsidiary and project debt (2):
Construction loans ....................................... 192,478 192,478 192,478
Project finance loans .................................... 767,711 767,711 767,711
Salton Sea notes and bonds ............................... 395,285 395,285 395,285
UK Funding Company Notes and Bonds ....................... 690,766 690,766 690,766
Northern Electric Bonds .................................. 432,500 432,500 432,500
Casecnan Notes and Bonds ................................. 371,500 371,500 371,500
MidAmerican FinCo Debt ................................... -- -- 750,000
MidAmerican debt ......................................... -- -- 1,433,020
------------ ------------ -------------
Total consolidated indebtedness ........................... 4,154,115 5,024,475 7,207,495
Deferred income ........................................... 50,979 50,979 50,979
Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary trusts ................ 553,930 553,930 553,930
Preferred securities of subsidiary ........................ 66,054 66,054 398,441
Stockholders' equity:
Preferred stock, no par value, 2,000 shares authorized ... -- -- --
Common stock, $.0675 par value, 180,000 shares authorized,
82,980 shares issued and 60,033 outstanding--actual and
pro forma; no par value, 180,000 shares authorized,
99,550 issued and 76,603 outstanding--pro forma as
adjusted.................................................. 5,602 5,602(3) --
Additional paid-in capital ................................ 1,236,851 1,236,851 1,692,453
Retained earnings ......................................... 273,254 253,278 253,278
Treasury stock, 22,947 common shares at cost .............. (740,843) (740,843) (740,843)
Accumulated other comprehensive income..................... 4,740 4,740 4,740
------------ ------------ -------------
Total stockholders' equity ................................ 779,604 759,628 1,209,628
------------ ------------ -------------
Total capitalization ...................................... $5,604,682 $6,455,066 $9,420,473
============ ============ =============
</TABLE>
- ------------
(1) The limited recourse senior secured notes are recourse to the Company
only to a limited extent, which is currently $0.
(2) Represents debt for which the repayment obligation is at the project or
subsidiary level and is non-recourse to the Company.
(3) Certain of the proceeds from the Equity Offering may be replaced with
proceeds of non-core asset sales.
S-15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
CALENERGY COMPANY, INC.
(ALL DATA IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
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" appearing
elsewhere or incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus. The selected consolidated data as of and for each of
the five years in the period ended December 31, 1997 have been derived from
the audited historical consolidated financial statements of the Company. The
selected consolidated data as of and for the six months ended June 30, 1997
and 1998 have been derived from the unaudited historical consolidated
financial statements of the Company and reflect all adjustments necessary in
the opinion of the Company's management (consisting of normal recurring
accruals) for a fair presentation of such data.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1993 1994 1995(2) 1996(3) 1997
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues .............. $132,059 $154,562 $335,630 $518,934 $2,166,338
Interest and other income ...... 17,194 31,292 63,093 57,261 104,573
---------- ---------- ---------- ---------- ------------
Total revenue ................... $149,253 $185,854 $398,723 $576,195 $2,270,911
Plant operations, cost of sales,
general and administrative,
royalty and other expenses .... 46,794 55,915 127,340 191,167 1,459,705
Depreciation and amortization .. 17,812 21,197 72,249 118,586 276,041
Interest expense, net of
capitalized interest ........... 23,389 52,906 102,083 126,038 251,305
Provision for income taxes ..... 18,184 17,002 30,631 41,821 99,044
Income before extraordinary item
and cumulative effect of
accounting principle(5)(7) ..... 43,074 38,834 63,415 92,461 51,873
Minority interest and dividends
on convertible preferred
securities of subsidiary trusts -- -- 3,005 6,122 45,993
Extraordinary item(5)(6) ........ -- (2,007) -- -- (135,850)
Cumulative effect of change in
accounting principle(7) ........ 4,100 -- -- -- --
Net income (loss)(5) ............ 47,174 36,827 63,415 92,461 (84,027)
Preferred dividends ............. 4,630 5,010 1,080 -- --
Net income available to common
stockholders(5) ................ 42,544 31,817 62,335 92,461 (84,027)
Income per share before
extraordinary item and
cumulative effect of change in
accounting principle ........... 1.08 1.02 1.32 1.69 0.77
Extraordinary item per share ... -- (0.06) -- -- (2.02)
Cumulative effect of change in
accounting principle per share . 0.12 -- -- -- --
Net income (loss) per share
basic........................... 1.20 0.96 1.32 1.69 (1.25)
Net income (loss) per share
diluted ........................ 1.14 0.90 1.22 1.54 (1.22)
Weighted average shares
outstanding--basic ............. 35,455 33,188 47,249 54,739 67,268
OTHER DATA:
Capital expenditures ............ $ 87,191 $119,013 $398,623 $341,706 $ 380,649
EBITDA(8)(9) .................... 102,459 129,939 271,383 385,028 811,206
Ratio of EBITDA to fixed
charges(8)(9)(10) .............. 3.4 2.1 2.0 2.3 2.5
Ratio of earnings to fixed
charges(10) .................... 2.8 1.7 1.5 1.6 1.4
Dividends declared per share ... -- -- -- -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,(1)
--------------------------
1997 1998(4)
------------ ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues .............. $1,048,511 $1,212,440
Interest and other income ...... 42,459 52,389
------------ ------------
Total revenue ................... $1,090,970 $1,264,829
Plant operations, cost of sales,
general and administrative,
royalty and other expenses .... 708,870 819,049
Depreciation and amortization .. 137,912 165,584
Interest expense, net of
capitalized interest ........... 119,506 159,729
Provision for income taxes ..... 46,591 40,483
Income before extraordinary item
and cumulative effect of
accounting principle(5)(7) ..... 58,337 59,761
Minority interest and dividends
on convertible preferred
securities of subsidiary trusts 19,754 20,223
Extraordinary item(5)(6) ........ -- --
Cumulative effect of change in
accounting principle(7) ........ -- --
Net income (loss)(5) ............ 58,337 59,761
Preferred dividends ............. -- --
Net income available to common
stockholders(5) ................ 58,337 59,761
Income per share before
extraordinary item and
cumulative effect of change in
accounting principle ........... .92 .99
Extraordinary item per share ... -- --
Cumulative effect of change in
accounting principle per share . -- --
Net income (loss) per share
basic........................... .92 .99
Net income (loss) per share
diluted ........................ .88 .95
Weighted average shares
outstanding--basic ............. 63,521 60,658
OTHER DATA:
Capital expenditures ............ $ 182,190 $ 304,140
EBITDA(8)(9) .................... 382,100 445,780
Ratio of EBITDA to fixed
charges(8)(9)(10) .............. 2.5 2.1
Ratio of earnings to fixed
charges(10) .................... 1.7 1.4
Dividends declared per share ... -- --
</TABLE>
S-16
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1993 1994 1995(2) 1996(3) 1997
---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments ............. $127,756 $ 254,004 $ 72,114 $ 424,500 $1,445,338
Properties, plants, contracts and
equipment, net .................. 463,514 561,643 1,781,255 3,225,496 3,528,910
Total assets ..................... 715,984 1,131,145 2,654,038 5,630,156 7,487,626
Revolving credit facility ........ -- -- -- 95,000 --
Senior discount notes ............ -- 431,946 477,355 527,535 529,640
Senior notes ..................... -- -- -- 224,150 574,205
Limited recourse senior secured
notes ........................... -- -- 200,000 200,000 200,000
Convertible subordinated
debentures ...................... 100,000 100,000 100,000 -- --
Convertible debt ................. -- -- 64,850 -- --
CalEnergy credit facility ........ -- -- -- 100,000 --
12% Senior notes ................. 35,730 -- -- -- --
Construction loans ............... -- 31,503 211,198 300,951 416,744
Project finance loans ............ 246,880 233,080 257,933 270,844 215,912
Salton Sea notes and bonds ...... -- -- 452,088 538,982 448,754
UK Credit Facility................ -- -- -- 128,423 --
UK Funding Company Notes and
Bonds ........................... -- -- -- -- 679,865
Casecnan Notes and Bonds ......... -- -- -- -- --
Northern Electric Bonds .......... -- -- -- 439,192 427,732
Total liabilities ................ 425,393 867,703 2,084,474 4,181,052 5,282,162
Redeemable preferred stock ...... 58,800 63,600 -- -- --
Company-obligated mandatorily
redeemable convertible preferred
securities of subsidiary trusts -- -- -- 103,930 553,930
Total stockholders' equity ...... 211,503 179,991 543,532 880,790 765,326
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,(1)
------------------------
1997 1998(4)
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and investments ............. $ 406,241 $ 265,543
Properties, plants, contracts and
equipment, net .................. 3,531,427 4,358,649
Total assets ..................... 6,186,435 7,481,881
Revolving credit facility ........ -- --
Senior discount notes ............ 529,640 529,640
Senior notes ..................... 224,177 574,235
Limited recourse senior secured
notes ........................... 200,000 200,000
Convertible subordinated
debentures ...................... -- --
Convertible debt ................. -- --
CalEnergy credit facility ........ -- --
12% Senior notes ................. -- --
Construction loans ............... 346,573 192,478
Project finance loans ............ 243,021 767,711
Salton Sea notes and bonds ...... 493,868 395,285
UK Credit Facility................ 674,163 --
UK Funding Company Notes and
Bonds ........................... -- 690,766
Casecnan Notes and Bonds ......... -- 371,500
Northern Electric Bonds .......... 435,493 432,500
Total liabilities ................ 4,708,134 6,031,314
Redeemable preferred stock ...... -- --
Company-obligated mandatorily
redeemable convertible preferred
securities of subsidiary trusts 283,930 553,930
Total stockholders' equity ...... 917,912 779,604
</TABLE>
- ------------
(1) The Company's operations have historically been seasonal in nature;
therefore, operating results and ratios for interim periods are not
indicative of the results for the full fiscal year.
(2) Reflects the acquisition of Magma Power Company which was completed on
February 24, 1995.
(3) Reflects the acquisition of the remaining 50% of the Partnership
Projects on April 17, 1996, the acquisition of Falcon Seaboard on
August 7, 1996 and the acquisition of majority ownership of Northern by
CE Electric on December 24, 1996. In March, 1997, the Company completed
the acquisition of Northern.
(4) Reflects the KDG Acquisition (as defined herein) on January 2, 1998.
(5) Reflects a 1997 non-recurring charge of $87 million, or $1.29 per
share, and an extraordinary item of $135,850, or $2.02 per share.
(6) The Company's 12% senior notes due 1995 were defeased in the first
quarter of 1994 in connection with the issuance of the Senior Discount
Notes, resulting in an extraordinary loss in 1994 in the amount of $2.0
million.
(7) 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.
(8) EBITDA means earnings before interest, taxes, depreciation,
amortization, and non-recurring item (1997 asset valuation impairment).
(9) 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 U.S. GAAP)
or (ii) cash flow from operating activities (determined in accordance
with U.S. GAAP).
(10) 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 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) and
preferred stock dividend requirements of majority-owned subsidiaries.
S-17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
MIDAMERICAN ENERGY HOLDINGS COMPANY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected historical financial data of MidAmerican for the years ended
December 31, 1995, 1996 and 1997 set forth below have been derived from
audited financial statements. The selected historical financial data of
MidAmerican for the six months ended June 30, 1997 and June 30, 1998 set
forth below have been derived from unaudited financial statements. The
financial data set forth below should be read in conjunction with the
historical consolidated financial statements of MidAmerican and related notes
thereto appearing elsewhere or incorporated by reference in this Prospectus
Supplement.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
--------------------------------------------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................... $1,649,341 $1,872,612 $1,922,281 $965,422 $864,951
Operating income (1)................... 292,354 343,638 270,506 132,628 130,983
Income from continuing operations (2) . 119,705 143,761 139,332 58,350 59,733
Average common shares outstanding ..... 100,401 100,752 98,058 99,534 94,675
Earnings per average common share from
continuing operations................. $ 1.19 $ 1.43 $ 1.42 $ 0.59 $ 0.63
Cash dividends declared per share ..... $ 1.18 $ 1.20 $ 1.20 $ 0.60 $ 0.60
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
------------------------------------------------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................ $4,470,097 $4,521,848 $4,278,091 $4,135,705 $4,407,497
Long-term debt (3).................. 1,468,617 1,474,701 1,178,769 1,239,287 1,263,169
Power purchase obligation (3) ...... 125,729 111,222 97,504 111,221 97,504
Short-term borrowings............... 184,800 161,990 138,054 146,185 167,429
Preferred stock:
Not subject to mandatory
redemption........................ 89,945 31,769 31,763 31,765 31,760
Subject to mandatory redemption
(4)............................... 50,000 150,000 150,000 150,000 150,000
Common stock equity (5)............. 1,225,715 1,239,946 1,301,286 1,186,313 1,311,583
Book value per common share (5) .... $ 12.17 $ 12.31 $ 13.65 $ 12.15 $ 13.94
</TABLE>
- ------------
(1) MidAmerican 1995 operating income includes $33,400 of costs related to
a restructuring and workforce reduction plan implemented and completed
in 1995.
(2) In 1997, MidAmerican recorded after-tax gains totaling $11,200 for
sales of assets of certain railcar businesses and portion of a common
stock investment that had appreciated significantly. MidAmerican
recorded after-tax losses of approximately $10,200 and $9,400 for the
write-down of certain nonregulated assets during 1995 and 1996,
respectively. In 1996, MidAmerican incurred $8,700 of costs in
connection with its merger proposal to IES Industries, Inc.
(3) Includes amounts due within one year.
(4) Post-1995 years include MidAmerican-obligated mandatorily redeemable
preferred securities of a subsidiary trust holding solely MidAmerican
junior subordinated debentures.
(5) Common equity increased in 1997 primarily due to recording at market
value an investment in McLeodUSA, Inc. common stock.
S-18
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
The following pro forma information reflects the Securities Offering and
expected retirement of the Senior Discount Notes. The following pro forma as
adjusted information gives effect to those transactions and to the
MidAmerican Merger, the Equity Offering and the Non-Recourse Financing as
described in the notes to the Unaudited Pro Forma Combined Condensed
Financial Data included elsewhere in this Prospectus Supplement. In each
case, the information is presented as if such transactions had occurred on
June 30, 1998 with respect to the balance sheet data and on January 1, 1997
with respect to the statement of operations data and other financial data.
The pro forma financial information set forth below should be read in
conjunction with the historical consolidated financial statements and
Unaudited Pro Forma Combined Condensed Financial Data of the Company and the
notes thereto appearing elsewhere or incorporated by reference in this
Prospectus Supplement and the accompanying Prospectus. The Securities
Offering is not conditioned on the closing of the MidAmerican Merger, the
Equity Offering or the Non-Recourse Financing. See "Prospectus
Summary--Overview of Pending MidAmerican Merger" and "Use of Proceeds."
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998(1) DECEMBER 31, 1997
--------------------------- ---------------------------
PRO FORMA PRO FORMA
PRO FORMA AS ADJUSTED PRO FORMA AS ADJUSTED
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues ...................................... $1,264,829 $ 2,148,463 $2,270,911 $4,242,504
Operating revenues .................................. 1,212,440 2,077,391 2,166,338 4,088,619
Income before income taxes .......................... 94,385 159,061 144,696 288,318
Interest expense, net of capitalized interest ...... 185,811 256,747 303,469 451,554
Net income available to common shareholders ........ 44,112 69,472 20,525 91,109
Net income per share ................................ .73 .90 .31 1.09
Net income per share diluted ........................ .71 .88 .30 1.07
Average number of basic shares ...................... 60,658 77,228 67,268 83,838
Average number of diluted shares .................... 64,791 85,557 68,686 85,256
BALANCE SHEET DATA:
Properties, plants, contracts and equipment, net ... $4,358,649 $ 7,132,598 N/A N/A
Total assets ........................................ 8,332,265 12,861,148 N/A N/A
Subsidiary and project debt ......................... 2,850,240 5,033,260 N/A N/A
Total indebtedness .................................. 5,024,475 7,207,495 N/A N/A
Convertible preferred securities of subsidiary
trusts ............................................. 553,930 553,930 N/A N/A
Stockholders' equity ................................ 759,628 1,209,628 N/A N/A
OTHER FINANCIAL DATA:
Depreciation and amortization ....................... $ 165,584 $ 270,952 $ 276,041 $ 480,555
EBITDA(2)(3) ........................................ 445,780 686,760 811,206 1,307,427
Ratio of EBITDA to fixed charges(3)(4) .............. 1.9 2.2 2.1 2.4
Ratio of earnings to fixed charges(4) ............... 1.2 1.3 1.2 1.4
</TABLE>
- ------------
(1) The Company's operations have historically been seasonal in nature;
therefore, operating results and ratios for interim periods are not
indicative of the results for the full year.
(2) EBITDA means earnings before interest, taxes, depreciation,
amortization, and 1997 non-recurring item.
(3) 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 GAAP) or
(ii) cash flow from operating activities (determined in accordance with
GAAP).
(4) 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, 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) and
preferred stock dividend requirements of majority-owned subsidiaries.
S-19
<PAGE>
THE BUSINESS OF THE COMPANY
GENERAL
The Company is a growing global energy company which, after consummation
of the MidAmerican Merger, will consist of the following operations: an
electric and gas utility services company in the U.S., an electric and gas
distribution and supply utility in the U.K., with over 3.2 million customers
and over $12 billion in assets, and a proven developer of profitable
independent power generation facilities around the world, with a particular
focus on investment grade countries such as the U.S., U.K., Australia,
Canada, New Zealand and the countries of Western Europe. The Company also
owns and develops natural gas reserves in markets where such reserves can be
utilized as an integral part of the Company's energy services business in
that market (e.g., the U.K.). The overall goal of the Company is to be a
leading provider of low cost energy services throughout the world as
governments privatize or deregulate electricity and gas markets.
The Company's strategy, which is more fully described in the "Strategy"
section at pages S-6 through S-7 herein, is comprised of the following key
elements:
o Diversification and growth through acquisition of international and
domestic utility and energy-related assets.
o Diversification and growth through greenfield development of energy
generation, transmission and distribution projects.
o Continued enhancement of the credit quality and diversification of its
revenue base, earnings and cash flows.
o Adherence to prudent financial and risk management practices and strict
investment criteria.
o Continued profit enhancement through operating efficiencies while
maintaining quality and reliability of service.
Utility Operations
Northern Electric
Northern is a regional electric company headquartered in Newcastle,
England providing electric and gas supply throughout England, Scotland and
Wales and electric distribution services in Northeast England. Supply and
distribution services are provided to over 2 million customers throughout
England and Wales.
Northern operates in two primary businesses: (1) the distribution of
electricity and (2) the supply of electricity and gas. The distribution
business is a natural monopoly and as such is regulated by the Office for
Electricity Regulation (the "Regulator"). The primary means of regulation is
a tariff structure utilizing a price cap mechanism which sets the maximum
price to be charged and allows Northern to retain a portion of all profits
achieved through such tariffs. The price cap is reviewed periodically by the
Regulator.
The United Kingdom has progressively deregulated its electric and gas
industry and a competitive market now exists in both. Northern has to date
been successful in profitably growing its customer base in the supply of
electricity and gas. Over the past two years, the number of customers
serviced by Northern has grown from approximately 1.4 million to 2.0 million.
The country has over 25 million electric customers and over 21 million gas
customers.
For more information on Northern, see pages S-21 through S-24 herein.
MidAmerican Energy Company
The Company has entered into a merger agreement with MidAmerican Energy
Holdings Company, Inc., which is headquartered in Des Moines, Iowa and is the
parent of MidAmerican Energy Company. The transaction represents the
continuation of the Company's U.S. growth and diversification strategy to
acquire a high-quality U.S. utility and compete for customers for the supply
of electricity and/or gas utilizing MidAmerican's low cost generation assets
and distribution system as an operational platform.
S-20
<PAGE>
MidAmerican is the largest combined electric and gas utility in Iowa with
648,000 electric and 619,000 gas customers. It has gas and electric
operations in Iowa, Illinois and South Dakota and gas operations in Nebraska.
The regulated service area is comprised of 10,600 square miles with a total
population of 1.7 million. MidAmerican has an installed generation capacity
of approximately 4,000 MW, comprised of 71% coal, 19% natural gas and 10%
nuclear fuel sources. Due to its geographic location and fuel sources,
MidAmerican is a low cost producer of electricity in the Mid-Continent Area
Power Pool. Mid-American's transmission system interconnections also allow it
to supply electricity to other major energy markets in the midwestern U.S.
such as the Chicago area, St. Louis, Kansas City, Milwaukee and Minneapolis.
MidAmerican's gas operations are served by at least four major gas pipelines.
Following the MidAmerican Merger, the Company will own interests in
approximately 6,000 net MW of facilities in operation or construction having
the following fuel sources: 47% coal, 19% geothermal, 26% natural gas, 6%
nuclear and 2% hydroelectric.
For more information on MidAmerican, see pages S-24 through S-27 herein.
Non-regulated Generation Operations: Power Project Portfolio
The Company has significant ownership interests in non-regulated
generation facilities both domestically and internationally. Currently, the
Company has net ownership interests of an aggregate of (i) 1,741 MW in 21
projects in operation representing an aggregate net capacity of 3,565 MW of
electric generating capacity, (ii) 275 MW in four projects under construction
representing an aggregate net capacity of 360 MW of electric generating
capacity, and (iii) 354 MW in projects in development representing an
aggregrate capacity of 629 MW of electric generating capacity.
For more information on the Company's power generation project portfolio,
see pages S-27 through S-28 herein.
Gas Operations
The Company has been active in acquiring and developing interests in
natural gas fields which have existing production and known reserves. The
acquisition of gas assets and operations supports the Company's growth
strategy in several ways: (1) gas operations are capable of providing stable,
long-term supply to generation facilities; (2) owned production will play an
integral role in the execution of supplying energy to the customer in
competitive markets; and (3) gas development efforts are a low cost method of
gaining entry, market intelligence and cash flow in new generation markets
around the world.
The Company has interests in producing gas fields in the North Sea, and in
the past year, the Company has acquired additional interests in gas fields
and a gas pipeline in the North Sea. These interests include a 25% interest
in the Esmond Transportation System which connects to the strategically
important European gas hub at Bacton, England. In addition, the Company
acquired the right to earn interests in the Yolla gas field offshore between
Victoria and Tasmania in Australia and the Gin Gin field onshore near Perth
in Western Australia.
For more information on the Company's producing gas field operations and
fields in development, see page S-28 herein.
BUSINESS OF NORTHERN
Key statistics regarding Northern's distribution and supply business are
set forth below, followed by a description of each of its additional
functional business units (which are operated separately) and a summary
description of the deregulated energy market in the U.K.
(SELECTED DATA ON NORTHERN, EXCEPT AS NOTED
AS OF AND FOR THE YEAR ENDED MARCH 31, 1998)
<TABLE>
<CAPTION>
<S> <C>
pounds sterling 980 million
Operating Revenue ........................ ($1.6 billion)
Number of Customers (Current) ............ 2.0 million
Kilometers of Distribution Lines ........ 43,000
Square Kilometers of Authorized Area .... 14,400
</TABLE>
S-21
<PAGE>
Northern Electric Distribution Limited. Northern Electric Distribution
Limited ("Northern Distribution"), a subsidiary of Northern, receives
electricity from the national grid transmission system and distributes
electricity to each customer's premises using Northern's network of
transformers, switchgear and cables. Substantially all of the customers in
Northern's authorized area are connected to Northern's network and can only
be supplied with electricity through the Northern distribution system,
regardless of whether the electricity is supplied by Northern's supply
business or by other suppliers, thus providing Northern with distribution
volume that is stable from year to year. Northern Distribution serves
approximately 1.5 million customers in Northern's area and charges its
customers access fees for the use of the distribution system.
At March 31, 1998, Northern's electricity distribution network (excluding
service connections to consumers) included approximately 17,000 kilometers of
overhead lines and approximately 26,000 kilometers of underground cables.
Substantially all substations are owned in freehold, and most of the balance
are held on leases which will not expire within 10 years. In addition to the
circuits referred to above, Northern's distribution facilities also include
approximately 24,000 transformers and approximately 24,000 substations.
Northern Electric and Gas Supply. Northern Electric and Gas Supply
("Northern Supply") focuses on Northern's supply business and is responsible
for marketing, tariff setting, contracts and customer service in connection
with the supply of both electricity and gas. Northern's electricity supply
business involves the bulk purchase of electricity, primarily from the Pool
(as defined below), and subsequent sale to individual customers. Northern's
supply business is subject to price control and is being progressively opened
to competition. This price control limits the prices that Northern can charge
to domestic and small non-domestic customers within its authorized area.
Supplies to other customers are not regulated since the Director General of
Electricity Supply ("the Regulator") has determined that the market is
sufficiently competitive not to require this.
Under its public electricity supply ("PES") or "first tier" licence
Northern has the right to supply electricity to all customers within its
authorised area. Under its various "second tier" licenses Northern has the
right to supply electricity in all other parts of Great Britain, subject to
certain conditions relating to the opening of competition in the case of
customers with demands below 100kW ("Franchise Supply Customers"). Northern
also holds an equivalent licence permitting it to supply electricity in
Northern Ireland. In Great Britain the market for electricity customers with
a maximum demand above 1 megawatt ("MW") has been open to competition since
privatisation and the market for customers with a maximum demand above 100kW
became competitive in April 1994. Northern is one of the largest suppliers in
the competitive and open electricity market in the United Kingdom and
supplies customers in all 15 PES areas in Great Britain and Northern Ireland.
Northern supplies substantially more sites than it had previously supplied
prior to the beginning of open competition in the supply business in the
United Kingdom.
Northern Supply also competes to supply gas inside and outside its
authorized area.
Northern Utility Services. Northern Utility Services Limited ("Northern
Utility") is an engineering company whose role is to adapt, maintain and
restore the distribution network of Northern Distribution and to sell related
services to third parties. Northern Utility has been able to make significant
cost reductions for Northern during the past year by working with suppliers
in order to improve core processes, close selected depot locations, increase
staff productivity and reduce material and plant costs. Northern Utility has
pioneered techniques using innovative diagnostic testing equipment which
reduces the need for intrusive maintenance. The equipment can identify some
of the causes of potential systems failures before breakdown and subsequent
loss of supply occurs. Also, the continued development in the use of
trenchless technology has brought both financial and environmental benefits
to Northern and its customers. While Northern Utility's largest customer is
Northern Distribution, it currently sells an average of approximately 16% of
its services to third parties. Northern Utility is Northern's largest
employer.
Northern Electric Retail Limited. Northern Electric Retail Limited
("Northern Retail"), a subsidiary of Northern, sells electrical and gas
appliances and provides account collection and customer services for
Northern's other businesses.
S-22
<PAGE>
Northern Electric Generation Limited. Northern Electric Generation
Limited ("Northern Generation"), a subsidiary of Northern, focuses on
electricity generation, primarily through its 15.4% stock ownership in
Teesside Power Limited, a company that owns and operates a 1,875 MW combined
cycle gas-fired power station. Northern takes 400 MW of electricity from the
plant pursuant to a 15 year contract. Northern Generation has also developed
two 50 MW independent gas fired generation projects.
Northern Metering Services Limited. Northern Metering Services Limited
("Northern Metering"), a subsidiary of Northern, provides meter supply,
installation, refurbishment and certification services as well as meter
operator and data collection services. Northern Metering has developed an
energy profiling system which helps businesses reduce costs through the more
efficient use of all fuels, not just electricity.
The United Kingdom Deregulated Energy Market
General. The electricity industry in the United Kingdom has been
progressively deregulated since the privatization of electric supply and
distribution in 1990. The Electricity Act of 1989 established an industry
structure that permitted this phased-in privatization to occur. Since that
time, in England and Wales, electricity is produced by generators, the
largest of which are National Power, PowerGen, Eastern and British Energy.
Electricity is transmitted through the national grid transmission system by
The National Grid Company plc ("NGC") and distributed to customers by the
twelve regional electric companies ("RECs") in their respective authorized
areas. Most customers currently are supplied with electricity by their local
REC, although there are other suppliers holding second tier supply licenses,
including other generators and RECs, who can compete to supply larger
customers in that REC's authorized area. Under the current licensing regime,
from September 1998 progressively, competition will be extended to include
customers who are currently Franchise Supply Customers, who will be free to
choose their electricity supplier.
Virtually all electricity generated in England and Wales is sold by
generators and bought by suppliers through the Pool. A generator that is a
Pool member and also a licensed supplier must nevertheless sell all the
electricity it generates into the Pool, and purchase all the electricity that
it supplies from the Pool. Because Pool prices fluctuate, generators and
suppliers may enter into bilateral arrangements, such as contracts for
differences ("CFDs"), to provide a degree of protection against such
fluctuations.
Distribution. Each of the RECs is required to offer terms for connection
to its distribution system to any person, for use of its distribution system
to any authorized electricity operator. In providing use of its distribution
system, a REC must not discriminate between its own supply business and that
of any other authorized electricity operator, or between those of other
authorized electricity operators; nor may its charges differ except where
justified by differences in cost.
Most revenue of the distribution business is controlled by a distribution
price control formula. The Retail Price Index ("RPI") used in this formula
reflects the average of the 12 month inflation rates recorded for the
previous July to December period. The distribution price control formula also
reflects an XD factor which is established by the Regulator following review
and is set at 3% from April 1, 1997. This formula determines the maximum
average price per unit of electricity distributed (in pence per kilowatt
hour) which a REC is entitled to charge. The distribution price control
formula permits RECs to partially retain additional revenues due to increased
distribution of units and a predetermined increase in customer numbers. The
price control does not seek to constrain the profits of a REC from year to
year. It is a control on income which operates independently of the REC's
costs. During the lifetime of the price control additional cost savings
therefore contribute directly to profit. The distribution prices allowable
under the current distribution price control formula are expected to be
reviewed by the Regulator at the expiration of the formula's scheduled
five-year duration, effective as of April 1, 2000. The formula may be further
reviewed at other times in the discretion of the Regulator.
Supply. Subject to minor exceptions, all electricity customers in the
United Kingdom must be supplied by a licensed supplier. Licensed suppliers
purchase electricity and make use of the transmission and distribution
networks to achieve delivery to customers' premises.
There are two types of licensed suppliers: PES (or first tier) suppliers
and second tier suppliers. PESs are the RECs, Scottish Power and
Hydro-Electric, each supplying in its respective authorized area.
S-23
<PAGE>
Second tier suppliers include National Power, PowerGen, British Energy,
Scottish Power, Hydro-Electric and other PESs supplying outside their
respective authorized areas. There are also a number of independent second
tier suppliers.
Until the competitive market fully opens, a Franchise Supply Customer can
only buy electricity from the PES authorized to supply the relevant
authorized area. Franchise Supply Customers typically include domestic and
small commercial and small industrial customers. Non-Franchise Supply
Customers with demand over 100kW are not limited to buying electricity from
the local PES and can choose to buy from a second tier supplier. Such
customers are typically larger commercial, agricultural and industrial
electricity users. Second tier suppliers compete with one another and with
the local PES to supply customers in this competitive (or "non-franchise")
sector of the market.
The supply of electricity to domestic and small non-domestic customers is
subject to price control regulation which effectively limits the tariffs that
can be charged to such customers and has, in recent years, generally resulted
in tariff reductions over time.
The Pool. The Pool was established at the time of privatization for bulk
trading of electricity in England and Wales between generators and suppliers.
The Pool reflects two principal characteristics of the physical generation
and supply of electricity from a particular generator to a particular
supplier. First, it is not possible to trace electricity from a particular
generator to a particular supplier. Second, it is not practicable to store
electricity in significant quantities, creating the need for a constant
matching of supply and demand. Subject to certain exceptions, all electricity
generated in England and Wales must be sold and purchased through the Pool.
All licensed generators and suppliers must become and remain signatories to
the Pooling and Settlement Agreement, which governs the constitution and
operation of the Pool and the calculation of payments due to and from
generators and suppliers. The Pool also provides centralized settlement of
accounts and clearing. The Pool does not itself buy or sell electricity.
Prices for electricity are set by the Pool daily for each one-half hour of
the following day based on the bids of the generators and a complex set of
calculations matching supply and demand and taking account of system
stability, security and other costs. A computerized system (the settlement
system) is used to calculate prices and to process metered, operational and
other data and to carry out the other procedures necessary to calculate the
payments due under the Pool trading arrangements. The settlement system is
administered on a day-to-day basis by Energy Settlements and Information
Services, Limited, a subsidiary of NGC, as settlement system administrator.
Suppliers and generators can enter into contracts for differences, which
act as a hedge against Pool price volatility. Generally, CFDs are contracts
between generators and suppliers that have the effect of fixing the price of
electricity for a contracted quantity of electricity over a specific time
period. Differences between the actual price set by the Pool and the agreed
prices give rise to difference payments between the parties to the particular
CFD. At any time, Northern's forecast franchise supply market demand is
substantially hedged through various types of agreements including CFDs.
THE BUSINESS OF MIDAMERICAN
MidAmerican established in 1997 the framework for a new approach to
managing its business. Beginning January 1, 1998, MidAmerican began operating
as four distinct business units: generation, transmission, energy delivery
and retail. Certain administrative functions are handled by a corporate
services group which supports all of the business units. Although specific
functions may be moved between business units as future circumstances
warrant, the main focus of each business unit has been established.
Presently, significant functions of the generation business unit include the
production and purchase of energy and the sale of wholesale energy. The
transmission business unit coordinates all activities related to
MidAmerican's transmission facilities, including monitoring access to and
assuring the reliability of the transmission system. Energy delivery includes
the distribution of electricity and natural gas to end-users, and related
activities. Retail includes marketing, customer service and related functions
for core and complementary products and services.
MidAmerican is an exempt public utility holding company headquartered in
Des Moines, Iowa, and incorporated in the state of Iowa. MidAmerican's
strategy is to become the leading regional provider of
S-24
<PAGE>
energy and complementary services. MidAmerican's interests include 100% of
the common stock of MidAmerican Energy Company, MidAmerican Capital and
Midwest Capital and 95% of the common stock of MidAmerican Realty Services.
MidAmerican Energy Company is primarily engaged in the business of
generating, transmitting, distributing and selling electric energy and in
distributing, selling and transporting natural gas. MidAmerican Capital
manages marketable securities and passive investment activities, nonregulated
wholesale and retail natural gas businesses, security services and other
energy-related, nonregulated activities. Midwest Capital functions as a
regional business development company in MidAmerican's service territory. In
an effort that began in 1996, MidAmerican is continuing to redeploy
investments and to invest in other lines of business that support its
strategy. For example, MidAmerican Realty Services, with over 4,000 sales
agents and 895 employees in six states, offers integrated real estate
services including residential brokerage, relocation, title and abstract
services. On a consolidated basis, the real estate brokerage operations rank
third in the nation and MidAmerican believes these operations will provide a
strategically important customer access point and an advertising and
"branding" vehicle as energy markets deregulate, in addition to being
profitable businesses on a stand-alone basis.
For the year ended December 31, 1997, 86.5% of MidAmerican's operating
revenues were from MidAmerican Energy Company, 13.4% were from MidAmerican
Capital and 0.1% were from Midwest Capital.
MidAmerican distributes electric energy in Council Bluffs, Des Moines,
Fort Dodge, Iowa City, Sioux City and Waterloo, Iowa, the Quad Cities
(Davenport and Bettendorf, Iowa and Rock Island, Moline and East Moline,
Illinois) and a number of adjacent communities and areas. MidAmerican
distributes natural gas in Cedar Rapids, Des Moines, Fort Dodge, Iowa City,
Sioux City and Waterloo, Iowa; the Quad Cities; Sioux Falls, South Dakota;
and a number of adjacent communities and areas. As of December 31, 1997,
MidAmerican had 647,700 retail electric customers and 618,000 retail natural
gas customers.
MidAmerican's electric and gas operations are conducted under franchises,
certificates, permits and licenses obtained from state and local authorities.
The franchises, with various expiration dates, are typically for 25-year
terms.
MidAmerican has a residential, agricultural, commercial and diversified
industrial customer group, in which no single industry or customer accounted
for more than 3.8% (food and kindred products industry) of its total 1997
electric operating revenues or 3.7% (food and kindred products industry) of
its total 1997 gas operating margin. Among the primary industries served by
MidAmerican are those which are concerned with the manufacturing, processing
and fabrication of primary metals, real estate, food products, farm and other
non-electrical machinery, and cement and gypsum products.
For the year ended December 31, 1997, MidAmerican derived approximately
68% of its gross operating revenues from its electric business and 32% from
its gas business. For 1996 and 1995, the corresponding percentages were 67%
electric and 33% gas, and 70% electric and 30% gas, respectively.
Historical electric sales by customer class as a percent of total electric
sales and retail electric sales data by state as a percent of total retail
electric sales are shown below:
Total Electric Sales of MidAmerican By Customer Class
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Residential........... 20.9% 21.1% 23.2%
Small General
Service.............. 16.5 16.2 19.1
Large General
Service.............. 27.4 27.6 26.1
Other................. 4.4 4.5 4.7
Sales for Resale...... 30.8 30.6 26.9
-------- -------- -------
Total................. 100.0% 100.0% 100.0%
======== ======== =======
</TABLE>
S-25
<PAGE>
Retail Electric Sales of MidAmerican By State
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Iowa........... 88.6% 88.7% 88.4%
Illinois....... 10.7 10.6 11.0
South Dakota .. 0.7 0.7 0.6
-------- -------- -------
Total.......... 100.0% 100.0% 100.0%
======== ======== =======
</TABLE>
Historical gas sales, excluding transportation throughput, by customer
class as a percent of total gas sales and by state as a percent of total
retail gas sales are shown below:
Total Gas Sales of MidAmerican By Customer Class
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Residential........... 60.8% 61.1% 57.3%
Small General
Service.............. 33.1 33.3 32.9
Large General
Service.............. 4.2 4.6 6.2
Sales for Resale and
Other................ 1.9 1.0 3.6
-------- -------- -------
Total................. 100.0% 100.0% 100.0%
======== ======== =======
</TABLE>
Retail Gas Sales of MidAmerican By State
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Iowa .......... 79.1% 78.0% 77.1%
Illinois....... 10.4 11.0 11.6
South Dakota .. 9.8 10.3 10.6
Nebraska....... 0.7 0.7 0.7
-------- -------- -------
Total.......... 100.0% 100.0% 100.0%
======== ======== =======
</TABLE>
There are seasonal variations in MidAmerican's electric and gas businesses
which are principally related to the use of energy for air conditioning and
heating. In 1997, 38% of MidAmerican's electric revenues were reported in the
months of June, July, August and September, reflecting the use of electricity
for cooling, and 54% of MidAmerican's gas revenues were reported in the
months of January, February, March and December, reflecting the use of gas
for heating.
MidAmerican Electric Operations
The annual hourly peak demand on MidAmerican's electric system occurs
principally as a result of air conditioning use during the cooling season.
MidAmerican's highest hourly peak demand in 1997 was 3,548 MW, which was 5 MW
less than MidAmerican's record hourly peak of 3,553 MW set in 1995.
MidAmerican's accredited 1997 summer net generating capability was 4,293
MW. Accredited net generating capability represents the amount of
Company-owned generation available to meet the requirements on MidAmerican's
energy system, net of the effect of participation purchases and sales. The
net generating capability at any time may be less due to regulatory
restrictions, fuel restrictions and generating units being temporarily out of
service for inspection, maintenance, refueling or modifications.
MidAmerican is interconnected with certain Iowa and neighboring utilities
and is involved in an electric power pooling agreement known as MAPP. MAPP is
a voluntary association of electric utilities doing business in Iowa,
Minnesota, Nebraska and North Dakota and portions of Montana, South Dakota
and Wisconsin and the Canadian provinces of Saskatchewan and Manitoba. Its
membership also includes power marketers, regulatory agencies and independent
power producers. MAPP facilitates operation of the transmission system,
serves as a power and energy market clearing house and is responsible for the
safety and reliability of the bulk electric system.
S-26
<PAGE>
MidAmerican Owned Net Generating Capacity
The table below sets forth the owned net operating capacity of
MidAmerican's power plants. It operates these except as indicated with an
asterisk.
<TABLE>
<CAPTION>
OWNERSHIP
-------------
<S> <C> <C>
Council Bluffs Energy Center units 1 & 2 .... 100% 131 MW
Council Bluffs Energy Center unit 3.......... 79% 534 MW
Louisa Generation Station.................... 88% 616 MW
Neal Generation Station units 1 & 2.......... 100% 435 MW
Neal Generation Station unit 3............... 72% 371 MW
Neal Generation Station unit 4............... 41% 253 MW
Ottumwa Generation Station*.................. 52% 372 MW
Quad-Cities Power Station*................... 25% 383 MW
Riverside Generation Station................. 100% 135 MW
Combustion Turbines.......................... 100% 758 MW
Moline Water Power........................... 100% 3 MW
-----------
Total Net Generating Capacity................ 3,991 MW
===========
</TABLE>
THE COMPANY'S POWER GENERATION PROJECT PORTFOLIO
The following table sets out certain information concerning various
Company projects in operation, under construction and in development pursuant
to signed power sales agreements or awarded mandates.
<TABLE>
<CAPTION>
FACILITY NET MW
PROJECT(1) NET MW OWNED(2) FUEL LOCATION
- ---------------------------- ---------- -------- ------- --------------
<S> <C> <C> <C> <C>
PROJECTS IN OPERATION
Coso ........................ 264 127 Geo California
Dieng Unit I(4) ............. 55 52 Geo Indonesia
Imperial Valley ............. 268 268 Geo California
Saranac ..................... 240 180 Gas New York
Power Resources ............. 200 200 Gas Texas
NorCon ...................... 80 64 Gas Pennsylvania
Yuma ........................ 50 50 Gas Arizona
Roosevelt Hot Springs ....... 23 17 Geo Utah
Desert Peak ................. 10 10 Geo Nevada
Mahanagdong ................. 165 149 Geo Philippines
Malitbog .................... 216 216 Geo Philippines
Upper Mahiao ................ 119 119 Geo Philippines
Teesside Power Limited ..... 1,875 289 Gas England
---------- --------
Total Projects in Operation 3,565 1,741
PROJECTS UNDER CONSTRUCTION
Casecnan(5) ................. 150 105 Hydro Philippines
Dieng Unit II(4)............. 80 75 Geo Indonesia
Patuha Unit I(4) ............ 80 70 Geo Indonesia
Viking ...................... 50 25 Gas England
---------- --------
Total Projects Under
Construction ............... 360 275
AWARDED AND OTHER
DEVELOPMENT PROJECTS(5)
Salton Sea Unit 5/Zinc
Extraction ................. 49 49 Geo California
Telephone Flat .............. 30 30 Geo California
MEC Merchant Plant........... 500 250 Gas Illinois
Exeter Power Limited ........ 50 25 Gas England
---------- --------
Total Awarded and Other
Projects ................... 629 354
---------- --------
Total Power Generation
Projects ................... 4,554 2,370
========== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
POLITICAL
COMMERCIAL U.S. $ POWER RISK
PROJECT(1) OPERATION PAYMENTS PURCHASER(3) INSURANCE
- ---------------------------- ------------ ---------- -------------- -----------
<S> <C> <C> <C> <C>
PROJECTS IN OPERATION
Coso ........................ 1987-90 Yes Edison No
Dieng Unit I(4) ............. 1998 Yes PLN (GOI) Yes
Imperial Valley ............. 1986-96 Yes Edison No
Saranac ..................... 1994 Yes NYSEG No
Power Resources ............. 1988 Yes TUEC No
NorCon ...................... 1992 Yes NIMO No
Yuma ........................ 1994 Yes SDG&E No
Roosevelt Hot Springs ....... 1984 Yes UP&L No
Desert Peak ................. 1985 Yes SPPC No
Mahanagdong ................. 1997 Yes PNOC-EDC GOP Yes
Malitbog .................... 1996-97 Yes PNOC-EDC GOP Yes
Upper Mahiao ................ 1996 Yes PNOC-EDC GOP Yes
Teesside Power Limited ..... 1993 No Various No
Total Projects in Operation
PROJECTS UNDER CONSTRUCTION
Casecnan(5) ................. 2000 Yes NIA (GOP) Yes
Dieng Unit II(4)............. 2000 Yes PLN (GOI) Yes
Patuha Unit I(4) ............ 2000 Yes PLN (GOI) Yes
Viking ...................... 1999 No Northern No
Total Projects Under
Construction ...............
AWARDED AND OTHER
DEVELOPMENT PROJECTS(5)
Salton Sea Unit 5/Zinc
Extraction ................. 2000 Yes TBD No
Telephone Flat .............. 2000 Yes BPA No
MEC Merchant Plant........... 2000 Yes TBD No
Exeter Power Limited ........ 1999 No Northern No
Total Awarded and Other
Projects ...................
Total Power Generation
Projects ...................
</TABLE>
- ------------
(1) The Company operates all such projects other than Teesside Power
Limited.
S-27
<PAGE>
(2) 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.
(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") (NIA also purchases water from this facility), Northern
Electric plc ("Northern"). The Government of the Philippines
undertaking supports PNOC-EDC's and NIA's respective obligations.
Southern California Edison Company ("Edison"); San Diego Gas &
Electric Company ("SDE&G"); Utah Power & Light Company ("UP&L");
Sierra Pacific Power Company ("SPPC"); Bonneville Power
Administration ("BPA"); New York State Electric & Gas Corporation
("NYSEG"); Texas Utilities Electric Company ("TUEC"); and Niagara
Mohawk Power Corporation ("NIMO").
(4) The total contracts for Dieng and Patuha cover 400 MW each. The
Government of Indonesia is not making payments on Dieng I and not
otherwise honoring these contracts, which are the subject of
international arbitration. The Company believes it has fully reserved
for the Indonesian exposure as part of the $87,000 1997 asset
impairment charge.
(5) Significant contingencies exist in respect of awards, including
without limitation, the need to obtain financing, permits and
licenses, and the completion of construction. The Company is also
pursuing a number of other power projects which are in the
preliminary stage of development.
THE COMPANY'S PRODUCING GAS FIELD OPERATIONS AND FIELDS IN DEVELOPMENT
CE Gas UK Limited. CE Gas UK Limited ("CE Gas") is a gas exploration and
production company which is focused on developing integrated upstream gas
projects. Its "upstream gas" business consists of the exploration,
development and production, including transportation and storage, of gas for
delivery to a point of sale into either a gas supply market or a power
generation facility. CE Gas holds various producing interests in the southern
basin of the United Kingdom sector of the North Sea, as indicated below. Also
as is more fully discussed below, CE Gas has recently been involved in
certain gas development and exploration activities relating to a large gas
field prospect in Poland and the Gingin and Yolla fields in Australia.
The Company's Producing Gas Field Operations and Fields in Development
<TABLE>
<CAPTION>
SHARE OF
PROVEN RESERVES
PRODUCING GAS FIELDS BCF(1) % WORKING INTEREST LOCATION
------------------ --------------- ------------- -------------------------------
<S> <C> <C> <C>
Windermere 14.1 20% U.K. Offshore (North Sea)
Victor 11.4 5% U.K. Offshore (North Sea)
Schooner 10.9 2% U.K. Offshore (North Sea)
Johnston field 20.5 18% U.K. Offshore (North Sea)
FIELDS IN
DEVELOPMENT(2) SIZE KM(2)
- ----------------------- --------------------
Gingin Concession 2,960 30%(3) S.W. Australia Onshore (Perth Basin)
Yolla 550 20% S.E. Australia (Offshore) Tasmania
Pila Concession 13,000(4) 100% N.W. Poland (Polish Trough)
</TABLE>
- ------------
(1) Gas reserves in Billion cubic feet (or "Bcf") as of December 31, 1997.
The classification "Proven" means reserves which geophysical,
geological and engineering data indicate to be in place or recoverable
(as the case may be) to a high degree of certainty (90% probability the
reserves will exceed the estimate).
(2) No current Proven reserves.
(3) Currently CE Gas beneficially owns approximately 30% of Gingin
Concession with a right to earn up to a 50% working interest.
(4) Subject to 25% relinquishment after every 2 years during the 8 year
contract term (which commenced in 1997) based on work program results.
S-28
<PAGE>
DESCRIPTION OF THE SECURITIES
The following description of the particular terms of the Securities
supplements and, to the extent inconsistent therewith, replaces the
description of the general terms of the Debt Securities set forth under the
heading "Description of Debt Securities" in the accompanying Prospectus. The
following description does not purport to be complete and is qualified in its
entirety by reference to the description in the accompanying Prospectus and
to the instruments referred to therein. The Securities will be issued
pursuant to an Indenture dated as of October 15, 1997, as supplemented by a
Second Supplemental Indenture to be dated as of September 22, 1998, between
CalEnergy and IBJ Schroder Bank & Trust Company, as trustee (the "Trustee")
(as so supplemented, the "Indenture"). The Indenture is referred to in the
Prospectus as the "Senior Debt Indenture." The Securities are "Senior Debt
Securities" as that term is used in the Prospectus and are also referred to
in the Prospectus as the "Offered Debt Securities." Provisions of the Senior
Note Indenture are more fully described under the caption "Description of
Debt Securities" in the accompanying Prospectus. Capitalized words not
defined herein are used as defined in the accompanying Prospectus.
GENERAL
The Securities will be senior unsecured obligations of CalEnergy, will
rank pari passu with all other senior unsecured indebtedness of CalEnergy,
and will be limited to $1,400,000,000 in aggregate principal amount.
The 2003 Notes will bear interest at the rate of 6.96% per annum and will
mature on September 15, 2003. The 2005 Notes will bear interest at the rate
of 7.23% per annum and will mature on September 15, 2005. The 2008 Notes will
bear interest at the rate of 7.52% per annum and will mature on September 15,
2008. The Bonds will bear interest at the rate of 8.48% per annum and will
mature on September 15, 2028. Interest on the Securities will be payable
semi-annually in arrears on each March 15 and September 15, commencing March
15, 1999, to the Holders thereof at the close of business on the preceding
March 1 and September 1, respectively. Interest on the Securities will be
computed on the basis of a 360-day year of twelve 30-day months.
The Securities will be issued without coupons and in fully registered form
only in denominations of $1,000 and integral multiples thereof.
CalEnergy 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 the accompanying Prospectus. In addition, if
Sections 13 and 15(d) cease to apply to CalEnergy, CalEnergy will covenant in
the Indenture to file comparable reports and information with the Trustee and
the Commission, and mail such reports and information to holders of
Securities at their registered addresses, for so long as any Securities
remain outstanding.
OPTIONAL REDEMPTION
The Securities are subject to optional redemption, in whole or in part,
pro rata at par plus accrued interest to the redemption date plus a premium
calculated to "make whole" to comparable U.S. Treasury securities plus (i) 25
basis points in the case of the 2003 Notes, (ii) 37.5 basis points in the
case of the 2005 Notes, (iii) 37.5 basis points in the case of the 2008 Notes
and (iv) 50 basis points in the case of the Bonds.
SINKING FUND
The Securities will not be subject to any mandatory sinking fund.
RANKING
The Securities will be general, unsecured senior obligations of CalEnergy
and will rank pari passu in right of payment with all other existing and
future senior unsecured obligations of CalEnergy and senior in right of
payment to all existing and, to the extent permitted under the Indenture,
future subordinated indebtedness of CalEnergy. The Securities will be
effectively subordinated to all existing and future secured indebtedness of
CalEnergy and to all indebtedness and other liabilities of CalEnergy's
subsidiaries, projects and joint ventures to the extent of the assets of such
entities. At June 30, 1998, on a pro forma basis, after giving effect to the
MidAmerican Merger, the Equity Offering, the Non-Recourse
S-29
<PAGE>
Financing, and the Securities Offering and the use of the net proceeds
therefrom, CalEnergy would have had $200 million of secured limited recourse
parent company indebtedness (of which $0 is currently recourse to CalEnergy)
and approximately $5,033 million of indebtedness that represented the
Company's proportionate share of project and joint venture and subsidiary
debt, all such debt would be effectively senior to the Securities, and
approximately $575 million of indebtedness that would be pari passu with the
Securities. See "Capitalization."
CHANGE IN COVENANTS WHEN SECURITIES RATED INVESTMENT GRADE
Following the first date upon which the Securities are rated Baa3 or
better by Moody's Investors Service, Inc., BBB-or better by Standard & Poor's
Corporation and BBB-or better by Duff & Phelps Credit Rating Co. (or, in any
case, if such person ceases to rate the Securities for reasons outside the
control of the Company, the equivalent investment grade credit rating from
any other "nationally recognized statistical rating organization" (within the
meaning of Rule 15c3-1(c)(2)(vi)(F) under the Securities Exchange Act of
1934) selected by the Company as a replacement rating agency) (the "Rating
Event Date") (and provided no Event of Default or event which with notice or
passage of time would constitute an Event of Default shall exist on the
Rating Event Date), the provisions described under "Mergers, Consolidations
and Sales of Assets" in the Prospectus and the covenants specifically listed
and described under "Certain Covenants" in the accompanying Prospectus (other
than "--Purchase of Debt Securities Upon a Change in Control" in the
accompanying Prospectus) will no longer be applicable to the Securities and
in their place the covenants and provisions described below under
"Restrictions on Liens" and "Consolidation, Merger, Sale of Assets" will be
applicable. There can be no assurance that a Rating Event Date will occur or,
if one occurs, that the Securities will continue to maintain an investment
grade rating. In the event that subsequent to a Rating Event Date an Event of
Default or event which with notice or passage of time would constitute an
Event of Default shall exist with respect to the Securities or the Securities
shall thereafter be rated less than Baa3 by Moody's Investors Service, Inc.,
less than BBB-by Standard & Poor's Corporation and less than BBB-by Duff &
Phelps Credit Rating Co. (or such other rating agency selected by the Company
as aforesaid) the provisions and covenants contained in the Indenture at the
time of the issuance of the Securities that cease to be applicable after the
Rating Event Date will not be reinstated. See "Description of Debt
Securities--Certain Covenants" in the accompanying Prospectus.
Restrictions on Liens
Following the Rating Event Date and so long as any of the Securities are
outstanding, CalEnergy shall not pledge, mortgage, hypothecate or permit to
exist any mortgage, pledge or other lien upon any property or assets at any
time directly owned by CalEnergy to secure any indebtedness for money
borrowed which is incurred, issued, assumed or guaranteed by CalEnergy
("Indebtedness"), without making effective provisions whereby the Securities
shall be equally and ratably secured with any and all such Indebtedness and
with any other Indebtedness similarly entitled to be equally and ratably
secured; provided however, that this restriction shall not apply to or
prevent the creation or existence of: (i) liens existing on the Rating Event
Date; (ii) purchase money liens which do not exceed the cost or value of the
purchased property or assets; (iii) liens not to exceed 10% of Consolidated
Net Tangible Assets and (iv) liens on property or assets granted in
connection with extending, renewing, replacing or refinancing in whole or in
part the Indebtedness (including, without limitation, increasing the
principal amount of such Indebtedness) secured by liens described in the
foregoing clauses (i) through (iii), provided that the liens in connection
with any such extension, renewal, replacement or refinancing will be limited
to the specific property or assets that was subject to the original lien.
In the event that CalEnergy shall propose to pledge, mortgage or
hypothecate or permit to existing any pledge, mortgage or other lien upon any
property or assets at any time directly owned by it to secure any
Indebtedness, other than as permitted by clauses (i) through (iv) of the
previous paragraph CalEnergy will give prior written notice thereof to the
Trustee and CalEnergy will, prior to or simultaneously with such pledge,
mortgage or hypothecation, effectively secure all the Securities equally and
ratably with such Indebtedness.
The foregoing covenant will not restrict the ability of CalEnergy's
Subsidiaries and Affiliates to pledge, mortgage, hypothecate or permit to
exist any mortgage, pledge or lien upon their property or assets, in
connection with project financings or otherwise.
S-30
<PAGE>
Consolidation, Merger, Sale of Assets
Following the Rating Event Date, and so long as any of the Securities are
outstanding, CalEnergy shall not consolidate with or merge with or into any
other Person, or convey, transfer or lease its consolidated properties and
assets substantially as an entirety to any Person, or permit any Person to
merge into or consolidate with CalEnergy, unless (i) CalEnergy is the
surviving or continuing corporation or the surviving or continuing
corporation or purchaser or lessee is a corporation incorporated under the
laws of the United States of America, one of the States thereof or the
District of Columbia or Canada and assumes CalEnergy's obligations under the
Securities and under the Indenture and (ii) immediately before and after such
transaction, no Event of Default shall have occurred and be continuing.
Except for a sale of the consolidated properties and assets of CalEnergy
substantially as an entirety as provided above, and other than properties or
assets required to be sold to conform with laws or governmental regulations,
CalEnergy will not be permitted, directly or indirectly, to sell or otherwise
dispose of any of its consolidated properties or assets (other than
short-term, readily marketable investments purchased for cash management
purposes with funds not representing the proceeds of other asset sales) if on
a pro forma basis, the aggregate net book value of all such sales during the
most recent 12-month period would exceed 10% of Consolidated Net Tangible
Assets computed as of the end of the most recent quarter preceding such sale;
provided, however, that any such sales shall be disregarded for purposes of
this 10% limitation if the net proceeds are invested in properties or assets
in similar or related lines of business of CalEnergy and its Subsidiaries
and, provided further, that CalEnergy may sell or otherwise dispose of
consolidated properties and assets in excess of such 10% limitation if the
net proceeds from such sales or dispositions, which are not reinvested as
provided above, are retained by CalEnergy as cash or Cash Equivalents or used
to retire Indebtedness of CalEnergy (other than Indebtedness which is
subordinated to the Securities) and its Subsidiaries.
Events of Default / Change of Control
After the Rating Event Date, the Events of Default and Change of Control
provisions described in the Prospectus will continue to be applicable to the
Securities. See "Description of Debt Securities--Events of Default" and
"Certain Covenants--Purchase of Debt Securities Upon a Change of Control" in
the accompanying Prospectus.
Certain Defined Terms
"Consolidated Net Tangible Assets" means, as of the date of any
determination thereof, the total amount of all assets of the Company
determined on a consolidated basis in accordance with GAAP as of such date
less the sum of (a) the consolidated current liabilities of the Company
determined in accordance with GAAP and (b) assets properly classified as
Intangible Assets.
"Intangible Assets" means, as of the date of determination thereof, all
assets of the Company properly classified as intangible assets determined on
a consolidated basis in accordance with GAAP.
GLOBAL SECURITIES
The Securities will be issued in the form of Global Securities deposited
with, or on behalf of, the Depositary and registered in the name of a nominee
of the Depositary. Except under the limited circumstances described in the
Prospectus under the caption "Book-Entry System," owners of beneficial
interests in the Global Securities will not be entitled to physical delivery
of the Securities in certificated form. The Global Securities may not be
transferred except as a whole by the Depositary to a nominee of the
Depositary or by a nominee of the Depository to the Depositary or another
nominee of the Depository or by the Depositary or any nominee to a successor
of the Depositary or a nominee of such successor.
A further description of the Depositary's procedures with respect to the
Global securities is set forth in the Prospectus under the caption
"Book-Entry System."
S-31
<PAGE>
UNDERWRITING
Under the terms of and subject to the conditions contained in an
underwriting agreement (the "Underwriting Agreement"), among the Company and
each of the Underwriters named below, each of the several Underwriters has
agreed to purchase from the Company, and the Company has agreed to sell to
each Underwriter, the principal amount of Notes and Bonds set forth opposite
the name of such Underwriter below:
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
UNDERWRITERS 2003 NOTES 2005 NOTES 2008 NOTES BONDS
- -------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Credit Suisse First Boston
Corporation........................... $124,700,000 $150,800,000 $261,000,000 $275,500,000
Lehman Brothers Inc.................... 70,950,000 85,800,000 148,500,000 156,750,000
Goldman, Sachs & Co. .................. 19,350,000 23,400,000 40,500,000 42,750,000
-------------- -------------- -------------- --------------
Total ................................ $215,000,000 $260,000,000 $450,000,000 $475,000,000
============== ============== ============== ==============
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the Notes are subject to the approval of certain
legal matters by counsel and to certain other conditions and that if any of
the Securities are purchased by the Underwriters pursuant to the Underwriting
Agreement, all of the Securities agreed to be purchased by the Underwriters
pursuant to the Underwriting Agreement must be so purchased.
The Company has been advised by the Underwriters that they propose to
offer the Securities offered hereby directly to the public initially at the
public offering prices set forth on the cover page of this Prospectus
Supplement. After the initial offering to the public, the offering price may
be changed.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to
contribute to payments which the Underwriters may be required to make in
respect thereof.
The Securities are new securities for which there currently is no market.
The Company does not intend to apply for listing of the Securities on any
securities exchange. Although each Underwriter has advised the Company that
it presently intends to make a market in the Securities, none of the
Underwriters is obligated to do so and any such market-making activities may
be discontinued at any time without notice in the sole discretion of each of
the Underwriters. Accordingly, no assurance can be given as to the
development or liquidity of any market for the Securities, or, if a market
does develop, at what prices the Securities will trade. If the Underwriters
cease to act as market makers for the Securities for any reason, there can be
no assurance that another firm or person will make a market in the
Securities.
Each of the Underwriters and their affiliates have provided from time to
time, and expect to provide in the future, various investment banking and
commercial banking services for the Company, for which such Underwriters have
received and will receive customary fees and commissions. In addition, the
Underwriters also acted as financial advisors to the Company in connection
with the MidAmerican Merger.
Until the distribution of the Securities is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
to bid for and purchase Securities. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize
the price of the Securities. Such transactions may consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Securities.
In addition, if the Underwriters over-allot (i.e., if they sell more
Securities than are set forth on the cover page of this Prospectus
Supplement), and thereby create a short position in the Securities in
connection with the offering, the Underwriters may reduce that short position
by purchasing Securities in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases.
Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Securities. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
S-32
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Securities in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare
and file a prospectus with the securities regulatory authorities in each
province where trades of Securities are effected. Accordingly, any resale of
the Securities in Canada must be made in accordance with applicable
securities laws which will vary depending on the relevant jurisdiction, and
which may require resales to be made in accordance with available statutory
exemptions or pursuant to a discretionary exemption granted by the applicable
Canadian securities regulatory authority. Purchasers are advised to seek
legal advice prior to any resale of the Securities.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Securities in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from
whom such purchase confirmation is received that (i) such purchaser is
entitled under applicable provincial securities laws to purchase such
Securities without the benefit of a prospectus qualified under such
securities laws, (ii) where required by law, that such purchaser is
purchasing as principal and not as agent, and (iii) such purchaser has
reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or rescission or rights of
action under the civil liability provisions of the U.S. federal securities
laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets
of the issuer and such persons may be located outside of Canada and, as a
result, it may not be possible to satisfy a judgment against the issuer or
such persons in Canada or to enforce a judgment obtained in Canadian courts
against such issuer or such persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Securities to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Securities acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission
Blanket Order BOR #95/17, a copy of which may be obtained from the Company.
Only one such report must be filed in respect of Securities acquired on the
same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Securities should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the
Securities in their particular circumstances and with respect to the
eligibility of the Securities for investment by the purchaser under relevant
Canadian legislation.
S-33
<PAGE>
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Steven A. McArthur, Executive Vice President and General Counsel
of the Company, and by Willkie Farr & Gallagher. Certain matters will be
passed upon on behalf of the Underwriters by Skadden, Arps, Slate, Meagher &
Flom LLP. As of August 31, 1998, Mr. McArthur beneficially owned
approximately 200,000 shares of the Company's common stock.
EXPERTS
The consolidated financial statements and financial statement schedules of
the Company and its subsidiaries as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997 included in
this Prospectus Supplement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing in this Prospectus
Supplement and incorporated herein by reference and are so included in
reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
With respect to the Company's unaudited interim financial information for
the periods ended March 31, 1998 and 1997 and June 30, 1998 and 1997,
included and incorporated by reference in this Prospectus Supplement,
Deloitte & Touche LLP have applied limited procedures in accordance with
professional standards for a review of such information. However, as stated
in their reports included in the Company's Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1998 and June 30, 1998, and included herein,
they did not audit and they do not express an opinion on that interim
financial information. Accordingly, the degree of reliance on their reports
on such information should be restricted in light of the limited nature of
the review procedures applied. Deloitte & Touche LLP are not subject to the
liability provisions of Section 11 of the Securities Act for their reports on
the unaudited interim financial information because those reports are not
"reports" or a "part" of the Registration Statement prepared or certified by
an accountant within the meaning of Sections 7 and 11 of the Securities Act.
The consolidated financial statements and financial statement schedules of
MidAmerican and its subsidiaries as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997 included or
incorporated by reference in this Prospectus Supplement have been audited by
PricewaterhouseCoopers LLP (formerly Coopers & Lybrand L.L.P.), independent
auditors, as stated in their reports appearing in this Prospectus Supplement
and incorporated herein by reference and are so included and incorporated by
reference in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
S-34
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
CALENERGY COMPANY, INC.
Consolidated Financial Statements:
Independent Auditors' Report......................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 ........................ F-3
Consolidated Statements of Operations for the Three Years Ended December 31, 1997 .. F-4
Consolidated Statements of Stockholders' Equity for the Three Years Ended
December 31, 1997 .................................................................. F-5
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1997 .. F-6
Notes to Consolidated Financial Statements .......................................... F-7
Interim Consolidated Financial Statements:
Independent Accountants' Report ..................................................... F-36
Consolidated Balance Sheets, June 30, 1998 and December 31, 1997 .................... F-37
Consolidated Statements of Operations for the Three and Six Months Ended June 30,
1998 and 1997 ...................................................................... F-38
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and
1997 ............................................................................... F-39
Notes to Consolidated Financial Statements .......................................... F-40
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
MIDAMERICAN ENERGY HOLDINGS COMPANY
Consolidated Financial Statements:
Report of Independent Accountants ................................................... F-45
Consolidated Statements of Income for the Three Years Ended December 31, 1997 ...... F-46
Consolidated Balance Sheets as of December 31, 1997 and 1996 ........................ F-47
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1997 .. F-48
Consolidated Statements of Capitalization as of December 31, 1997 and 1996 ......... F-49
Consolidated Statements of Retained Earnings for the Three Years Ended
December 31, 1997 .................................................................. F-51
Notes to Consolidated Financial Statements .......................................... F-52
Interim Consolidated Financial Statements:
Consolidated Statements of Income for the Three, Six and Twelve Months Ended June
30, 1998 and 1997 .................................................................. F-77
Consolidated Statements of Comprehensive Income for the Three, Six and Twelve Months
Ended June 30, 1998 and 1997 ....................................................... F-78
Consolidated Balance Sheets as of June 30, 1998 and 1997 and December 31, 1997 ..... F-79
Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30,
1998 and 1997 ...................................................................... F-80
Notes to Consolidated Financial Statements .......................................... F-81
</TABLE>
F-1
<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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 12, 1998
F-2
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 3) ............................. $1,445,338 $ 424,500
Joint venture cash and investments ............................. 6,072 47,764
Restricted cash ................................................ 223,636 106,968
Short-term investments ......................................... 1,282 4,921
Accounts receivable ............................................ 376,745 342,307
Properties, plants, contracts and equipment, net ............... 3,528,910 3,225,496
Excess of cost over fair value of net assets acquired, net .... 1,312,788 790,920
Equity investments ............................................. 238,025 238,856
Deferred charges and other assets .............................. 354,830 448,424
------------- -------------
Total assets ................................................. $7,487,626 $5,630,156
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable ............................................... $ 173,610 $ 218,164
Other accrued liabilities ...................................... 1,106,641 668,612
Parent company debt ............................................ 1,303,845 1,146,685
Subsidiary and project debt .................................... 2,189,007 1,678,392
Deferred income taxes .......................................... 509,059 469,199
------------- -------------
Total liabilities ............................................ 5,282,162 4,181,052
------------- -------------
Deferred income ................................................ 40,837 29,067
Commitments and contingencies (Notes 3, 18, 19 and 20)
Company--obligated mandatorily redeemable convertible preferred
securities of subsidiary trusts ............................... 553,930 103,930
Preferred securities of subsidiary ............................. 56,181 136,065
Minority interest .............................................. 134,454 299,252
Common stock and options subject to redemption ................. 654,736 --
Stockholders' equity:
Preferred stock--authorized 2,000 shares, no par value ........ -- --
Common stock--par value $.0675 per share, authorized 180,000
shares, issued 82,980 and 63,747 shares, outstanding 81,322
and 63,448 shares, respectively ............................... 5,602 4,303
Additional paid in capital ..................................... 1,261,081 563,567
Retained earnings .............................................. 213,493 297,520
Cumulative effect of foreign currency translation adjustment .. (3,589) 29,658
Common stock and options subject to redemption ................. (654,736) --
Treasury stock--1,658 and 299 common shares at cost ........... (56,525) (8,787)
Unearned compensation--restricted stock ........................ -- (5,471)
------------- -------------
Total stockholders' equity ................................... 765,326 880,790
------------- -------------
Total liabilities and stockholders' equity ................... $7,487,626 $5,630,156
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Operating revenue ...................................... $2,166,338 $518,934 $335,630
Interest and other income .............................. 104,573 57,261 63,093
------------- ----------- -----------
Total revenues ....................................... 2,270,911 576,195 398,723
------------- ----------- -----------
Costs and expenses:
Cost of sales .......................................... 1,055,195 31,840 --
Operating expense ...................................... 345,833 132,655 103,602
General and administration ............................. 52,705 21,451 23,376
Depreciation and amortization .......................... 276,041 118,586 72,249
Loss on equity investment in Casecnan .................. 5,972 5,221 362
Interest expense ....................................... 296,364 165,900 134,637
Less interest capitalized .............................. (45,059) (39,862) (32,554)
Non-recurring charge--asset valuation impairment ...... 87,000 -- --
------------- ----------- -----------
Total costs and expenses ............................. 2,074,051 435,791 301,672
------------- ----------- -----------
Income before provision for income taxes ............... 196,860 140,404 97,051
Provision for income taxes ............................. 99,044 41,821 30,631
------------- ----------- -----------
Income before minority interest ........................ 97,816 98,583 66,420
Minority interest ...................................... 45,993 6,122 3,005
------------- ----------- -----------
Income before extraordinary item ....................... 51,823 92,461 63,415
Extraordinary item, net of minority interest of $58,222 (135,850) -- --
------------- ----------- -----------
Net income (loss) ...................................... (84,027) 92,461 63,415
Preferred dividends .................................... -- -- 1,080
------------- ----------- -----------
Net income (loss) available to common stockholders .... $ (84,027) $ 92,461 $ 62,335
============= =========== ===========
Income per share before extraordinary item ............. $ 0.77 $ 1.69 $ 1.32
------------- ----------- -----------
Extraordinary item ..................................... $ (2.02) $ -- $ --
------------- ----------- -----------
Net income (loss) per share ............................ $ (1.25) $ 1.69 $ 1.32
============= =========== ===========
Income per share before extraordinary item--diluted ... $ 0.75 $ 1.54 $ 1.22
------------- ----------- -----------
Extraordinary item--diluted ............................ $ (1.97) $ -- $ --
------------- ----------- -----------
Net income (loss) per share--diluted ................... $ (1.22) $ 1.54 $ 1.22
============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
DOLLARS AND SHARES IN THOUSANDS
<TABLE>
<CAPTION>
COMMON
STOCK
& OPTIONS
OUTSTANDING ADDITIONAL FOREIGN SUBJECT
COMMON COMMON PAID-IN RETAINED CURRENCY TO TREASURY UNEARNED
SHARES STOCK CAPITAL EARNINGS ADJUST. REDEMPTION STOCK COMPENSATION TOTAL
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31,
1994 ................ 31,849 $2,407 $ 100,421 $142,937 $ -- $ -- $(65,774) $ -- $ 179,991
Equity offering ...... 18,170 1,004 240,825 -- -- -- 56,801 -- 298,630
Restricted stock ..... 500 -- 848 -- -- -- 8,652 (9,500) --
Exercise of stock
options and other
equity transactions . 176 10 446 -- -- -- 563 2,494 3,513
Purchase of treasury
stock ............... (102) -- -- -- -- -- (1,590) -- (1,590)
Preferred stock
dividends, Series C,
including cash
distribution of $43 . -- -- -- (1,293) -- -- -- -- (1,293)
Tax benefit from stock
plan ................ -- -- 866 -- -- -- -- -- 866
Net income before
preferred dividends . -- -- -- 63,415 -- -- -- -- 63,415
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Balance December 31,
1995 ................ 50,593 3,421 343,406 205,059 -- -- (1,348) (7,006) 543,532
Exercise of stock
options and other
equity transactions . 5,263 337 53,030 -- -- -- 4,569 1,535 59,471
Purchase of treasury
stock ............... (472) -- -- -- -- -- (12,008) -- (12,008)
Conversion of debt ... 8,064 545 164,912 -- -- -- -- -- 165,457
Tax benefit from stock
plan ................ -- -- 2,219 -- -- -- -- -- 2,219
Foreign currency
translation
adjustment .......... -- -- -- -- 29,658 -- -- -- 29,658
Net income ........... -- -- -- 92,461 -- -- -- -- 92,461
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Balance December 31,
1996 ................ 63,448 4,303 563,567 297,520 29,658 -- (8,787) (5,471) 880,790
Equity offering ...... 19,100 1,289 697,315 -- -- -- -- -- 698,604
Exercise of stock
options and other
equity transactions . 396 10 (2,757) -- -- -- 7,767 5,471 10,491
Purchase of treasury
stock ............... (1,622) -- -- -- -- -- (55,505) -- (55,505)
Common stock and
options subject to
redemption .......... -- -- -- -- -- (654,736) -- -- (654,736)
Tax benefit from stock
plan ................ -- -- 2,956 -- -- -- -- -- 2,956
Foreign currency
translation
adjustment .......... -- -- -- -- (33,247) -- -- -- (33,247)
Net loss ............. -- -- -- (84,027) -- -- -- -- (84,027)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Balance December 31,
1997 ................ 81,322 $5,602 $1,261,081 $213,493 $ (3,589) $(654,736)$(56,525) $ -- $ 765,326
========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................. $ (84,027) $ 92,461 $ 63,415
Adjustments to reconcile net cash flow from operating activities:
Non-recurring charge-asset valuation impairment .................. 87,000 -- --
Depreciation and amortization .................................... 239,234 109,447 65,244
Amortization of excess of cost over fair value of net assets
acquired ........................................................ 36,807 9,139 7,005
Amortization of original issue discount .......................... 2,160 50,194 45,409
Amortization of deferred financing costs ......................... 26,161 9,677 8,979
Amortization of unearned compensation ............................ 5,471 1,535 2,494
Provision for deferred income taxes .............................. 55,584 12,252 13,983
Loss (income) on equity investments .............................. (16,068) (910) 362
Income (loss) applicable to minority interest .................... (35,387) 1,431 3,005
Changes in other items: ..........................................
Accounts receivable .............................................. (34,146) (13,936) 213
Accounts payable, accrued liabilities and deferred income ...... 29,799 2,093 12,103
------------- ----------- -------------
Net cash flows from operating activities ......................... 312,588 273,383 222,212
------------- ----------- -------------
Cash flows from investing activities:
Purchase of Northern, Falcon Seaboard, Partnership Interest and
Magma, net of cash acquired ...................................... (632,014) (474,443) (907,614)
Distributions from equity investments ............................. 23,960 8,222 --
Capital expenditures relating to operating projects ............... (194,224) (24,821) (27,120)
Philippine construction............................................ (27,334) (167,160) (289,655)
Indonesian and other development .................................. (155,963) (81,068) (8,973)
Salton Sea IV construction......................................... -- (63,772) (62,430)
Pacific Northwest, Nevada, and Utah exploration costs ............ (3,128) (4,885) (10,445)
Decrease in short-term investments ................................ 2,880 33,998 80,565
Decrease (increase) in restricted cash ............................ (116,668) 63,175 (17,452)
Other ............................................................. 60,390 (2,910) 11,514
Investment in Casecnan ............................................ -- -- (61,177)
------------- ----------- -------------
Net cash flows from investing activities ......................... (1,042,101) (713,664) (1,292,787)
------------- ----------- -------------
Cash flows from financing activities:
Proceeds from sale of common and treasury stock and exercise of
stock options .................................................... 703,624 54,935 299,649
Proceeds from convertible preferred securities of subsidiary
trusts............................................................ 450,000 103,930 --
Proceeds from issuance of parent company debt ..................... 350,000 324,136 200,000
Repayment of parent company debt .................................. (100,000) -- --
Net proceeds from revolver......................................... (95,000) 95,000 --
Proceeds from subsidiary and project debt ......................... 795,658 428,134 654,695
Repayments of subsidiary and project debt ......................... (271,618) (210,892) (176,664)
Deferred charges relating to debt financing ....................... (48,395) (36,010) (34,733)
Purchase of treasury stock ........................................ (55,505) (12,008) (1,590)
Other ............................................................. 13,142 10,756 (29,169)
------------- ----------- -------------
Net cash flows from financing activities .......................... 1,741,906 757,981 912,188
------------- ----------- -------------
Effect of exchange rate changes ................................... (33,247) 4,860 --
------------- ----------- -------------
Net increase (decrease) in cash and investments ................... 979,146 322,560 (158,387)
------------- ----------- -------------
Cash and cash equivalents at beginning of year..................... 472,264 149,704 308,091
------------- ----------- -------------
Cash and cash equivalents at end of year .......................... $ 1,451,410 $ 472,264 $ 149,704
============= =========== =============
Supplemental Disclosures:
Interest paid (net of amounts capitalized) ........................ $ 316,060 $ 92,829 $ 50,840
============= =========== =============
Income taxes paid ................................................. $ 44,483 $ 23,211 $ 14,812
============= =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
Dollars, Pounds and Shares in Thousands, Except Per Share Amounts
1. BUSINESS
CalEnergy Company, Inc. (the "Company") is a United States-based global
power company which generates, distributes and supplies electricity to
utilities, government entities, retail customers and other customers located
throughout the world. The Company was founded in 1971 and through its
subsidiaries is primarily engaged in the development, ownership and operation
of environmentally responsible independent power production facilities
worldwide utilizing geothermal, natural gas, hydroelectric and other energy
sources. In addition, the Company is engaged in the distribution and supply
of electricity to approximately 1.5 million customers primarily in northeast
England as well as the generation and supply of electricity (together with
other related business activities) throughout England and Wales. The Company
is also active in supplying gas and has applications for over 400,000
customers in those areas of England, Wales and Scotland where retail gas
competition has been introduced.
The Company has organized several partnerships and joint ventures (herein
referred to as the "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. In 1992, the Company entered
into the natural gas-fired electrical generation market through the purchase
of a development opportunity in Yuma, Arizona which commenced commercial
operation in 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
1995, the Company acquired Magma Power Company ("Magma"). Magma's operating
assets included four projects referred to as the Partnership Project in which
Magma had a 50% interest, and three projects referred to as the Salton Sea
Project of which Magma owned 100%. A fourth project included in the Salton
Sea Project was constructed after the acquisition of Magma and commenced
operations in June 1996. In addition, in April 1996, the Company acquired the
remaining 50% interest in the Partnership Project. In August 1996, the
Company acquired Falcon Seaboard Resources, Inc. ("Falcon Seaboard") which
includes significant interests in three operating gas-fired cogeneration
facilities and a related natural gas pipeline. On December 24, 1996, CE
Electric UK plc ("CE Electric"), which in 1997 was 70% owned indirectly by
the Company and 30% owned indirectly by Peter Kiewit Sons', Inc. ("PKS"),
acquired majority ownership of the outstanding ordinary share capital of
Northern Electric plc ("Northern") pursuant to a tender offer ("Tender
Offer"). As of March 18, 1997, CE Electric effectively owned 100% of Northern
ordinary shares.
Northern is one of the twelve regional electricity companies ("RECs")
which came into existence as a result of the restructuring and subsequent
privatization of the electricity industry in the United Kingdom in 1990.
Northern is primarily engaged in the distribution and supply of electricity.
Northern was granted a Public Electricity Supply ("PES") license under the
Electricity Act to supply electricity in Northern's Authorized Area
("Authorized Area"). Northern's Authorized Area covers approximately 14,400
square kilometers with a population of approximately 3.2 million people and
includes the counties of Northumberland, Tyne and Wear, Durham, Cleveland and
North Yorkshire. Northern supplies electricity outside its Authorized Area
pursuant to second tier licenses. Northern also is involved in non-regulated
activities, including the supply of gas within England, Wales and Scotland,
the generation of electricity, electrical appliance retailing and gas
exploration and production.
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
partnerships and joint ventures in which it has an undivided interest in the
assets and is proportionally liable for its share of liabilities. Other
investments and corporate joint ventures where the Company has the ability to
exercise significant influence are accounted for under the equity method of
accounting. Investments, where the Company's ability to
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
influence is limited, are accounted for under the cost method of accounting.
All significant inter-enterprise transactions and accounts have been
eliminated. The results of operations of the Company include the Company's
proportionate share of results of operations of entities acquired as of the
date of each acquisition.
CASH EQUIVALENTS, INVESTMENTS AND RESTRICTED CASH
The Company considers all investment instruments purchased with an
original maturity of three months or less to be cash equivalents. Restricted
cash is not considered a cash equivalent.
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
contributions and debt service reserve requirements relating to the projects.
These funds are restricted by their respective project debt agreements to be
used only for the related project.
At December 31, 1997, 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.
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, between
10 and 30 years. 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 Northern, Falcon Seaboard, Partnership Interest and Magma acquisitions
by the Company have been accounted for as purchase business combinations. All
identifiable assets acquired and liabilities assumed were assigned a portion
of the cost of acquiring the respective companies equal to their fair values
at the date of the acquisition and include the following:
Property and equipment of Northern is depreciated using a systematic
method, which approximates the straight line method over the estimated
useful lives of the related assets which range from 3-40 years.
Power sales agreements are amortized separately over (1) the remaining
portion of the scheduled price periods of the power sales agreements and
(2) for the Partnership Interest and Magma acquisitions the 20 year
avoided cost periods of the power sales agreements using the straight line
method.
Capitalized costs for gas reserves, other than costs of unevaluated
exploration projects and projects awaiting development consent, are depleted
using the unit of production method. Depletion is calculated based on
hydrocarbon reserves of properties in the evaluated pool estimated to be
commercially recoverable and include anticipated future development costs in
respect of those reserves.
Expenditures on major information technology systems are capitalized and
depreciated on a straight line basis over the useful life of the developed
systems which range from 3-10 years.
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 and natural
gas resources. All such costs, which include dry
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
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.
EXCESS OF COST OVER FAIR VALUE
Total acquisition costs in excess of the fair values assigned to the net
assets acquired are amortized over a 40 year period for the Northern and
Magma acquisitions and a 25 year period for the Falcon Seaboard acquisition,
both using the straight line method.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss would
be recognized whenever evidence exists that the carrying value is not
recoverable.
DEFERRED WELL AND REWORK COSTS
Well rework costs are deferred and amortized over the estimated period
between reworks. These deferred costs, net of accumulated amortization, are
$5,421 and $8,371 at December 31, 1997 and 1996, respectively, and are
included in other assets.
REVENUE RECOGNITION
Revenues are recorded based upon service rendered and electricity and
steam delivered, distributed or supplied to the end of the month. Where there
is an overrecovery of supply or distribution business revenues against the
maximum regulated amount, revenues are deferred equivalent to the
overrecovered amount. The deferred amount is deducted from revenue and
included in other liabilities. Where there is an underrecovery, no
anticipation of any potential future recovery is made.
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 using the effective interest method.
DEFERRED INCOME TAXES
The Company recognizes deferred tax assets and liabilities based on the
difference between the financial statement and tax bases of assets and
liabilities using estimated tax rates in effect for the year in which the
differences are expected to reverse. The Company intends to repatriate
earnings of foreign subsidiaries in the foreseeable future. As a result,
deferred income taxes are provided for retained earnings of international
subsidiaries and corporate joint ventures which are intended to be remitted.
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.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
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.
PENSIONS
Northern contributes to the Electricity Supply Pension Scheme and
contributions to the scheme are charged to the income statement. The capital
cost of ex gratia and supplementary pensions are normally charged to the
income statement in the period in which they are granted. Variations in
pension cost, which are identified as a result of actuarial
valuations/reviews, are amortized over the average expected remaining working
lives of employees in proportion to their expected payroll costs. Differences
between the amounts funded and the amounts charged to the profit and loss
account are treated as either provisions or prepayments in the balance sheet.
NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
adopted Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share." SFAS 128 replaced primary and fully diluted earnings
per share with basic and diluted earnings per share, respectively.
Basic and diluted earnings per common share are based on the weighted
average number of common shares outstanding during the period. Diluted
earnings per common share also assumes the conversion of the convertible
preferred securities of subsidiary trusts, when dilutive, and the exercise of
all dilutive stock options outstanding at their option prices, with the
option exercise proceeds and tax benefits used to repurchase shares of common
stock at the average market price using the treasury stock method.
A reconciliation of basic earnings per share before extraordinary item to
diluted earnings per share before extraordinary item follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ------------------------------ ------------------------------
PER-SHARE PER-SHARE PER-SHARE
----------------------------- ------------------------------ ------------------------------
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
---------- -------- -------- ----------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per share
before extraordinary item .. $51,823 67,268 $0.77 $ 92,461 54,739 $1.69 $62,335 47,249 $1.32
Effect of dilutive securities
Stock options ............... -- 1,418 -- 1,881 -- 1,688
Convertible preferred
securities of subsidiary
trusts(1) ................... -- -- 2,840 2,517 -- --
Convertible debt ............. -- -- 4,968 5,935 6,038 7,258
---------- -------- -------- ----------- -------- -------- ---------- -------- --------
Diluted earnings per share
before extraordinary item .. $51,823 68,686 $0.75 $100,269 65,072 $1.54 $68,373 56,195 $1.22
========== ======== ======== =========== ======== ======== ========== ======== ========
</TABLE>
- ------------
(1) The convertible preferred securities of subsidiary trusts were
antidilutive in 1997.
RECLASSIFICATION
Certain amounts in the fiscal 1996 and 1995 financial statements and
supporting footnote disclosures have been reclassified to conform to the
fiscal 1997 presentation. Such reclassification did not impact previously
reported net income or retained earnings.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB adopted SFAS No. 130, "Reporting Comprehensive
Income", and No. 131, "Disclosures about Segments of an Enterprise and
Related Information". SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. SFAS 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. Both statements will be
effective for the Company beginning January 1, 1998. The Company has not yet
determined the impact of these statements on current disclosures.
3. KDG ACQUISITION
On September 11, 1997, the Company signed a definitive agreement with
Kiewit Diversified Group ("KDG"), a wholly owned subsidiary of PKS, for the
Company to purchase KDG's ownership interest in various project partnerships
and CalEnergy common shares (the "KDG Acquisition"). Accordingly, common
stock and options subject to redemption have been reclassified in the
consolidated balance sheet.
KDG's ownership interest in CalEnergy comprised approximately 20,231
shares of common stock (assuming exercise by KDG of one million options to
purchase CalEnergy shares), the 30% interest in Northern Electric, as well as
the following minority project interests: Mahanagdong (45%), Casecnan (35%),
Dieng (47%), Patuha (44%) and Bali (30%) and other interests in international
development stage projects.
CalEnergy paid $1,159,215 for the KDG Acquisition and final closing of the
transaction occurred in January 1998. CalEnergy funded this acquisition with
available cash and the net proceeds of the equity offering and the debt
offering completed in October 1997.
4. ACQUISITIONS
NORTHERN
On December 24, 1996, CE Electric UK plc ("CE Electric"), which in 1997
was 70% owned indirectly by the Company and 30% owned indirectly by PKS,
acquired majority ownership of the outstanding ordinary share capital of
Northern Electric plc ("Northern") pursuant to a tender offer (the "Northern
Tender Offer") commenced in the United Kingdom on November 5, 1996. As of
March 18, 1997, CE Electric effectively acquired the remaining ordinary
shares and owned 100% of Northern's ordinary shares.
The Company and PKS contributed to CE Electric approximately $410,000 and
$176,000 respectively, of the approximately $1,200,000 required to acquire
all of Northern's ordinary and preference shares in connection with the
Tender Offer. The Company obtained such funds from cash on hand, short-term
borrowings, and borrowings of approximately $100,000 under a Credit Agreement
entered into with Credit Suisse on October 28, 1996 (the "CalEnergy Credit
Facility"). The Company has repaid the entire CalEnergy Credit Facility
through the use of proceeds of the Trust Securities offering. The remaining
funds necessary to consummate the Tender Offer were provided from a pounds
sterling560,000 Term Loan and Revolving Facility Agreement, dated October 28,
1996 (the "U.K. Credit Facility"). CE Electric has repaid the entire U.K.
Credit Facility through the use of proceeds of the senior note and sterling
bond offerings of CE Electric UK Funding Company.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
The Northern acquisition has been accounted for as a purchase business
combination. All identifiable assets acquired and liabilities assumed were
assigned a portion of the cost of acquiring Northern, equal to their fair
values at the date of the acquisition. Minority interest was recorded at
historical cost.
In 1993, Northern entered into a contract relating to the purchase of 400
MW of capacity from a 15.4% owned related party, Teesside Power Limited
("Teesside"), for a period of 15 years beginning April 1, 1993. The contract
sets escalating purchase prices at predetermined levels. Currently the
escalating contract prices exceed those paid by the Company to the
electricity pool (the "Pool") which is operated by the National Grid Group.
However, under current price cap regulation expected to expire in 1998 the
Company is able to recover these costs. For the period after the price cap
regulation ends, the Company has established a liability for the estimated
loss as a result of this contract.
Northern utilizes contracts for differences ("CFDs") to mitigate its
exposure to volatility in the prices of electricity purchased through the
Pool. Such contracts allow the Company to effectively convert the majority of
its anticipated Pool purchases from market to fixed prices. As of December
31, 1997, CFDs were in place to hedge a portion of electricity purchases of
approximately 55,000 GWh through the year 2008.
FALCON SEABOARD
On August 7, 1996 the Company completed the acquisition of Falcon Seaboard
for a cash price of $229,500 including acquisition costs. Through the
acquisition, the Company indirectly acquired significant ownership interests
in three operating gas-fired cogeneration facilities and a related
natural-gas pipeline. The plants are located in Texas, Pennsylvania and New
York and total 520 MW in capacity.
The Falcon Seaboard acquisition has been accounted for as a purchase
business combination. All identifiable assets acquired and liabilities
assumed were assigned a portion of the cost of acquiring Falcon Seaboard,
equal to their fair values at the date of the acquisition.
EDISON MISSION ENERGY'S PARTNERSHIP INTEREST
On April 17, 1996 the Company completed the acquisition of Edison Mission
Energy's Partnership Interests in four geothermal operating facilities in
California for a cash purchase price of $71,000 including acquisition costs.
The four projects, Vulcan, Hoch (Del Ranch), Leathers and Elmore, are located
in the Imperial Valley of California. Prior to this transaction, the Company
was a 50% owner of these facilities.
The Partnership Interest acquisition has been accounted for as a purchase
business combination. All identifiable assets acquired and liabilities
assumed were assigned a portion of the cost of acquiring the Partnership
Interest, equal to their fair values at the date of the acquisition.
Unaudited pro forma combined revenue, income and basic earnings per share
before extraordinary item of the Company, Northern, Falcon Seaboard, and the
Partnership Interest for the twelve months ended December 31, 1997 and 1996,
as if the acquisitions had occurred at the beginning of 1996 after giving
effect to certain pro forma adjustments related to the acquisitions were
$2,270,911, $52,430, and $0.78 compared to $2,162,381, $64,811 and $1.18,
respectively. Excluding the $87,000, $1.29 per share, non-recurring charge,
pro forma income before extraordinary item would have been $139,430 in 1997.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
5. PROPERTIES, PLANTS, CONTRACTS AND EQUIPMENT
Properties, plants, contracts and equipment comprise the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -----------
<S> <C> <C>
Operating project costs:
Distribution system ............................ $1,237,743 $ 928,575
Power plants ................................... 1,464,885 1,277,663
Wells and resource development ................. 395,314 377,731
Power sales agreements ......................... 227,535 227,535
Other assets ................................... 254,973 176,483
------------- -----------
Total operating assets ......................... 3,580,450 2,987,987
Less accumulated depreciation and amortization (497,832) (271,216)
------------- -----------
Net operating assets ........................... 3,082,618 2,716,771
------------- -----------
Mineral and gas reserves, net .................. 297,048 270,851
Construction in progress:
Malitbog ...................................... -- 152,411
Indonesia ..................................... 140,172 81,875
Other development .............................. 9,072 3,588
------------- -----------
Total........................................... $3,528,910 $3,225,496
============= ===========
</TABLE>
COSO PROJECT OPERATING FACILITIES
The Coso Project operating facilities comprise the Company's proportionate
share of the assets of three of its Coso Joint Ventures: Coso Finance
Partners ("Navy I Joint Venture"), Coso Energy Developers ("BLM Joint
Venture"), and Coso Power Developers ("Navy II Joint Venture"). The Navy I
power 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, current profits and losses are allocated
46.4% to the Company. The BLM power 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 is 48%. Under terms of the Navy II
Joint Venture, all profits, losses and capital contributions for Navy II are
divided equally by the two partners.
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, 1997, the balance of funds deposited
approximated $6,337, which amount is included in restricted cash.
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.
The Coso Joint Ventures had royalty expense included in operating expenses
of $13,458, $13,412 and $13,623 in the years ended December 31, 1997, 1996
and 1995, respectively.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
IMPERIAL VALLEY PROJECT OPERATING FACILITIES
The Company currently operates eight geothermal power plants in the
Imperial Valley in California. The Partnership Project consists of the
Vulcan, Hoch (Del Ranch), Elmore, and Leathers Partnerships. The remaining
four plants which comprise the Salton Sea Project are indirect wholly owned
subsidiaries of the Company. These geothermal power plants consist of Salton
Sea I, Salton Sea II, Salton Sea III and Salton Sea IV. The Partnership
Project and the Salton Sea Project are collectively referred to as the
Imperial Valley Project. The Imperial Valley Project commencement dates and
nominal capacities are as follows:
<TABLE>
<CAPTION>
IMPERIAL VALLEY COMMENCEMENT NOMINAL
PLANTS DATE CAPACITY
- -------------------- --------------------- ------------
<S> <C> <C>
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
Salton Sea IV May 24, 1996 39.6 MW
</TABLE>
The Partnership Project pays royalties based on both energy revenues and
total electricity revenues. Hoch (Del Ranch) and Leathers pay royalties of
approximately 5% of energy revenues and 1% of total electricity revenue.
Elmore pays royalties of approximately 5% of energy revenues. Vulcan pays
royalties of 4.167% of energy revenues.
The Salton Sea Project's weighted average royalty expense in 1997 was
approximately 6.1%. The royalties are paid to numerous recipients based on
varying percentages of electrical revenue or steam production multiplied by
published indices.
The Imperial Valley Projects had royalty expense included in operating
expenses of $14,343, $10,228 and $10,398 in the years ended December 31,
1997, 1996 and 1995, respectively.
SIGNIFICANT CUSTOMERS AND CONTRACTS
All of the Company's sales of electricity from the Coso Project and
Imperial Valley Project, which comprise approximately 20% of 1997 operating
revenue, are to Southern California Edison Company ("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 projects and Edison. These SO4 Agreements provide for capacity
payments, capacity bonus payments and energy payments. Edison makes fixed
annual capacity and capacity bonus payments to the projects to the extent
that capacity factors exceed certain benchmarks. The price for capacity and
capacity bonus payments is fixed for the life of the SO4 Agreements. Energy
is sold at increasing scheduled rates for the first ten years after firm
operation and thereafter at Edison's Avoided Cost of Energy.
The scheduled energy price periods of the Coso Project SO4 Agreements
extended until at least August 1997 for each of the units operated by the
Navy I Partnership and extend until at least March 1999 and January 2000 for
each of the units operated by the BLM and Navy II Partnerships, respectively.
The Company's share of aggregate annual capacity payments is approximately
$17,000 and its share of aggregate bonus payments is approximately $3,000.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
The scheduled energy price periods of the Partnership Project SO4
Agreements extended until February 1996 for the Vulcan Partnership and extend
until December 1998, December 1998, and December 1999 for each of the Hoch
(Del Ranch), Elmore and Leathers Partnerships, respectively. The annual
capacity payments are approximately $24,500 and the bonus payments are
approximately $4,400 in aggregate for the four plants.
Excluding Navy I and Vulcan, which are receiving Edison's Avoided Cost of
Energy, the Company's SO4 Agreements provide for energy rates ranging from
12.8 cents per kWh in 1997 to 15.6 cents per kWh in 1999. The weighted
average energy rate for all of the Company's SO4 Agreements was 12.0 cents
per kWh in 1997.
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 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 Salton Sea I was
5.3 cents per kWh during 1997. 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 capacity payment is approximately $1,100 per annum.
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 September 30, 2004. The annual capacity and
bonus payments for Salton Sea II and Salton Sea III are approximately $3,300
and $9,700, respectively.
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 indices 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 September 30, 2017, the original termination date of the
Salton Sea I PPA.
For the year ended December 31, 1997, and 1996 Edison's average Avoided
Cost of Energy was 3.3 cents and 2.5 cents, respectively, per kWh which is
substantially below the contract energy prices earned for the year ended
December 31, 1997. 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.
PHILIPPINE PROJECTS
The Upper Mahiao Project 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
build-own-operate-transfer project ("BOOT"), in which the Company's
subsidiary CE Cebu Geothermal Power Company, Inc. ("CE Cebu"), the project
company, is responsible for providing operations and maintenance during the
ten year BOOT period. The electricity generated by the Upper Mahiao
geothermal power plant is sold to PNOC-Energy Development Corporation
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
("PNOC-EDC"), which is also responsible for supplying the facility with the
geothermal steam. After the 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.
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).
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. 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.
Unit I of the Malitbog Project (the "Malitbog Project") was deemed
complete in July 1996 and Units II and III in July 1997 at which times such
units commenced receiving capacity payments under the Malitbog ECA. The
Malitbog Project is owned and operated by Visayas Geothermal Power Company
("VGPC"), a Philippine general partnership that is wholly owned, indirectly,
by the Company. Under its contract, VGPC is to sell 100% of its output 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 ("NPC"). However, VGPC receives 100% of its
revenues from such sales in the form of capacity payments. As with the Upper
Mahiao Project, the Malitbog Project is structured as a ten year BOOT, in
which the Company is responsible 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 Mahanagdong Project (the "Mahanagdong Project") was deemed complete in
July 1997 and accordingly, the Mahanagdong Project began receiving capacity
payments pursuant to the Mahanagdong ECA in August of 1997. The Mahanagdong
Project is owned and operated by CE Luzon Geothermal Power Company, Inc., a
Philippine corporation, that is expected to be indirectly owned by the
Company (after the KDG Acquisition) subject to a minority partner
participation. 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.
GAS PROJECTS
The Saranac Project sells electricity to New York State Electric & Gas
pursuant to a 15 year negotiated power purchase agreement (the "Saranac
PPA"), which provides for capacity and energy payments. Capacity payments,
which in 1997 total 2.2 cents per kWh, are received for electricity produced
during "peak hours" as defined in the Saranac PPA and escalate at
approximately 4.1% annually for the remaining term of the contract. Energy
payments, which average 6.6 cents per kWh in 1997, escalate at approximately
4.4% annually for the remaining term of the Saranac PPA. The Saranac PPA
expires in June of 2009.
The Power Resources Project sells electricity to Texas Utilities Electric
Company ("TUEC") pursuant to a 15 year negotiated power purchase agreement
(the "Power Resources PPA"), which provides for capacity and energy payments.
Capacity payments and energy payments, which in 1997 are
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
$3,032 per month and 2.96 cents per kWh, respectively, escalate at 3.5%
annually for the remaining term of the Power Resources PPA. The Power
Resources PPA expires in September 2003.
The NorCon Project sells electricity to Niagara Mohawk Power Corporation
("Niagara") pursuant to a 25 year negotiated power purchase agreement (the
"NorCon PPA") which provides for energy payments calculated pursuant to an
adjusting formula based on Niagara's ongoing Tariff Avoided Cost and the
contractual Long-Run Avoided Cost. The NorCon PPA term extends through
December 2017. The Company and Niagara are currently engaged in discussions
regarding a potential restructuring or buyout and termination of the NorCon
PPA.
The Yuma Project sells electricity to 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 contract term extends through May 2024.
NEVADA AND UTAH PROPERTIES
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 geothermal plant
at Desert Peak, Nevada that is currently selling electricity to Sierra
Pacific Power Company ("Sierra") at Sierra's Avoided Cost. Subsequent to year
end, an indirect subsidiary of the Company entered into a lease agreement
whereby they will lease the facility to another power producer and receive
rental payments.
SALTON SEA MINERALS EXTRACTION
The Company developed and owns the rights to a proprietary process for the
extraction of minerals from elements in solution in the geothermal brine and
fluids utilized at its Imperial Valley plants (the "Salton Sea Extraction
Project") as well as the production of power to be used in the extraction
process. A pilot plant has successfully produced commercial quality zinc at
the Company's Imperial Valley Project. The Company is also investigating
producing silica from the solids precipitated out of the geothermal power
process.
TELEPHONE FLAT
Under a Bonneville Power Administration ("BPA") geothermal pilot program,
the Company has been developing a 30 net MW geothermal project which was
originally located in the Newberry Known Geothermal Resource Area in
Deschutes County, Oregon (the "Telephone Flat Project"). Pursuant to an
amended power sales contract the project has been relocated to Telephone Flat
and BPA has agreed to purchase 30 MW from the project with an option to
purchase up to an additional 100 MW. The movement of the project to this
alternative location and BPA's purchase obligation are subject to obtaining a
final environmental impact statement relating to the new site location.
Completion of this project is subject to a number of significant
uncertainties and cannot be assured.
6. EQUITY INVESTMENTS
At December 31, 1997, the Company had an indirect ownership of
approximately 35% in the Casecnan Project, a combined irrigation and 150 net
MW hydroelectric power generation project located
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
on the island of Luzon in the Philippines. The Company is expected to
indirectly own approximately 70% of the Casecnan Project after the KDG
Acquisition.
The Company had an indirect ownership of 50% in the Mahanagdong Project,
subject to a minority partner participation. The Company will indirectly own
100% of the Mahanagdong Project after the KDG Acquisition.
The Company has an approximate 45% economic interest in Saranac Power
Partners, L.P. and a 20% economic interest in NorCon Power Partners, L.P. as
part of the Falcon Seaboard acquisition.
Summary financial information for these equity investments follows:
<TABLE>
<CAPTION>
CASECNAN SARANAC NORCON MAHANAGDONG
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
As of and for the year ended December 31,
1997:
Assets ........................................ $482,527 $315,671 $118,415 $294,250
Liabilities ................................... 384,369 211,299 115,487 197,575
Net income (loss) ............................. (11,267) 43,097 4,072 14,996
As of and for the year ended December 31,
1996:
Assets ........................................ 492,166 325,174 125,956 240,222
Liabilities ................................... 380,737 213,326 121,223 168,512
Net income (loss) ............................. (11,207) 40,005 (53) N/A
</TABLE>
7. PARENT COMPANY DEBT
Parent company debt comprises the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Senior discount notes .................. $ 529,640 $ 527,535
9.5% senior notes ...................... 224,205 224,150
7.63% senior notes ..................... 350,000 --
Limited recourse senior secured notes* 200,000 200,000
CalEnergy credit facility .............. -- 100,000
Revolving credit facility .............. -- 95,000
------------- ------------
$1,303,845 $1,146,685
============= ============
</TABLE>
- ------------
* The amount of recourse obligation to the parent was $0 at December 31,
1997.
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 was amortized from the issue date
through January 15, 1997, during which time no cash interest was paid on the
Senior Discount Notes. Cash interest on the Senior Discount Notes is payable
semiannually on January 15 and July 15 of each year, commencing July 15,
1997. The Senior Discount Notes are redeemable at any time on or after
January 15, 1999 initially at a redemption price of 105.125% declining to
100% on January 15, 2002 plus accrued interest to the date of redemption. 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 unless 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.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
9.5% SENIOR NOTES
On September 20, 1996, the Company issued $225,000 of 9.5% Senior Notes
(the "9.5% Senior Notes") due 2006. Interest on the 9.5% Senior Notes is
payable semiannually on March 15 and September 15 of each year, commencing
March 15, 1997. The 9.5% Senior Notes are redeemable at any time on or after
September 15, 2001 initially at a redemption price of 104.75% declining to
100% on September 15, 2004 plus accrued interest to the date of redemption.
The 9.5% Senior Notes are unsecured senior obligations of the Company.
7.63% SENIOR NOTES
On October 28, 1997, the Company issued $350,000 of 7.63% Senior Notes
(the "7.63% Senior Notes") due 2007. Interest on the 7.63% Senior Notes will
be payable semiannually on April 15 and October 15 of each year, commencing
April 15, 1998. The 7.63% Senior Notes are unsecured senior obligations of
the Company.
LIMITED RECOURSE SENIOR SECURED NOTES
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 ("Note Indenture"), which was $0 at December 31, 1997.
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.
CALENERGY CREDIT FACILITY
On October 28, 1996, the Company obtained a $100,000 credit facility (the
"CalEnergy Credit Facility") of which the Company had drawn $100,000 as of
December 31, 1996. The Company has repaid the entire balance of the CalEnergy
Credit Facility.
REVOLVING CREDIT FACILITY
On July 8, 1996, the Company obtained a $100,000 three year revolving
credit facility. On November 26, 1997, the credit facility was amended and
increased to $400,000 and extended to November 2000. The facility is
unsecured and is available to fund working capital requirements and finance
future business expansion opportunities.
ANNUAL REPAYMENTS OF PARENT COMPANY DEBT
There are no annual repayments of the parent company debt due for the next
five years.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
8. SUBSIDIARY AND PROJECT DEBT:
Project loans held by subsidiaries and projects which are non recourse to
the Company comprise the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Salton Sea Notes and Bonds .................... $ 448,754 $ 538,982
Northern eurobonds ............................ 427,732 439,192
U.K. credit facility .......................... -- 128,423
CE Electric UK Funding Company Senior Notes .. 357,331 --
CE Electric UK Funding Company Sterling Bonds 322,534 --
Power Resources project debt .................. 103,334 114,571
Coso Funding Corp. project loans .............. 106,616 148,346
Construction loans ............................ 416,744 300,951
Other ......................................... 5,962 7,927
------------- ------------
$2,189,007 $1,678,392
============= ============
</TABLE>
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.
Pursuant to separate project financing agreements, the assets of each
subsidiary are pledged or encumbered to support or otherwise provide the
security for their own project or subsidiary debt. 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.
"Subsidiaries" means all of CalEnergy's direct or indirect subsidiaries (1)
owning interests in the Coso, Imperial Valley, Saranac, NorCon, Power
Resources, Mahanagdong, Malitbog, Upper Mahiao, Casecnan, Dieng and Patuha
projects or (2) owning interests in the subsidiaries that own interests in
the foregoing projects.
SALTON SEA NOTES AND BONDS
The Salton Sea Funding Corporation, a wholly owned subsidiary of the
Company, (the "Funding Corporation") debt securities are as follows:
<TABLE>
<CAPTION>
FINAL
SENIOR SECURED SERIES DATE RATE 1997 1996
--------------------- -------------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
July 21, 1995 A Notes May 30, 2000 6.69% $ 97,354 $161,732
July 21, 1995 B Bonds May 30, 2005 7.37% 133,000 133,000
July 21, 1995 C Bonds May 30, 2010 7.84% 109,250 109,250
June 20, 1996 D Notes May 30, 2000 7.02% 44,150 70,000
June 20, 1996 E Bonds May 30, 2011 8.30% 65,000 65,000
----------- -----------
$448,754 $538,982
=========== ===========
</TABLE>
Principal and interest payments are made in semi-annual installments. The
Salton Sea Notes and Bonds are secured by the Company's four existing Salton
Sea plants 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. The Salton Sea Notes and Bonds
are nonrecourse to the Company.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
Pursuant to a depository agreement, Funding Corporation established a
debt service reserve fund in the form of a letter of credit in the amount of
$70,430 from which scheduled interest and principal payments can be made.
NORTHERN EUROBONDS
The Northern debt includes a debenture due in 1999, which bears a fixed
interest rate of 12.661%. The debt also includes bearer bonds repayable in
2005 and 2020, bearing fixed interest rates of 8.625% and 8.875%,
respectively.
The balance at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Debenture due 1999 ... $ 97,530 $ 99,924
Bearer bonds due 2005.. 165,236 171,130
Bearer bonds due 2020.. 164,966 168,138
----------- ----------
$427,732 $439,192
=========== ==========
</TABLE>
U.K. CREDIT FACILITY
On October 28, 1996, CE Holdings, an indirect subsidiary of the Company,
obtained a pounds sterling560,000 five year term loan and revolving credit
facility (the "U.K. Credit Facility"). The Company did not guarantee, nor was
it otherwise subject to recourse for, amounts borrowed under the U.K. Credit
Facility. The agreement placed restrictions on distributions from CE Electric
to any of its shareholders based on certain financial ratios. CE Electric has
repaid the entire U.K. Credit Facility through the use of proceeds from the
senior note and sterling bond offerings of CE Electric UK Funding Company
described below.
CE ELECTRIC UK FUNDING COMPANY SENIOR NOTES AND STERLING BONDS
On December 15, 1997, CE Electric UK Funding Company, an indirect
subsidiary of the Company (the "Funding Company"), issued $125,000 of 6.853%
senior notes due 2004, and $237,000 of 6.995% senior notes due 2007
(collectively, the "CE Electric UK Funding Company Senior Notes"), and pounds
sterling200,000 of 7.25% Sterling Bonds due 2022. The CE Electric UK Funding
Company Senior Notes and Sterling Bonds prohibit distributions to any of its
shareholders unless certain financial ratios are met by the Funding Company.
POWER RESOURCES PROJECT FINANCING DEBT
Power Resources, an indirect wholly-owned subsidiary, has project
financing debt consisting of a term loan payable to a consortium of banks
with interest and principal due quarterly through October 2003. The debt
carries fixed interest rates of 10.385% and 10.625%.
COSO FUNDING CORP. PROJECT LOANS
The Coso Funding Corp. project loans are from Coso Funding Corp., a
single-purpose corporation formed to issue notes for its own account and act
as an agent on behalf of the Coso Project. The Coso Funding Corp. project
loans carry a fixed interest rate with weighted average interest rates of
8.65% and 8.46% at December 31, 1997 and 1996, respectively. The loans have
scheduled repayments through December 2001. The Coso Project has established
irrevocable letters of credit of $67,850 as a debt service reserve fund.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
ANNUAL REPAYMENTS OF SUBSIDIARY AND PROJECT DEBT
The annual repayments of the subsidiary and project debt, excluding
construction loans, for the years beginning January 1, 1998 and thereafter
are as follows:
<TABLE>
<CAPTION>
CE ELECTRIC UK
SALTON SEA FUNDING COMPANY COSCO
NOTES AND NORTHERN SENIOR NOTES POWER FUNDING
BONDS EUROBONDS STERLING BONDS RESOURCES CORP. OTHER TOTAL
------------ ----------- --------------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 ......... $106,938 $ -- $ -- $ 12,805 $ 38,912 $1,544 $ 160,199
1999 ......... 57,836 97,530 -- 14,268 31,717 1,297 202,648
2000 ......... 25,072 -- -- 16,087 4,080 1,051 46,290
2001 ......... 22,376 -- -- 18,119 31,907 838 73,240
2002 ......... 24,298 -- -- 20,312 -- 1,232 45,842
Thereafter .. 212,234 330,202 679,865 21,743 -- -- 1,244,044
------------ ----------- --------------- ----------- ----------- --------- ------------
$448,754 $427,732 $679,865 $103,334 $106,616 $5,962 $1,772,263
============ =========== =============== =========== =========== ========= ============
</TABLE>
CONSTRUCTION LOANS
The Company's allocable share of non-recourse project construction loans
comprise the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Upper Mahiao ............... $150,628 $150,628
Malitbog ................... 176,657 137,881
CE Indonesia Funding Corp. 89,459 12,442
----------- ----------
$416,744 $300,951
=========== ==========
</TABLE>
The Upper Mahiao and Malitbog construction loans are scheduled to be
replaced by non-recourse term project financing upon completion of
construction and commencement of commercial operations.
UPPER MAHIAO CONSTRUCTION LOAN
Draws on the construction loan for the Upper Mahiao geothermal power
project at December 31, 1997 totaled $150,628. A consortium of international
banks provided the construction financing with variable interest rates based
on LIBOR or "Prime" with interest payments due every quarter and at LIBOR
maturity. The weighted average interest rate at December 31, 1997 and 1996 is
approximately 8.43% and 8.01%, respectively. The Export-Import Bank of the
U.S. ("Ex-Im Bank") is providing political risk insurance to commercial banks
on the construction loan. 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 in 1998. The largest portion of the term
loan for the project will also be provided by Ex-Im Bank. The term financing
for the Ex-Im Bank loan will be at a fixed interest rate of 5.95%.
MALITBOG CONSTRUCTION LOAN
Draws on the construction loan for the Malitbog geothermal power project
at December 31, 1997 totaled $176,657. International banks and the Overseas
Private Investment Corporation ("OPIC") have provided the construction and
term loan facilities at variable interest rates (weighted average of 8.48%
and 8.15% at December 31, 1997 and 1996, respectively). The international
bank portion of the debt will be insured by OPIC against political risks and
the Company's equity contribution to Visayas Geothermal
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
Power Company ("VGPC") is covered by political risk insurance from the
Multilateral Investment Guarantee Agency and OPIC. 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 in 1998.
CE INDONESIA FUNDING CORP.
In June 1997, the Company's indirect special-purpose subsidiary, CE
Indonesia Funding Corp., entered into a $400,000 revolving credit facility
(which is nonrecourse to the Company) to finance the development and
construction of the Company's geothermal power facilities in Indonesia. This
credit facility was used in part to replace the original project financing
for Himpurna California Energy's Dieng Unit I. At December 31, 1997, the
Company's share of the credit facility relating to Dieng Unit I was $50,481
and carried a variable interest rate (weighted average of 7.44% at December
31, 1997).
On November 18, 1997, Himpurna California Energy announced the funding of
the Dieng Unit II project pursuant to the CE Indonesia Funding Corp. facility
arranged in June 1997. At December 31, 1997, the Company's share of the
credit facility relating to Dieng Unit II was $11,211 and carried a variable
interest rate (weighted average of 7.48% at December 31, 1997).
On September 2, 1997, Patuha Power announced the funding of the Patuha
Unit I project pursuant to the CE Indonesia Funding Corp. facility arranged
in June 1997. At December 31, 1997, the Company's share of the credit
facility relating to Patuha was $27,767 and carried a variable interest rate
(weighted average of 7.44% at December 31, 1997).
9. INCOME TAXES
Provision for income taxes is comprised of the following at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Currently payable:
State.............. $ 5,084 $ 7,520 $ 5,510
Federal............ 33,114 19,873 11,138
Foreign............ 5,262 2,176 --
--------- --------- --------
43,460 29,569 16,648
--------- --------- --------
Deferred:
State.............. (264) 1,619 921
Federal............ 14,579 9,209 13,062
Foreign............ 41,269 1,424 --
--------- --------- --------
55,584 12,252 13,983
--------- --------- --------
Total.............. $99,044 $41,821 $30,631
========= ========= ========
</TABLE>
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
A reconciliation of the federal statutory tax rate to the effective tax
rate applicable to income before provision for income taxes follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate........................... 35.00% 35.00% 35.00%
Percentage depletion in excess of cost
depletion....................................... (3.77) (6.12) (7.38)
Investment and energy tax credits................ (.64) (8.34) (1.80)
State taxes, net of federal tax effect........... 1.59 4.38 4.09
Goodwill amortization............................ 2.06 2.51 2.53
Non-deductible expense........................... 1.33 .84 1.10
Lease investment................................. -- -- (2.18)
Dividends on convertible preferred securities of
subsidiary trusts*.............................. (4.12) (1.17) --
Tax effect of foreign income..................... 2.64 2.54 --
Asset valuation impairment....................... 15.47 -- --
Other............................................ .75 .15 .20
-------- -------- --------
Effective tax rate............................... 50.31% 29.79% 31.56%
======== ======== ========
</TABLE>
- ------------
* Dividends on convertible preferred securities of subsidiary trusts are
included in minority interest.
Deferred tax liabilities (assets) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Depreciation and amortization, net................. $ 802,215 $ 725,366
Pensions........................................... 19,441 22,883
Unremitted foreign earnings........................ 10,781 2,857
Other.............................................. 3,324 3,262
----------- -----------
835,761 754,368
----------- -----------
Deferred contract costs............................ (193,996) (128,745)
Deferred income.................................... (12,690) (9,298)
Energy and investment tax credits.................. (42,049) (55,931)
Advance corporation tax............................ -- (20,205)
Alternative minimum tax credits.................... (39,402) (50,819)
Accruals not currently deductible for tax
purposes.......................................... (31,561) (13,372)
Other.............................................. (7,004) (6,799)
----------- -----------
(326,702) (285,169)
----------- -----------
Net deferred taxes................................. $ 509,059 $ 469,199
=========== ===========
</TABLE>
The Company has unused investment and geothermal energy tax credit
carryforwards of approximately $42,049 expiring between 2004 and 2012. The
Company also has approximately $39,402 of alternative minimum tax credit
carryforwards which have no expiration date.
10. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
OF SUBSIDIARY TRUSTS
The Company has organized special purpose Delaware business trusts ("Trust
I", "Trust II" and "Trust III" or collectively, the "Trusts") pursuant to
their respective amended and restated declarations of trusts (collectively,
the "Declarations"). On April 12, 1996, February 26, 1997 and August 12,
1997, the
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
Company, through these Trusts, issued Company-obligated mandatorily
redeemable convertible preferred securities (collectively, the "Trust
Securities") as follows:
<TABLE>
<CAPTION>
ISSUER ISSUE DATE RATE AMOUNT CONVERSION RATE
- --------------------------- ----------------- ------- ---------- ---------------
<S> <C> <C> <C> <C>
CalEnergy Capital Trust I April 12, 1996 6.25% $103,930 1.6728
CalEnergy Capital Trust II February 26, 1997 6.25% $180,000 1.1655
CalEnergy Capital Trust III August 12, 1997 6.50% $270,000 1.047
</TABLE>
The Company owns all of the common securities of the Trusts. The Trust
Securities have a liquidation preference of fifty dollars each and represent
undivided beneficial ownership interests in each of the Trusts. The assets of
the Trusts consist solely of the Company's Convertible Subordinated
Debentures due March 10, 2016, February 25, 2012 and September 1, 2027,
respectively, in outstanding aggregate principal amounts of $103,930,
$180,000 and $270,000, respectively (collectively, the "Junior Debentures")
issued pursuant to their respective indentures. The indentures include
agreements by the Company to pay expenses and obligations incurred by the
Trusts. Each Trust Security with a par value of $50 is convertible at the
option of the holder at any time into shares of CalEnergy Common Stock based
on the conversion rate and subject to customary anti-dilution adjustments.
Until converted into the Company's Common Stock, the Trust Securities 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 Trusts.
Distributions on the Trust Securities (and Junior Debentures) are cumulative,
accrue from the date of initial issuance and are payable quarterly in
arrears. 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 indentures.
Pursuant to Preferred Securities Guarantee Agreements (collectively, the
"Guarantees"), between the Company and a preferred guarantee trustee, the
Company has agreed irrevocably to pay to the holders of the Trust Securities,
to the extent that the Trustee has funds available to make such payments,
quarterly distributions, redemption payments and liquidation payments on the
Trust Securities. Considered together, the undertakings contained in the
Declarations, Junior Debentures, Indentures and Guarantees constitute full
and unconditional guarantees by the Company of the Trusts' obligations under
the Trust Securities.
11. PREFERRED STOCK
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 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.
12. STOCK OPTIONS AND RESTRICTED STOCK
The Company has issued various stock options. As of December 31, 1997, a
total of 6,949 shares are reserved for stock options, of which 6,780 shares
have been granted and remain outstanding at prices of $3.74 to $40.81 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
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
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 1996 Plan become exercisable over a period of two 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 1996 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 1996 Plan. The non-1996 plan options are primarily options
granted to Kiewit.
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 canceled 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 was amortized over the vesting period of which 125
shares were immediately vested and the remaining 375 shares vested through
January 1, 1998. Accordingly, $5,471, $1,535 and $2,494 of unearned
compensation was charged to general and administrative expense in 1997, 1996
and 1995, respectively.
TRANSACTIONS IN STOCK OPTIONS
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------
SHARES AVAILABLE
FOR GRANT UNDER OPTION PRICE WEIGHTED AVG
1996 OPTION PLAN SHARES PER SHARES OPTION PRICE TOTAL
---------------- --------- --------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 86 9,601 $3.00 -$19.00 $12.84 $123,277
---------------- --------- --------------- -------------- ----------
Options granted ........... (396) 396 $15.81 -$19.00 18.15 7,188
Options terminated ........ 571 (571) $14.88 -$19.00 18.69 (10,673)
Options exercised ......... -- (135) $3.00 -$15.94 3.41 (460)
---------------- --------- --------------- -------------- ----------
Balance December 31, 1995 261 9,291 $3.00 -$19.00 12.84 119,332
Options granted ........... (1,157) 1,157 $25.06 -$30.38 28.17 32,590
Options terminated ........ 468 (468) $3.00 -$19.00 17.96 (8,406)
Options exercised ......... -- (5,203) $3.00 -$21.68 11.13 (57,931)
Additional shares reserved
under 1996 Option Plan .. 739 -- -- -- --
---------------- --------- --------------- -------------- ----------
Balance December 31, 1996 311 4,777 $3.00 -$30.38 17.92 85,585
---------------- --------- --------------- -------------- ----------
Options granted ........... (2,307) 2,513 $29.06 -$40.81 34.80 87,457
Options terminated ........ 165 (165) $3.00 -$29.06 20.04 (3,307)
Options exercised ......... -- (345) $3.74 -$29.06 13.28 (4,583)
Additional shares reserved
under 1996 Option Plan .. 2,000 -- -- -- --
---------------- --------- --------------- -------------- ----------
Balance December 31, 1997 169 6,780 $3.74 -$40.81 $24.36 $165,152
================ ========= =============== ============== ==========
Options exercisable at:
December 31, 1995 ........ 8,229 $3.00 -$19.00 $12.26 $100,886
December 31, 1996 ........ 3,071 $3.00 -$30.38 $14.25 $ 43,770
December 31, 1997 ........ 3,665 $3.74 -$40.19 $18.12 $ 66,425
========= =============== ============== ==========
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
The following table summarizes information about stock options outstanding
and exercisable as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE AVERAGE REMAINING NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- --------------- ------------- -------------- ----------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$3.74 $11.99 1,161 $11.22 3 years 1,161 $11.22
12.00 21.99 2,020 16.90 6 years 1,739 16.82
22.00 31.99 1,092 28.10 8 years 311 28.25
32.00 40.81 2,507 34.83 9 years 454 34.12
- --------------- ------------- -------------- ----------------- ------------- --------------
6,780 $24.36 7 years 3,665 $18.12
------------- -------------- ----------------- ------------- --------------
</TABLE>
The Company applies the intrinsic value based method of accounting for its
stock-based employee compensation plans. If the fair value based method had
been applied for 1997, non-cash compensation expense and the effect on net
income available to common stockholders and earnings per share would have
been approximately $3,600, or $0.05 per share. If the fair value based method
had been applied for 1996 and 1995, non-cash compensation expense and the
effect on net income available to common stockholders and earnings per share
would have been immaterial. The fair value for stock options was estimated
using the Black-Scholes option pricing model with assumptions for the
risk-free interest rate of 5.50% in 1997 and 6.00% in 1996 and 1995, expected
volatility of 25% in 1997 and 22% in 1996 and 1995, expected life of
approximately 3.7 years in 1997 and 4.5 years in 1996 and 1995, and no
expected dividends. The weighted average fair value of options granted during
1997, 1996 and 1995 was $9.55, $8.62 and $5.72 per option, respectively.
13. COMMON STOCK SALES & RELATED OPTIONS
On October 17, 1997, the Company completed the public offering of 17,100
shares of its common stock ("Common Stock") at $37 7/8 per share (the "Public
Offering"). In addition, 2,000 shares of Common Stock were purchased from
CalEnergy in a direct sale by a trust affiliated with Walter Scott, Jr., the
Chairman and Chief Executive Officer of PKS (the "Direct Sale"),
contemporaneously with the closing of the Public Offering. Proceeds from the
Public Offering and the Direct Sale were approximately $699,920.
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 Kiewit 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 proceeds of $300,388 from the Offering.
14. ASSET VALUATION IMPAIRMENT CHARGE
The non-recurring charge of $87,000 represents an asset valuation
impairment charge under Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets," relating to CalEnergy's assets in
Indonesia. Moreover, the Company intends to continue to take actions to
attempt to require the Government of Indonesia to honor its contractual
obligations; however, the ultimate outcome of the current uncertain situation
in Indonesia with respect to the possible abrogation by the Indonesian
government of the Dieng, Patuha and Bali contracts adds significant risk to
the completion of those projects. Consequently, the charge of $87,000
represents the amount by which the carrying amount of such assets exceed the
fair value of the assets determined by discounting the expected future net
cash flows of the Indonesia projects, assuming proceeds from political risk
insurance and no tax benefits.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
15. EXTRAORDINARY ITEM
On July 31, 1997, the Finance Act in the United Kingdom was passed by
Parliament and included the introduction of a one time so-called "windfall
tax" equal to 23% of the difference between the price paid for Northern upon
privatization and the Labour government's assessed "value" of Northern as
calculated by reference to a formula set forth in the July budget. This
amounted to $135,850, net of minority interest of $58,222, which was recorded
as an extraordinary item. The first installment was paid December 1, 1997 and
the second installment is payable on December 1, 1998.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
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 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 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.
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 under the indicated
captions in Notes 7, 8 and 10.
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Senior discount notes ................................. $529,640 $569,148 $527,535 $556,971
9.5% Senior notes...................................... 224,205 243,615 224,150 229,866
7.63% Senior notes .................................... 350,000 352,857 -- --
Limited recourse senior secured notes ................. 200,000 217,829 200,000 212,560
CalEnergy credit facility ............................. -- -- 100,000 100,000
Revolving line of credit .............................. -- -- 95,000 95,000
Salton Sea notes and bonds ............................ 448,754 463,720 538,982 531,807
Northern eurobonds .................................... 427,732 482,064 439,192 445,830
Construction loans .................................... 416,744 416,744 300,951 300,951
Coso Funding Corp. project loans ...................... 106,616 112,932 148,346 153,650
CE Electric UK Funding Company Senior Notes .......... 357,331 357,331 -- --
CE Electric UK Funding Company Sterling Bonds ........ 322,534 333,257 -- --
Power Resources project debt .......................... 103,334 103,334 114,571 114,571
U.K. credit facility .................................. -- -- 128,423 128,423
Other ................................................. 5,962 5,962 7,927 7,927
Convertible preferred securities of subsidiary trusts 553,930 514,373 103,930 128,354
---------- ----------- ---------- -----------
</TABLE>
17. INTEREST RATE SWAP AGREEMENTS
On December 15, 1997, CE Electric UK Funding Company entered into certain
interest rate swap agreements for the CE Electric UK Funding Company Senior
Notes with two large multi-national
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
financial institutions. The swap agreements effectively convert the U.S.
dollar fixed interest rate to a fixed rate in Sterling. For the $125,000 of
6.853% senior notes, the agreements extend until December 30, 2004 and
convert the U.S. dollar interest rate to a fixed Sterling rate of 7.744%. For
the $237,000 of 6.995% senior notes, the agreements extend until December 30,
2007 and convert the U.S. dollar interest rate to a fixed Sterling rate of
7.737%. The estimated fair value of these swap agreements is approximately
$4,929 based on quotes from the counter party to these instruments and
represents the estimated amount that the Company would expect to pay to
terminate these agreements. It is the Company's intention to hold the swap
agreements to their intended maturity.
18. REGULATORY MATTERS
Northern is subject to price cap regulation. Price control formulas for
the supply and distribution businesses are enforced by the Office of
Electricity Regulation ("OFFER").
In the distribution business the current price control is expected to last
until 2000. The formula was reviewed with effect from April 1, 1995 and April
1, 1996 which resulted in one-time reductions in allowed income per unit
distributed of about 17% and 13% respectively, with continuing real
reductions in each of the subsequent three years 1997/98 to 1999/2000. The
current formula requires that each year regulated distribution income per
unit is increased or decreased by RPI-Xd where RPI reflects the average of
the twelve month inflation rates recorded for the previous July to December
period and Xd is set at 3%. The formula also takes account of the changes in
system electrical losses, the number of customers connected and the voltage
at which customers receive the units of electricity distributed.
In the supply business the current formula applies only to customers with
demands below 100kW. Under the current formula the purchase cost of
electricity and the cost of transmission, distribution and the fossil fuel
levy are passed through to customers in full. That part of the formula
governing Northern's own supply business costs requires that this element of
the permitted income falls by 2% per annum in real terms. The current formula
is due to be replaced from April 1, 1998 with a new formula which will
require Northern to reduce prices to those customers protected by the new
price control from the level prevailing at August 1, 1997 by about 4.2%
(minus inflation) with effect from April 1, 1998 and a further 3% (minus
inflation) with effect from April 1, 1999.
The market for electricity supplied to customers with demands over 1MW was
opened to competition in 1990. In 1994 this limit was reduced to 0.1MW. In
1998, liberalization of the entire market is due to commence in stages with
complete liberalization achieved by June 1999.
19. PENSION COMMITMENTS
Northern participates in the Electricity Supply Pension Scheme, which
provides pension and other related defined benefits, based on final
pensionable pay, to substantially all employees throughout the Electricity
Supply Industry in the United Kingdom.
The actuarial computation for December 31, 1997 and 1996 assumed interest
rates of 6.75% and 7.75%, respectively, an expected return on plan assets of
7.25% and 8.25%, respectively, and annual compensation increases of 4.75% and
5.75%, respectively, over the remaining service lives of employees covered
under the plan. Amounts funded to the pension are primarily invested in
equity and fixed income securities. Northern's funding policy for the plan is
to contribute annually at a rate that is intended to remain a level
percentage of compensation for the covered employees.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
The following table details the funded status and the amount recognized
in the balance sheet of the Company as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits.................................. $ 847,694 $797,932
Nonvested benefits .............................. -- --
----------- ----------
Accumulated benefit obligation ................... 847,694 797,932
Effect of future increase in compensation ....... 40,898 58,218
----------- ----------
Projected benefit obligation ..................... 888,592 856,150
Fair value of plan assets ........................ 1,012,601 919,163
----------- ----------
Assets in excess of projected benefit obligation 124,009 63,013
Unrecognized net gain ............................ 61,265 --
----------- ----------
Prepaid pension asset ............................ $ 62,744 $ 63,013
=========== ==========
</TABLE>
Net periodic pension cost for 1997 included the following components (the
components for the period from the acquisition date of Northern to December
31, 1996 are not meaningful):
<TABLE>
<CAPTION>
<S> <C>
Service cost--benefits earned during the period .. $ 12,600
Interest cost on projected benefit obligation ... 62,300
Actual return on plan assets ..................... (71,300)
----------
Net periodic pension cost ........................ $ 3,600
==========
</TABLE>
20. COMMITMENTS AND CONTINGENCIES
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 (the "Casecnan Project") located in
the central part of the island of Luzon in the Republic of the Philippines.
CE Casecnan Water and Energy Company, Inc., a Philippine Corporation ("CE
Casecnan") which is expected to be approximately 70% indirectly owned by the
Company (after the KDG Acquisition), is developing the Casecnan Project. CE
Casecnan financed a portion of the costs of the Casecnan Project through the
issuance of $125,000 of its 11.45% Senior Secured Series A Notes due 2005 and
$171,500 of its 11.95% Senior Secured Series B Bonds due 2010 and $75,000 of
its Secured Floating Rate Notes due 2002, pursuant to an indenture dated as
of November 27, 1995, as amended to date.
The Casecnan Project was being constructed pursuant to a fixed-price,
date-certain, turnkey construction contract (the "Hanbo Contract") on a joint
and several basis by Hanbo Corporation ("Hanbo") and Hanbo Engineering and
Construction Co., Ltd. ("HECC"), both of which are South Korean corporations.
As of May 7, 1997, CE Casecnan terminated the Hanbo Contract due to defaults
by Hanbo and HECC including the insolvency of each such company. On May 7,
1997 CE Casecnan entered into a new turnkey engineering, procurement and
construction contract to complete the construction of the Casecnan Project
(the "Replacement Contract"). The work under the Replacement Contract is
being conducted by a consortium consisting of Cooperativa Muratori Cementisti
CMC di Ravenna and Impressa Pizzarottie & C. Spa working together with
Siemens A.G., Sulzer Hydro Ltd., Black & Veatch and Colenco Power Engineering
Ltd. (collectively, the "Replacement Contractor").
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
In connection with the Hanbo Contract termination, CE Casecnan tendered a
certificate of drawing to Korea First Bank ("KFB") on May 7, 1997 under the
irrevocable standby letter of credit issued by KFB as security under the
Hanbo Contract to pay for certain transition costs and other presently
ascertainable damages under the Hanbo Contract. As a result of KFB's wrongful
dishonor of the draw request, CE Casecnan filed an action in New York State
Court. That Court granted CE Casecnan's request for a temporary restraining
order requiring KFB to deposit $79,329, the amount of the requested draw, in
an interest bearing account with an independent financial institution in the
United States. KFB appealed this order, but the appellate court denied KFB's
appeal and on May 19, 1997, KFB transferred funds in the amount of $79,329 to
a segregated New York bank account pursuant to the Court order. If KFB were
to fail to honor its obligations under the Casecnan letter of credit, such
action could have a material adverse effect on the Casecnan Project and CE
Casecnan.
On August 6, 1997, CE Casecnan announced that it had issued a notice to
proceed to the Replacement Contractor. The Replacement Contractor was already
on site and has fully mobilized and commenced engineering, procurement and
construction work on the Casecnan Project.
On August 27, 1997, CE Casecnan announced that it had received a favorable
summary judgment ruling in New York State Court against KFB. The judgment,
which has been appealed by the bank, requires KFB to honor the $79,329
drawing by CE Casecnan on the $117,850 irrevocable standby letter of credit.
On September 29, 1997, CE Casecnan tendered a second certificate of
drawing for $10,828 to KFB and on December 30, 1997, CE Casecnan tendered a
third certificate of drawing for $2,920 to KFB. KFB also wrongfully
dishonored these draws, but pursuant to a stipulation agreed to deposit the
draw amounts in an interest bearing account with the same independent
financial institution in the United States pending resolution of the appeal
regarding the first draw and agreed to expedite the appeal.
The receipt of the letter of credit funds from KFB remains essential and
CE Casecnan will continue to press KFB to honor its clear obligations under
the letter of credit and to pursue Hanbo and KFB for any additional damages
arising out of their actions to date. If KFB were to fail to honor its
obligations under the Casecnan letter of credit, such action could have a
material adverse effect on the Casecnan Project and CE Casecnan.
On September 2, 1997, Hanbo and HECC filed a Request for Arbitration
before the International Chamber of Commerce ("ICC"). The Request for
Arbitration asserts various claims by Hanbo and HECC against CE Casecnan
relating to the terminated Hanbo Contract and seeking damages. On October 10,
1997, CE Casecnan served its answer and defenses in response to the Request
for Arbitration as well as counterclaims against Hanbo and HECC for breaches
of the Hanbo Contract. The arbitration proceedings before the ICC are ongoing
and CE Casecnan intends to pursue vigorously its claims against Hanbo, HECC
and KFB in the proceedings described above.
INDONESIA
On September 20, 1997, a Presidential Decree (the "Decree") was issued in
Indonesia, providing for government action to the effect that, in order to
address certain recent fluctuations in the value of the Indonesian currency,
the start-up dates for a number of private power projects would be: (i)
continued according to their initial schedule (because construction was
underway); (ii) postponed as to their start-up dates (because they are not
yet in construction) until economic conditions have recovered; or (iii)
reviewed with a view to being continued, postponed or rescheduled, depending
on the status of those projects. In the Decree, Dieng Units 1, 2 and 3 are
approved to continue according to their initial schedule; Patuha Unit 1 and
Bali Units 1 and 2 are to receive further review to determine whether or not
they should be continued in accordance with their initial schedule; and Bali
Units 3 and 4, Patuha Units 2, 3 and 4 and Dieng Unit 4 are to be postponed
for an unspecified period. In this regard, the Company notes that its
contracts and government undertakings for the Dieng, Patuha and Bali projects
do not by
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
their terms permit such categorization or delays by the government and that
the Company has obtained political risk insurance coverage for its Dieng and
Patuha projects. Moreover, the Company intends to continue to take actions to
attempt to require the Government of Indonesia to honor its contractual
obligations; however, subsequent actions by the Government of Indonesia and
continued economic problems in Indonesia have created further uncertainty as
to whether the contracts for such projects will be abrogated by the
Indonesian government and accordingly have created significant risks to the
completion of these projects. As a result, the Company recorded a SFAS 121
asset valuation impairment charge of $87,000 in the fourth quarter of 1997.
This charge includes all reasonably estimated asset valuation impairments
associated with the Company's assets in Indonesia and gives effect to the
political risk insurance on such investments.
EDISON
On June 9, 1997, Edison filed a complaint alleging breach of the power
purchase agreements ("SO4 Agreements") between Edison and the Coso Joint
Ventures as a result of alleged improper venting of certain noncondensible
gases at the Coso geothermal energy project. In the complaint Edison seeks
unspecified damages, including the refund of certain amounts previously paid
under the SO4 Agreements, and termination of the SO4 Agreements. In September
1997, the Coso Joint Ventures and the Company filed a cross-complaint against
Edison and its affiliates, The Mission Group and Mission Power Engineering
Company alleging, among other things, that Edison's lawsuit violates the 1993
settlement agreement which settled certain litigation arising from the
construction of certain units at the Coso geothermal project by Edison
affiliates. In addition, the Coso Joint Ventures filed a separate complaint
against Edison alleging breach of the SO4 Agreements, unfair business
practices, slander and various other tort and contract claims. The actions
were effectively consolidated in December 1997. As a result of certain
procedural actions by the parties and a November court order, Edison filed an
amended complaint on December 16, 1997 and the Coso Joint Ventures amended
their cross-complaint. The litigation is in its early procedural stages and
the pleadings have not been settled. The Coso Joint Ventures believe that
their claims and defenses are meritorious and that they will prevail if the
matter is ultimately heard on its merits. The Coso Joint Ventures intend to
vigorously defend this action and prosecute all available counterclaims
against Edison.
NYSEG
On February 14, 1995, NYSEG filed with the FERC a Petition for a
Declaratory Order, Complaint, and Request for Modification of Rates in Power
Purchase Agreements Imposed Pursuant to the Public Utility Regulatory
Policies Act of 1978 ("Petition") seeking FERC (i) to declare that the rates
NYSEG pays under the Saranac PPA, which was approved by the New York Public
Service Commission (the "PSC") were in excess of the level permitted under
PURPA and (ii) to authorize the PSC to reform the Saranac PPA. On March 14,
1995, the Saranac Partnership intervened in opposition to the Petition
asserting, inter alia, that the Saranac PPA fully complied with PURPA, that
NYSEG's action was untimely and that the FERC lacked authority to modify the
Saranac PPA. On March 15, 1995, the Company intervened also in opposition to
the Petition and asserted similar arguments. 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 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 NYSEG's request. On June 14, 1995, NYSEG petitioned
the United States Court of Appeals for the District of Columbia Circuit (the
"Court of Appeals") for review of FERC's April 12, 1995 order. FERC moved to
dismiss NYSEG's petition for review on July 28, 1995. On October 30, 1996,
all parties filed final briefs and the Court of Appeals heard oral arguments
on December 2, 1996. On July 11, 1997, the Court of Appeals dismissed NYSEG's
appeal from FERC's denial of the petition on jurisdictional grounds.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
On August 7, 1997, NYSEG filed a complaint in the U.S. District Court for
the Northern District of New York against the FERC, the PSC (and the
Chairman, Deputy Chairman and the Commissioners of the PSC as individuals in
their official capacity), the Saranac Partnership and Lockport Energy
Associates, L.P. ("Lockport") concerning the power purchase agreements that
NYSEG entered into with Saranac Partners and Lockport.
NYSEG's suit asserts that the PSC and the FERC improperly implemented
PURPA in authorizing the pricing terms that NYSEG, the Saranac Partnership
and Lockport agreed to in those contracts. The action raises similar legal
arguments to those rejected by the FERC in its April and July 1995 orders.
NYSEG in addition asks for retroactive reformation of the contracts as of the
date of commercial operation and seeks a refund of $281 million from the
Saranac Partnership. Saranac and other parties have filed motions to dismiss
and oral arguments on those motions were heard on March 2, 1998. Saranac
believes that NYSEG's claims are without merit for the same reasons described
in the FERC's orders.
LEASES
Certain retail facilities, buildings and equipment are leased. The leases
expire in periods ranging from one to 75 years and some provide for renewal
options.
At December 31, 1997, the Company's future minimum rental payments with
respect to non-cancelable operating leases were as follows:
<TABLE>
<CAPTION>
<S> <C>
1998............................... $ 5,321
1999 .............................. 4,970
2000 .............................. 4,914
2001 .............................. 4,742
2002 .............................. 4,643
Thereafter ....................... 53,905
---------
$78,495
=========
</TABLE>
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
21. GEOGRAPHIC INFORMATION
The Company operates in one principal industry segment: the generation,
distribution and supply of electricity to customers located throughout the
world. Europe consists primarily of Northern. The Company's operations by
geographic area are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
REVENUE
Americas......... $ 570,587 $486,189 $386,833
Asia ............ 102,960 33,282 --
Europe .......... 1,566,442 39,191 --
Corporate/Other 30,922 17,533 11,890
------------ ---------- ----------
$2,270,911 $576,195 $398,723
============ ========== ==========
OPERATING INCOME*
Americas......... $ 301,589 $259,665 $209,872
Asia ............ 61,131 16,766 --
Europe .......... 191,299 6,163 --
Corporate/Other (12,882) (10,931) (10,376)
------------ ---------- ----------
$ 541,137 $271,663 $199,496
============ ========== ==========
</TABLE>
- ------------
* Operating income excludes the loss on equity investment in Casecnan, net
interest expense and the non-recurring charge.
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
IDENTIFIABLE ASSETS
Americas........... $2,268,629 $2,364,448
Asia .............. 835,616 649,053
Europe ............ 2,937,686 2,384,789
Corporate/Other .. 1,445,695 231,866
------------- ------------
$7,487,626 $5,630,156
============= ============
</TABLE>
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (Continued)
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of the Company's quarterly results of operations
for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED*
----------------------------------------------------
1997:(1) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------------------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
Operating revenue........................ $542,589 $505,922 $ 527,896 $589,931
Total revenue ........................... 565,976 524,994 551,893 628,048
Total costs and expenses ................ 506,104 460,184 467,900 639,863
---------- ---------- -------------- -------------
Income (loss) before income taxes ...... 59,872 64,810 83,993 (11,815)
Provision for income taxes .............. 22,249 24,342 27,929 24,524
---------- ---------- -------------- -------------
Income (loss) before minority interest . 37,623 40,468 56,064 (36,339)
Minority interest ....................... 10,175 9,579 9,656 16,583
---------- ---------- -------------- -------------
Income (loss) before extraordinary item 27,448 30,889 46,408 (52,922)
Extraordinary item ...................... -- -- (135,850) --
---------- ---------- -------------- -------------
Net income (loss) attributable to common
stockholders............................ 27,448 30,889 (89,442) (52,922)
---------- ---------- -------------- -------------
Income (loss) per share before
extraordinary item ..................... $ .43 $ .49 $ .73 $ (.67)
Extraordinary item ...................... -- -- (2.14) --
---------- ---------- -------------- -------------
Net income (loss) per share ............. $ .43 $ .49 $ (1.41) $ (.67)
---------- ---------- -------------- -------------
Income (loss) per share before
extraordinary item--diluted ............ $ .42 $ .46 $ .67 $ (.67)
Extraordinary item--diluted ............. -- -- (1.80) --
---------- ---------- -------------- -------------
Net income (loss) per share--diluted .... $ .42 $ .46 $ (1.13) $ (.67)
========== ========== ============== =============
THREE MONTHS ENDED*
----------------------------------------------------
1996:(1) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------------------- ---------- ---------- -------------- -------------
Operating revenue........................ $ 75,944 $104,735 $ 165,487 $172,768
Total revenue ........................... 90,356 115,794 179,048 190,997
Total costs and expenses ................ 69,398 86,039 121,545 158,809
---------- ---------- -------------- -------------
Income before income taxes .............. 20,958 29,755 57,503 32,188
Provision for income taxes .............. 6,497 9,040 18,325 7,959
---------- ---------- -------------- -------------
Income before minority interest ........ 14,461 20,715 39,178 24,229
Minority interest ....................... -- 1,443 1,624 3,055
---------- ---------- -------------- -------------
Net income attributable to common
stockholders............................ $ 14,461 $ 19,272 $ 37,554 $ 21,174
---------- ---------- -------------- -------------
Net income per share .................... $ .28 $ .37 $ .71 $ .34
---------- ---------- -------------- -------------
Net income per share--diluted............ $ .27 $ .34 $ .61 $ .33
========== ========== ============== =============
</TABLE>
- ------------
* The Company's operations are seasonal in nature.
(1) Reflects acquisitions of Northern, Falcon Seaboard and the Partnership
Interest.
F-35
<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, 1998, and the related
consolidated statements of operations for the three and six month periods
ended June 30, 1998 and 1997 and the related consolidated statements of cash
flows for the six month periods ended June 30, 1998 and 1997. 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, 1997, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the year then ended
(not presented herein), and in our report dated February 12, 1998, 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, 1997 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 23, 1998
F-36
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 265,543 $1,445,338
Joint venture cash and investments ......................... 6,903 6,072
Restricted cash and investments ............................ 407,289 223,636
Accounts receivable ........................................ 479,704 376,745
Properties, plants, contracts and equipment, net .......... 4,358,649 3,528,910
Excess of cost over fair value of net assets acquired, net 1,449,972 1,312,788
Equity investments ......................................... 128,110 238,025
Deferred charges and other assets .......................... 385,711 356,112
------------- -------------
Total assets.............................................. $7,481,881 $7,487,626
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable ........................................... $ 192,172 $ 173,610
Other accrued liabilities .................................. 1,134,383 1,106,641
Parent company debt ........................................ 1,303,875 1,303,845
Subsidiary and project debt ................................ 2,850,240 2,189,007
Deferred income taxes ...................................... 550,644 509,059
------------- -------------
Total liabilities ........................................ 6,031,314 5,282,162
------------- -------------
Deferred income............................................. 50,979 40,837
Company-obligated mandatorily redeemable
convertible preferred securities of subsidiary trusts ..... 553,930 553,930
Preferred securities of subsidiary.......................... 66,054 56,181
Minority interest........................................... -- 134,454
Common stock and options subject to redemption (Note 3) .... -- 654,736
Stockholders' equity:
Preferred stock--authorized 2,000 shares, no par value ..... -- --
Common stock--par value $0.0675 per share,
authorized 180,000 shares, issued 82,980 shares,
outstanding
60,033 and 81,322 at June 30, 1998 and
December 31, 1997, respectively ........................... 5,602 5,602
Additional paid in capital ................................. 1,236,851 1,261,081
Retained earnings .......................................... 273,254 213,493
Common stock and options subject to redemption (Note 3) ... -- (654,736)
Treasury stock--22,947 and 1,658 common
shares at June 30, 1998 and December 31,
1997, respectively, at cost ............................... (740,843) (56,525)
Accumulated other comprehensive income ..................... 4,740 (3,589)
------------- -------------
Total stockholders' equity ............................... 779,604 765,326
------------- -------------
Total liabilities and stockholders' equity................ $7,481,881 $7,487,626
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Operating revenue......................... $590,589 $505,922 $1,212,440 $1,048,511
Interest and other income ................ 29,929 19,072 52,389 42,459
---------- ---------- ------------- ------------
Total revenues.......................... 620,518 524,994 1,264,829 1,090,970
---------- ---------- ------------- ------------
Costs and expenses:
Cost of sales............................. 269,768 241,548 582,413 512,495
Operating expense......................... 111,131 76,880 213,778 166,926
General and administration................ 10,814 12,005 22,858 25,492
Depreciation and amortization............. 85,659 70,456 165,584 137,912
Loss on equity investment in Casecnan .... -- 1,289 -- 3,957
Interest expense.......................... 93,648 71,644 188,206 142,266
Less interest capitalized................. (15,059) (13,638) (28,477) (22,760)
---------- ---------- ------------- ------------
Total costs and expenses................ 555,961 460,184 1,144,362 966,288
---------- ---------- ------------- ------------
Income before provision for income taxes 64,557 64,810 120,467 124,682
Provision for income taxes................ 21,952 24,342 40,483 46,591
---------- ---------- ------------- ------------
Income before minority interest........... 42,605 40,468 79,984 78,091
Minority interest......................... 10,139 9,579 20,223 19,754
---------- ---------- ------------- ------------
Net income available to common
stockholders............................. $ 32,466 $ 30,889 $ 59,761 $ 58,337
========== ========== ============= ============
Net income per share--basic............... $ .54 $ .49 $ .99 $ .92
========== ========== ============= ============
Basic common shares outstanding........... 60,235 63,531 60,658 63,521
========== ========== ============= ============
Net income per share--diluted............. $ .51 $ .46 $ .95 $ .88
========== ========== ============= ============
Diluted shares outstanding................ 74,346 72,759 74,641 71,357
========== ========== ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------------
1998 1997
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 59,761 $ 58,337
Adjustments to reconcile net cash flow from operating activities:
Depreciation and amortization ...................................... 143,598 124,437
Amortization of excess of cost over fair value of net assets
acquired........................................................... 21,986 13,475
Amortization of deferred financing and other costs ................. 8,458 21,047
Provision for deferred income taxes ................................ 21,316 23,418
Income on equity investments ....................................... (4,023) (4,676)
Income applicable to minority interest ............................. 2,242 12,600
Changes in other items:
Accounts receivable ............................................... (86,712) (2,219)
Accounts payable and accrued liabilities .......................... (12,319) (83,447)
Deferred income ................................................... 10,142 (5,998)
------------- -----------
Net cash flows from operating activities............................ 164,449 156,974
Cash flows from investing activities:
Purchase of Kiewit Interests and Northern Electric, net of cash
acquired............................................................ (502,916) (629,094)
Distributions from equity investments................................ 7,120 13,219
Acquisition of gas assets............................................ (35,677) --
Philippine construction.............................................. (61,002) (32,946)
Indonesian construction.............................................. (71,800) (40,652)
Exploration and other development costs ............................. (15,046) (7,426)
Capital expenditures relating to operations ......................... (120,615) (101,166)
Decrease (increase) in short-term investments ....................... 1,256 (1,983)
Decrease in restricted cash and investments ......................... 160,850 22,503
Decrease (increase) in other assets.................................. (26,596) 71,301
------------- -----------
Net cash flows from investing activities............................ (664,426) (706,244)
Cash flows from financing activities:
Proceeds from subsidiary and project debt ........................... 107,234 598,280
Repayments of subsidiary and project debt ........................... (103,402) (71,602)
Proceeds from exercise of options.................................... 2,357 4,983
Decrease in amounts due from joint ventures ......................... 16,861 10,732
Deferred charges relating to debt financing ......................... (20,094) (11,813)
Purchase of treasury stock........................................... (689,592) (1,875)
Purchase of stock options from Kiewit................................ (21,313) --
Other................................................................ 20,633 --
Proceeds from issuance of convertible preferred securities of
subsidiary trust.................................................... -- 180,000
Repayment of parent company debt..................................... -- (195,000)
------------- -----------
Net cash flows from financing activities............................ (687,316) 513,705
Effect of exchange rate changes, net................................. 8,329 (26,705)
Net decrease in cash and cash equivalents ........................... (1,178,964) (62,270)
------------- -----------
Cash and cash equivalents at beginning of period..................... 1,451,410 472,583
------------- -----------
Cash and cash equivalents at end of period........................... $ 272,446 $ 410,313
============= ===========
Supplemental disclosures:
Interest paid, net of amount capitalized............................. $ 139,395 $ 123,802
============= ===========
Income taxes paid.................................................... $ 29,417 $ 22,629
============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<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, 1998 and the results of
operations for the three and six months ended June 30, 1998 and 1997, and
cash flows for the six months ended June 30, 1998 and 1997. The results of
operations for the three and six months ended June 30, 1998 and 1997 are not
necessarily indicative of the results to be expected for the full year.
The consolidated financial statements include the accounts of the Company
and its wholly and majority owned subsidiaries, and its proportionate share
of the partnerships and joint ventures in which it has an undivided interest
in the assets and is proportionally liable for its share of liabilities.
Other investments and corporate joint ventures where the Company has the
ability to exercise significant influence are accounted for under the equity
method. Investments, where the Company's ability to influence is limited, are
accounted for under the cost method of accounting.
Certain amounts in the 1997 financial statements and supporting footnote
disclosures have been reclassified to conform to the 1998 presentation. Such
reclassification did not impact previously reported net income or retained
earnings.
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.
2. SUBSEQUENT EVENT:
On August 12, 1998, the Company announced that it had entered into an
Agreement and Plan of Merger with MidAmerican Energy Holdings Company
("MidAmerican"), pursuant to which the Company agreed (i) to pay $27.15 in
cash for each outstanding share of MidAmerican common stock (valuing
MidAmerican at approximately $4 billion, including $1.4 billion of debt and
preferred stock which will remain outstanding at MidAmerican) in a merger,
pursuant to which MidAmerican will become a wholly owned subsidiary of the
Company, and (ii) to reincorporate in the state of Iowa and be renamed
MidAmerican Energy Holdings Company. Closing of the transaction is subject to
the approval of the shareholders of both companies and the obtaining of
certain regulatory approvals.
F-40
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PER KWH AMOUNTS)
3. PROPERTIES, PLANTS, CONTRACTS AND EQUIPMENT:
Properties, plants, contracts and equipment comprise the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ --------------
(UNAUDITED)
<S> <C> <C>
Operating assets:
Distribution system .................................. $1,292,035 $1,237,743
Power plants ......................................... 1,865,892 1,464,885
Wells and resource development ....................... 451,494 395,314
Power sales agreements ............................... 268,212 227,535
Other assets ......................................... 278,357 254,973
------------ --------------
Total operating assets ............................... 4,155,990 3,580,450
Less accumulated depreciation and amortization ...... (642,298) (497,832)
------------ --------------
Net operating assets ................................. 3,513,692 3,082,618
Mineral and gas reserves and exploration assets, net 361,492 297,048
Construction in progress:
Casecnan ............................................ 224,213 --
Dieng ............................................... 96,994 94,666
Patuha .............................................. 149,954 49,612
Bali and other development .......................... 12,304 4,966
------------ --------------
Total................................................. $4,358,649 $3,528,910
============ ==============
</TABLE>
4. KDG ACQUISITION:
On September 11, 1997, the Company signed a definitive agreement with
Kiewit Diversified Group ("KDG"), a wholly owned subsidiary of Peter Kiewit
Sons', Inc. ("PKS"), for the Company to purchase KDG's ownership interest in
various project partnerships and CalEnergy common shares (the "KDG
Acquisition").
KDG's ownership interest in CalEnergy comprised approximately 20,231
shares of common stock (assuming exercise by KDG of one million options to
purchase CalEnergy shares), the 30% interest in Northern Electric, as well as
the following minority project interests: Mahanagdong (45%), Casecnan (35%),
Dieng (47%), Patuha (44%) and Bali (30%) and other interests in international
development stage projects.
CalEnergy paid $1,159,215 for the KDG Acquisition and final closing of the
transaction occurred in January 1998. CalEnergy funded this acquisition with
available cash and the net proceeds of the equity offering and the debt
offering completed in October 1997. The KDG Acquisition is being accounted
for under the purchase method of accounting. The purchase price has been
allocated to assets acquired and liabilities assumed based on preliminary
valuations and the Company is awaiting final valuations. The assets acquired
will be amortized over their estimated useful life and goodwill over a period
of ten to forty years.
Pro forma revenue and net income, as if the acquisition occurred at the
beginning of the period presented, was not materially different from
historical amounts.
F-41
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PER KWH AMOUNTS)
5. CONVERSION OF PHILIPPINE TERM LOANS:
On April 8, 1998, the Company converted the construction project financing
for its Malitbog geothermal power project to term loans of $170,726. The
Overseas Private Investment Corporation ("OPIC") is providing term loan
financing of $60,904 that was fixed as of June 15, 1998 at an interest rate
of 9.176%, maturing in 2005. A syndicate of international commercial banks is
providing the remaining $109,822 of term loan financing at a variable
interest rate based on LIBOR, maturing in 2005.
On May 5, 1998, the Company converted the construction project financing
for its Upper Mahiao geothermal power project to term loans of $155,517.
Export-Import Bank of the United States ("Ex-Im Bank") is providing term loan
financing of $145,517 at a fixed interest rate of 5.95%, maturing in 2006.
United Coconut Planters Bank of the Philippines is providing the remaining
$10,000 of term loan financing at a variable interest rate based on LIBOR,
maturing in 2003.
On June 18, 1998, the Company converted the construction project financing
for its Mahanagdong geothermal power project to term loans of $220,378. Ex-Im
Bank is providing term loan financing of $180,378 at a fixed interest rate of
6.92%, maturing in 2007. OPIC is providing the remaining $40,000 of term loan
financing at a variable interest rate based on LIBOR, maturing in 2007.
6. COMMITMENTS AND CONTINGENCIES:
CASECNAN
On April 17, 1998, CE Casecnan Water and Energy Company, Inc., a
Philippine Corporation ("CE Casecnan") which is currently approximately 70%
indirectly owned by the Company, announced that it and Hanbo Corporation,
Hanbo Engineering and Construction Co., Ltd., Hanbo Steel Company, Ltd. and
Korea First Bank ("KFB") had reached a settlement with regard to certain
disputed terminated contracts and standby letter of credit issues. Under the
settlement, KFB agreed to pay CE Casecnan $90,000 and the parties have
discontinued with prejudice the pending arbitration and litigation
proceedings and released each other from all claims arising out of the
litigation and arbitration. In accordance with the terms of such settlement,
CE Casecnan received $10,000 from KFB on April 17, 1998 and the remaining
$80,000, including interest, on July 3, 1998.
INDONESIA
On September 20, 1997, a Presidential Decree (the "Decree") was issued in
Indonesia, providing for government action to the effect that, in order to
address certain recent fluctuations in the value of the Indonesian currency,
the start-up dates for a number of private power projects would be: (i)
continued according to their initial schedule (because construction was
underway); (ii) postponed as to their start-up dates (because they were not
yet under construction) until economic conditions recover; or (iii) reviewed
with a view to being continued, postponed or rescheduled, depending on the
status of those projects. In the Decree, Dieng Units 1, 2 and 3 were approved
to continue according to their initial schedule; Patuha Unit 1 and Bali Units
1 and 2 were to receive further review to determine whether or not they would
be continued in accordance with their initial schedule; and Bali Units 3 and
4, Patuha Units 2, 3 and 4 and Dieng Unit 4 were postponed for an unspecified
period. In this regard, the Company notes that its contracts and government
undertakings for the Dieng, Patuha and Bali projects do not by their terms
permit such categorization or delays by the government and that the Company
has obtained political risk insurance coverage for its Dieng and Patuha
projects.
Moreover, the Company intends to continue to take actions to attempt to
require the Government of Indonesia to honor its contractual obligations;
however, subsequent actions by the Government of Indonesia and continued
economic problems in Indonesia have created further uncertainty as to whether
the contracts for such projects will be abrogated by the Indonesian
government and accordingly have created significant risks to the completion
of these projects.
F-42
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PER KWH AMOUNTS)
6. COMMITMENTS AND CONTINGENCIES: (Continued)
The Company believes it has fully reserved for the Indonesian exposure as
part of the $87,000 1997 fourth quarter asset valuation impairment charge.
EDISON
On June 9, 1997, Edison filed a complaint alleging breach of the power
purchase agreements ("SO4 Agreements") between Edison and Coso Finance
Partners, Coso Power Partners and Coso Energy Developers as a result of
alleged improper venting of certain noncondensible gases at the Coso
geothermal energy project located in California (partnerships in which
CalEnergy holds an approximate 50% ownership interest, collectively the "Coso
Partnerships").
In the complaint Edison seeks unspecified damages, including the refund of
certain amounts previously paid under the SO4 Agreements, and termination of
the SO4 Agreements. In September 1997, the Coso Partnerships and the Company
filed a cross-complaint against Edison and its affiliates, The Mission Group
and Mission Power Engineering Company alleging, among other things, that
Edison's lawsuit violates the 1993 settlement agreement which settled certain
litigation arising from the construction of certain units at the Coso
geothermal project by Edison affiliates. In addition, the Coso Partnerships
filed a separate complaint against Edison alleging breach of the SO4
Agreements, unfair business practices, slander and various other tort and
contract claims. The actions were effectively consolidated in December 1997.
As a result of certain procedural actions by the parties and a November court
order, Edison filed an amended complaint on December 16, 1997 and the Coso
Partnerships amended their cross-complaint. In addition, the Court has struck
Edison's request to terminate the SO4 Agreements and obtain a refund of all
funds paid to the Coso Partnerships. The litigation is in its early
procedural stages and the pleadings have not been settled. The Coso
Partnerships believe that their claims and defenses are meritorious and that
they will prevail if the matter is ultimately heard on its merits. The Coso
Partnerships intend to vigorously defend this action and prosecute all
available counterclaims against Edison.
NYSEG
On February 14, 1995, NYSEG filed with the FERC a Petition for a
Declaratory Order, Complaint, and Request for Modification of Rates in Power
Purchase Agreements Imposed Pursuant to the Public Utility Regulatory
Policies Act of 1978 ("Petition") seeking FERC (i) to declare that the rates
NYSEG pays under the Saranac PPA, which was approved by the New York Public
Service Commission (the "PSC"), were in excess of the level permitted under
PURPA and (ii) to authorize the PSC to reform the Saranac PPA. On March 14,
1995, the Saranac Partnership (a partnership in which CalEnergy holds an
approximate 45% economic interest) intervened in opposition to the Petition
asserting, inter alia, that the Saranac PPA fully complied with PURPA, that
NYSEG's action was untimely and that the FERC lacked authority to modify the
Saranac PPA. On March 15, 1995, the Company intervened also in opposition to
the Petition and asserted similar arguments. 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 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 NYSEG's request. On June 14, 1995, NYSEG petitioned
the United States Court of Appeals for the District of Columbia Circuit (the
"Court of Appeals") for review of FERC's April 12, 1995 order. FERC moved to
dismiss NYSEG's petition for review on July 28, 1995. On October 30, 1996,
all parties filed final briefs and the Court of Appeals heard oral arguments
on December 2, 1996. On July 11, 1997, the Court of Appeals dismissed NYSEG's
appeal from FERC's denial of the petition on jurisdictional grounds.
F-43
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PER KWH AMOUNTS)
6. COMMITMENTS AND CONTINGENCIES: (Continued)
On August 7, 1997, NYSEG filed a complaint in the U.S. District Court for
the Northern District of New York against the FERC, the PSC (and the
Chairman, Deputy Chairman and the Commissioners of the PSC as individuals in
their official capacity), the Saranac Partnership and Lockport Energy
Associates, L.P. ("Lockport") concerning the power purchase agreements that
NYSEG entered into with Saranac Partners and Lockport. NYSEG's suit asserts
that the PSC and the FERC improperly implemented PURPA in authorizing the
pricing terms that NYSEG, the Saranac Partnership and Lockport agreed to in
those contracts. The action raises similar legal arguments to those rejected
by the FERC in its April and July 1995 orders. NYSEG in addition asks for
retroactive reformation of the contracts as of the date of commercial
operation and seeks a refund of $281 million from the Saranac Partnership.
Saranac and other parties have filed motions to dismiss and oral arguments on
those motions were heard on March 2, 1998. Saranac believes that NYSEG's
claims are without merit for the same reasons described in the FERC's orders.
7. COMPREHENSIVE INCOME:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", which established standards for reporting and display
of comprehensive income and its components. Comprehensive income for the
three months ended June 30, 1998 and 1997 was $29,948 and $36,209,
respectively. Comprehensive income for the six months ended June 30, 1998 and
1997 was $68,090 and $31,632, respectively. Comprehensive income differs from
net income due to foreign currency translation adjustments.
8. ACCOUNTING PRONOUNCEMENTS:
In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP is
effective for financial statements for fiscal years beginning after December
15, 1998. The Company has not yet determined the impact of this accounting
pronouncement.
In April 1998, the AcSEC issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities", which requires that costs of start-up activities and
organization costs be expensed as incurred. The SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company has not yet determined the impact of this accounting pronouncement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which established accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company has not
yet determined the impact of this accounting pronouncement.
F-44
<PAGE>
To the Shareholders and Board
of Directors of MidAmerican
Energy Holdings Company and
Subsidiaries:
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the accompanying consolidated balance sheets and
statements of capitalization of MidAmerican Energy Holdings Company and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, retained earnings and cash flows for each of the three
years in the period ended December 31, 1997. 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MidAmerican
Energy Holdings Company and subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Kansas City, Missouri
January 23, 1998
F-45
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES
Electric utility .................................... $1,126,300 $1,099,008 $1,094,647
Gas utility ......................................... 536,306 536,753 459,588
Nonregulated ........................................ 259,675 236,851 95,106
------------ ------------ ------------
1,922,281 1,872,612 1,649,341
------------ ------------ ------------
OPERATING EXPENSES
Utility:
Cost of fuel, energy and capacity .................. 235,760 234,317 230,261
Cost of gas sold ................................... 346,016 345,014 279,025
Other operating expenses ........................... 429,794 350,174 399,648
Maintenance ........................................ 98,090 88,621 85,363
Depreciation and amortization ...................... 170,540 164,592 158,950
Property and other taxes ........................... 101,317 92,630 96,350
------------ ------------ ------------
1,381,517 1,275,348 1,249,597
------------ ------------ ------------
Nonregulated:
Cost of sales ...................................... 240,182 218,256 70,209
Other .............................................. 30,076 35,370 37,181
------------ ------------ ------------
270,258 253,626 107,390
------------ ------------ ------------
Total operating expenses ........................... 1,651,775 1,528,974 1,356,987
------------ ------------ ------------
OPERATING INCOME..................................... 270,506 343,638 292,354
------------ ------------ ------------
NON-OPERATING INCOME
Interest income...................................... 5,318 4,012 4,485
Dividend income...................................... 13,792 16,985 16,954
Realized gains and losses on securities, net ........ 7,798 1,895 688
Other, net........................................... 22,111 (4,020) (10,467)
------------ ------------ ------------
49,019 18,872 11,660
------------ ------------ ------------
FIXED CHARGES
Interest on long-term debt .......................... 89,898 102,909 105,550
Other interest expense .............................. 10,034 10,941 9,449
Preferred dividends of subsidiaries ................. 14,468 10,689 8,059
Allowance for borrowed funds ........................ (2,597) (4,212) (5,552)
------------ ------------ ------------
111,803 120,327 117,506
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES............................................... 207,722 242,183 186,508
INCOME TAXES......................................... 68,390 98,422 66,803
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS ................... 139,332 143,761 119,705
------------ ------------ ------------
DISCONTINUED OPERATIONS
Income (Loss) from operations (net of income taxes) . (118) 2,117 3,059
Loss on disposal (net of income taxes)............... (4,110) (14,832) --
------------ ------------ ------------
(4,228) (12,715) 3,059
------------ ------------ ------------
NET INCOME........................................... $ 135,104 $ 131,046 $ 122,764
============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING.................... 98,058 100,752 100,401
EARNINGS PER COMMON SHARE
Continuing operations................................ $ 1.42 $ 1.43 $ 1.19
Discontinued operations.............................. (0.04) (0.13) 0.03
------------ ------------ ------------
Earnings per average common share.................... $ 1.38 $ 1.30 $ 1.22
============ ============ ============
DIVIDENDS DECLARED PER SHARE......................... $ 1.20 $ 1.20 $ 1.18
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
---------------------------
1997 1996
------------ -------------
<S> <C> <C>
ASSETS
UTILITY PLANT
Electric...................................................... $4,084,920 $4,010,847
Gas........................................................... 756,874 723,491
------------ -------------
4,841,794 4,734,338
Less accumulated depreciation and amortization ............... 2,275,099 2,153,058
------------ -------------
2,566,695 2,581,280
Construction work in progress ................................ 55,418 49,305
------------ -------------
2,622,113 2,630,585
------------ -------------
POWER PURCHASE CONTRACT....................................... 173,107 190,897
------------ -------------
INVESTMENT IN DISCONTINUED OPERATIONS......................... -- 166,320
------------ -------------
CURRENT ASSETS
Cash and cash equivalents..................................... 10,468 97,749
Receivables, less reserves of $347 and $2,093, respectively .. 207,471 312,015
Inventories................................................... 86,091 90,864
Other......................................................... 18,452 11,031
------------ -------------
322,482 511,659
------------ -------------
INVESTMENTS................................................... 799,524 622,972
------------ -------------
OTHER ASSETS.................................................. 360,865 399,415
------------ -------------
TOTAL ASSETS.................................................. $4,278,091 $4,521,848
============ =============
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity................................... $1,301,286 $1,239,946
MidAmerican preferred securities, not subject to
mandatory redemption......................................... 31,763 31,769
Preferred securities, subject to mandatory redemption:
MidAmerican preferred securities ............................ 50,000 50,000
MidAmerican-obligated preferred securities of subsidiary
trust holding solely MidAmerican junior subordinated
debentures ................................................. 100,000 100,000
Long-term debt (excluding current portion) ................... 1,034,211 1,395,103
------------ -------------
2,517,260 2,816,818
------------ -------------
CURRENT LIABILITIES
Notes payable ................................................ 138,054 161,990
Current portion of long-term debt............................. 144,558 79,598
Current portion of power purchase contract ................... 14,361 13,718
Accounts payable.............................................. 145,855 169,806
Taxes accrued................................................. 92,629 82,254
Interest accrued.............................................. 22,355 28,513
Other......................................................... 38,766 22,830
------------ -------------
596,578 558,709
------------ -------------
OTHER LIABILITIES
Power purchase contract....................................... 83,143 97,504
Deferred income taxes......................................... 761,795 722,300
Investment tax credit......................................... 83,127 88,842
Other......................................................... 236,188 237,675
------------ -------------
1,164,253 1,146,321
------------ -------------
TOTAL CAPITALIZATION AND LIABILITIES.......................... $4,278,091 $4,521,848
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 135,104 $ 131,046 $ 122,764
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization ............................. 197,454 190,511 181,636
Net decrease in deferred income taxes and
investment tax credit, net ............................... (71,191) (7,894) (961)
Amortization of other assets .............................. 33,761 20,541 19,630
Cash proceeds from accounts receivable sale ............... 70,000 -- --
Capitalized cost of real estate sold ...................... 1,859 3,568 1,744
Loss (income) from discontinued operations ................ 4,228 12,715 (3,059)
Gain on sale of securities, assets and other investments . (9,996) (10,132) (1,050)
Other-than-temporary decline in value of investments ..... 3,795 15,566 17,971
Impact of changes in working capital, net of effects
from discontinued operations ............................. 28,098 (53,752) (21,024)
Other ..................................................... (867) 19,218 19,369
----------- ----------- -----------
Net cash provided ........................................ 392,245 321,387 337,020
----------- ----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures .......................... (166,932) (154,198) (190,771)
Quad Cities Nuclear Power Station decommissioning trust
fund....................................................... (9,819) (8,607) (8,636)
Deferred energy efficiency expenditures .................... (12,258) (20,390) (35,841)
Nonregulated capital expenditures........................... (14,066) (55,788) (12,881)
Purchase of securities...................................... (159,770) (198,947) (164,521)
Proceeds from sale of securities............................ 180,890 243,290 94,493
Proceeds from sale of assets and other investments ......... 57,433 33,285 34,263
Investment in discontinued operations....................... 181,321 (5,984) (9,752)
Other investing activities, net............................. (1,360) 8,308 6,946
----------- ----------- -----------
Net cash provided (used) .................................. 55,439 (159,031) (286,700)
----------- ----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid....................................... (117,605) (120,770) (118,828)
Issuance of long-term debt, net of issuance cost ........... -- 99,500 12,750
Retirement of long-term debt, including reacquisition cost . (122,300) (136,616) (110,351)
Reacquisition of preferred shares........................... (6) (58,176) (10)
Reacquisition of common shares.............................. (96,618) -- --
Issuance of preferred shares, net of issuance cost ......... -- 96,850 --
Increase (decrease) in MidAmerican Capital Company
unsecured revolving credit facility ....................... (174,500) 44,500 95,000
Issuance of common shares .................................. -- -- 15,083
Net increase (decrease) in notes payable ................... (23,936) (22,810) 60,300
----------- ----------- -----------
Net cash used ............................................. (534,965) (97,522) (46,056)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... (87,281) 64,834 4,264
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 97,749 32,915 28,651
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................... $ 10,468 $ 97,749 $ 32,915
=========== =========== ===========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized................... $ 96,805 $ 107,179 $ 116,843
=========== =========== ===========
Income taxes paid........................................... $ 130,521 $ 85,894 $ 69,319
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-----------------------------------------
1997 1996
-------------------- --------------------
<S> <C> <C> <C> <C>
COMMON SHAREHOLDERS' EQUITY
Common shares, no par; 350,000,000 shares authorized;
95,300,882 and 100,751,713 shares outstanding, respectively ..... $ 753,873 $ 801,431
Retained earnings ................................................ 409,296 440,971
Valuation allowance, net of income taxes ......................... 138,117 (2,456)
----------- -----------
1,301,286 51.7% 1,239,946 44.0%
----------- ------- ----------- -------
MIDAMERICAN PREFERRED SECURITIES (100,000,000 SHARES AUTHORIZED)
Cumulative shares outstanding not subject to mandatory
redemption:
$3.30 Series, 49,481 and 49,523 shares, respectively ........... 4,948 4,952
$3.75 Series, 38,310 and 38,320 shares, respectively ........... 3,831 3,832
$3.90 Series, 32,630 shares ..................................... 3,263 3,263
$4.20 Series, 47,369 shares ..................................... 4,737 4,737
$4.35 Series, 49,945 and 49,950 shares, respectively ........... 4,994 4,995
$4.40 Series, 50,000 shares ..................................... 5,000 5,000
$4.80 Series, 49,898 shares ..................................... 4,990 4,990
----------- -----------
31,763 1.2% 31,769 1.1%
----------- ------- ----------- -------
Cumulative shares outstanding; subject to mandatory redemption:
$5.25 Series, 100,000 shares .................................... 10,000 10,000
$7.80 Series, 400,000 shares .................................... 40,000 40,000
----------- -----------
50,000 2.0% 50,000 1.8%
----------- ------- ----------- -------
MIDAMERICAN-OBLIGATED PREFERRED SECURITIES
MidAmerican-obligated mandatorily redeemable cumulative
preferred securities of subsidiary trust holding solely
MidAmerican junior subordinated debentures:
7.98% Series, 4,000,000 shares .................................. 100,000 4.0% 100,000 3.6%
----------- ------- ----------- -------
LONG-TERM DEBT
MidAmerican mortgage bonds:
5.05% Series, due 1998 .......................................... -- 49,100
6.25% Series, due 1998 .......................................... -- 75,000
7.875% Series, due 1999 ......................................... 60,000 60,000
6% Series, due 2000 ............................................. 35,000 35,000
6.75% Series, due 2000 .......................................... 75,000 75,000
7.125% Series, due 2003 ......................................... 100,000 100,000
7.70% Series, due 2004 .......................................... 55,630 60,000
7% Series, due 2005 ............................................. 90,500 100,000
7.375% Series, due 2008 ......................................... 75,000 75,000
8% Series, due 2022 ............................................. 50,000 50,000
7.45% Series, due 2023 .......................................... 6,940 26,500
8.125% Series, due 2023 ......................................... 100,000 100,000
6.95% Series, due 2025........................................... 12,500 21,500
MidAmerican pollution control revenue obligations:
5.15% to 5.75% Series, due periodically through 2003 ........... 8,064 8,424
5.95% Series, due 2023 (secured by general mortgage bonds) ..... 29,030 29,030
</TABLE>
The accompanying notes are an integral part of these statements.
F-49
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
---------------------------------------------
1997 1996
----------------------- ---------------------
<S> <C> <C> <C> <C>
LONG-TERM DEBT (CONTINUED)
Variable rate series -
Due 2016 and 2017 (3.7% and 3.5%, respectively) .......... $ 37,600 $ 37,600
Due 2023 (secured by general mortgage
bonds, 3.7% and 3.5%, respectively) ..................... 28,295 28,295
Due 2023 (3.7% and 3.5%, respectively) ................... 6,850 6,850
Due 2024 (3.7% and 3.6%, respectively) ................... 34,900 34,900
Due 2025 (3.7% and 3.5%, respectively).................... 12,750 12,750
MidAmerican notes:
8.75% Series, due 2002 .................................... 240 240
6.5% Series, due 2001 ..................................... 100,000 100,000
6.4% Series, due 2003 through 2007 ........................ 2,000 2,000
Obligation under capital lease ............................ 2,104 2,218
Unamortized debt premium and discount, net ................ (3,192) (4,009)
------------- ------------
Total utility............................................. 919,211 1,085,398
------------- ------------
Nonregulated subsidiaries notes:
7.34% Series, due 1998 .................................... -- 20,000
7.76% Series, due 1999 .................................... 45,000 45,000
8.52% Series, due 2000 through 2002 ....................... 70,000 70,000
8% Series, due annually through 2004 ...................... -- 205
Borrowings under unsecured revolving credit facility
(6.2%) ................................................... -- 64,000
Borrowings under unsecured revolving credit facility
(6.1%) ................................................... -- 26,000
Borrowings under unsecured revolving credit facility
(6.1%) ................................................... -- 84,500
------------- ------------
Total nonregulated subsidiaries .......................... 115,000 309,705
------------- ------------
1,034,211 41.1% 1,395,103 49.5%
------------- -------- ------------ -------
TOTAL CAPITALIZATION........................................ $2,517,260 100.0% $2,816,818 100.0%
============= ======== ============ =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
BEGINNING OF YEAR...................................... $440,971 $430,589 $426,683
----------- ----------- -----------
NET INCOME............................................. 135,104 131,046 122,764
----------- ----------- -----------
DEDUCT (ADD):
Loss on repurchase of common shares.................... 49,174 -- --
Dividends declared on common shares of $1.20, $1.20
and $1.18 per share, respectively..................... 117,605 120,770 118,828
Other.................................................. -- (106) 30
----------- ----------- -----------
166,779 120,664 118,858
----------- ----------- -----------
END OF YEAR............................................ $409,296 $440,971 $430,589
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-51
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) MERGER AND FORMATION OF THE COMPANY:
MidAmerican Energy Holdings Company (Company or Holdings) is a holding
company for MidAmerican Energy Company (MidAmerican), MidAmerican Capital
Company (MidAmerican Capital) and Midwest Capital Group, Inc. (Midwest
Capital). Prior to December 1, 1996, MidAmerican held the capital stock of
MidAmerican Capital and Midwest Capital. Effective December 1, 1996, each
share of MidAmerican common stock was exchanged for one share of Holdings
common stock. As part of the transaction, MidAmerican distributed the capital
stock of MidAmerican Capital and Midwest Capital to Holdings.
MidAmerican was formed on July 1, 1995, as a result of the merger of
Iowa-Illinois Gas and Electric Company (Iowa-Illinois), Midwest Resources
Inc. (Midwest Resources) and its utility subsidiary, Midwest Power Systems
Inc. (Midwest Power). Each outstanding share of preferred and preference
stock of the predecessor companies was converted into one share of a
similarly designated series of MidAmerican preferred stock, no par value.
Each outstanding share of common stock of Midwest Resources and Iowa-Illinois
was converted into one share and 1.47 shares, respectively, of MidAmerican
common stock, no par value. The merger was accounted for as a
pooling-of-interest and the financial statements included herein are
presented as if the merger and the formation of the holding company had
occurred as of the earliest period shown.
(B) CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS:
The accompanying Consolidated Financial Statements include the Company and
its wholly owned subsidiaries, MidAmerican, MidAmerican Capital and Midwest
Capital. All significant intercompany transactions have been eliminated.
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 liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results may differ from those estimates.
(C) REGULATION:
MidAmerican's utility operations are subject to the regulation of the Iowa
Utilities Board (IUB), the Illinois Commerce Commission (ICC), the South
Dakota Public Utilities Commission, and the Federal Energy Regulatory
Commission (FERC). MidAmerican's accounting policies and the accompanying
Consolidated Financial Statements conform to generally accepted accounting
principles applicable to rate-regulated enterprises and reflect the effects
of the ratemaking process.
Statement of Financial Accounting Standards (SFAS) No. 71 sets forth
accounting principles for operations that are regulated and meet certain
criteria. For operations that meet the criteria, SFAS 71 allows, among other
things, the deferral of costs that would otherwise be expensed when incurred.
A possible consequence of the changes in the utility industry is the
discontinued applicability of SFAS 71. The majority of MidAmerican's electric
and gas utility operations currently meet the criteria of SFAS 71, but its
applicability is periodically reexamined. On December 16, 1997, MidAmerican's
generation operations serving Illinois were no longer subject to the
provisions of SFAS 71 due to passage of restructuring legislation in
Illinois. Thus, MidAmerican was required to write off regulatory assets and
liabilities from its balance sheet related to its Illinois generation
operations. The net amount of such write-off's were immaterial. If other
utility operations no longer meet the criteria of SFAS 71, MidAmerican would
be required to write off the related regulatory assets and liabilities from
its balance
F-52
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
sheet and thus, a material adjustment to earnings in that period could
result. The following regulatory assets, primarily included in Other Assets
in the Consolidated Balance Sheets, represent probable future revenue to
MidAmerican because these costs are expected to be recovered in charges to
utility customers (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred income taxes ................. $143,851 $140,649
Energy efficiency costs ............... 111,471 112,244
Debt refinancing costs ................ 34,923 40,230
FERC Order 636 transition costs ...... 9,279 25,033
Environmental costs ................... 20,417 22,577
Retirement benefit costs .............. 595 11,025
Enrichment facilities decommissioning 8,781 11,089
Unamortized costs of retired plant ... 5,771 8,953
Other.................................. 4,201 2,655
---------- ----------
Total................................. $339,289 $374,455
========== ==========
</TABLE>
(D) REVENUE RECOGNITION:
Revenues are recorded as services are rendered to customers. MidAmerican
records unbilled revenues, and related energy costs, representing the
estimated amount customers will be billed for services rendered between the
meter-reading dates in a particular month and the end of such month. Accrued
unbilled revenues were $80.2 million and $70.1 million at December 31, 1997
and 1996, respectively, and are included in Receivables on the Consolidated
Balance Sheets.
MidAmerican's Illinois and South Dakota jurisdictional sales, or
approximately 11% of total retail electric sales, and the majority of its
total retail gas sales are subject to adjustment clauses. These clauses allow
MidAmerican to adjust the amounts charged for electric and gas service as the
costs of gas, fuel for generation or purchased power change. The costs
recovered in revenues through use of the adjustment clauses are charged to
expense in the same period.
(E) DEPRECIATION AND AMORTIZATION:
MidAmerican's provisions for depreciation and amortization for its utility
operations are based on straight-line composite rates. The average
depreciation and amortization rates for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Electric .. 3.8% 3.8% 3.9%
Gas ........ 3.4% 3.7% 3.7%
</TABLE>
Utility plant is stated at original cost which includes overhead costs,
administrative costs and an allowance for funds used during construction.
The cost of repairs and minor replacements is charged to maintenance
expense. Property additions and major property replacements are charged to
plant accounts. The cost of depreciable units of utility plant retired or
disposed of in the normal course of business is eliminated from the utility
plant accounts and such cost, plus net removal cost, is charged to
accumulated depreciation.
An allowance for the estimated annual decommissioning costs of the Quad
Cities Nuclear Power Station (Quad Cities) equal to the level of funding is
included in depreciation expense. See Note 4(e) for additional information
regarding decommissioning costs.
F-53
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(F) INVESTMENTS:
Investments, managed primarily through the Company's nonregulated
subsidiaries, include the following amounts as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Investments:
Marketable securities .............. $467,207 $219,890
Equipment leases ................... 73,928 89,791
Nuclear decommissioning trust fund 93,251 76,304
Energy projects .................... 21,180 24,467
Special-purpose funds .............. 10,057 44,863
Real estate ........................ 42,424 45,457
Corporate owned life insurance .... 33,471 27,395
Coal transportation ................ 14,516 18,623
Communications ..................... 10,000 56,333
Security ........................... 8,551 5,367
Other .............................. 24,939 14,482
---------- ----------
Total .............................. $799,524 $622,972
========== ==========
</TABLE>
Marketable securities generally consist of preferred stocks, common stocks
and mutual funds held by MidAmerican Capital. Investments in marketable
securities classified as available-for-sale are reported at fair value with
net unrealized gains and losses reported as a net of tax amount in Common
Shareholders' Equity until realized. Investments in marketable securities
that are classified as held-to-maturity are reported at amortized cost. An
other-than-temporary decline in the value of a marketable security is
recognized through a write-down of the investment to earnings.
Investments held by the nuclear decommissioning trust fund for the Quad
Cities units are classified as available-for-sale and are reported at fair
value with net unrealized gains and losses reported as adjustments to the
accumulated provision for nuclear decommissioning.
(G) CONSOLIDATED STATEMENTS OF CASH FLOWS:
The Company considers all cash and highly liquid debt instruments
purchased with a remaining maturity of three months or less to be cash and
cash equivalents for purposes of the Consolidated Statements of Cash Flows.
Net cash provided (used) from changes in working capital, net of effects
from discontinued operations was as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Receivables ............... $ 34,544 $(84,802) $(31,314)
Inventories ............... 4,773 (5,629) 7,013
Other current assets ..... (7,421) 6,732 (4,140)
Accounts payable .......... (23,950) 47,751 15,903
Taxes accrued ............. 10,375 356 (9,755)
Interest accrued .......... (6,158) (2,122) (24)
Other current liabilities 15,935 (16,038) 1,293
---------- ----------- -----------
Total..................... $ 28,098 $(53,752) $(21,024)
========== =========== ===========
</TABLE>
F-54
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(H) ACCOUNTING FOR LONG-TERM POWER PURCHASE CONTRACT:
Under a long-term power purchase contract with Nebraska Public Power
District (NPPD), expiring in 2004, MidAmerican purchases one-half of the
output of the 778-megawatt Cooper Nuclear Station (Cooper). The Consolidated
Balance Sheets include a liability for MidAmerican's fixed obligation to pay
50% of NPPD's Nuclear Facility Revenue Bonds and other fixed liabilities. A
like amount representing MidAmerican's right to purchase power is shown as an
asset.
Capital improvement costs prior to July 11, 1997, including carrying
costs, were deferred, and are being amortized and recovered in rates over
either a five-year period or the term of the NPPD contract. Beginning July
11, 1997, capital improvement costs are recovered currently from customers
and are expensed as incurred.
The fuel cost portion of the power purchase contract is included in Cost
of Fuel, Energy and Capacity on the Consolidated Statements of Income. All
other costs MidAmerican incurs in relation to its long-term power purchase
contract with NPPD are included in Other Operating Expenses on the
Consolidated Statements of Income.
See Notes 4(d), 4(e) and 4(f) for additional information regarding the
power purchase contract.
(I) ACCOUNTING FOR DERIVATIVES:
1) Preferred Stock Hedge Instruments:
The Company is exposed to market value risk from changes in interest rates
for certain fixed rate sinking fund preferred and perpetual preferred stocks
(fixed rate preferred stocks) included in Investments on the Consolidated
Balance Sheets. The Company reviews the interest rate sensitivity of these
securities and purchases put options on U.S. Treasury securities (put
options) to reduce interest rate risk on preferred stocks. The Company does
not purchase or sell put options for speculative purposes. The Company's
intent is to substantially offset any change in market value of the fixed
rate preferred stocks due to a change in interest rates with a change in
market value of the put options.
The preferred stocks are publicly traded securities and, as such, changes
in their fair value are reported, net of income taxes, as a valuation
allowance in shareholders' equity. Unrealized gains and losses on the
associated put options are included in the determination of the fair value of
the preferred stocks. The fair value of the put options, including unrealized
gains and losses, included in the determination of the fair value of the
preferred securities as of December 31, 1997 and 1996 was $1.9 million and
$5.1 million, respectively. Realized gains and losses on the put options are
included in Realized Gains and Losses on Securities, Net in the Consolidated
Statements Income in the period the underlying hedged fixed rate preferred
stocks are sold. At December 31, 1997, the Company held put options with a
notional value of $3.2 million.
2) Gas Futures Contracts and Swaps:
The Company uses gas futures contracts and swap contracts to reduce its
exposure to changes in the price of natural gas purchased to meet the needs
of its customers and to manage margins on natural gas storage opportunities.
Investments in natural gas futures contracts, which total $1.6 million and
$0.8 million as of December 31, 1997 and 1996, are included in Receivables on
the Consolidated Balance Sheets. Gains and losses on gas futures contracts
that qualify for hedge accounting are deferred and reflected as adjustments
to the carrying value of the hedged item or included in Other Assets on the
Consolidated Balance Sheets until the underlying physical transaction is
recorded if the instrument is used to hedge an anticipated future
transaction. The net gain or loss on gas futures contracts is included in the
determination of income in the same period as the expense for the physical
delivery of the natural gas.
F-55
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realized gains and losses on gas futures contracts and the net amounts
exchanged or accrued under the natural gas swap contracts are included in
Cost of Gas Sold, Other Net or Nonregulated-Costs of Sales consistent with
the expense for the physical commodity. Deferred net gains (losses) related
to the Company's gas futures contracts are $(0.4) million and $0.8 million as
of December 31, 1997 and 1996, respectively.
The Company periodically evaluates the effectiveness of its natural gas
hedging programs. If a high degree of correlation between prices for the
hedging instruments and prices for the physical delivery is not achieved, the
contracts are recorded at fair value and the gains or losses are included in
the determination of income. At December 31, 1997 the Company held the
following hedging instruments:
<TABLE>
<CAPTION>
NOTIONAL VOLUME WEIGHTED AVERAGE
(MMBTU) (PER MMBTU)
--------------- ----------------
<S> <C> <C>
Natural Gas Futures (Long) ............ 3,670,000 $2.277
Natural Gas Futures (Short) ........... 1,670,000 $2.305
Natural Gas Swaps (Fixed to Variable) 2,497,400
Weighted average variable price ..... $2.558
Weighted average fixed price ......... $3.114
Natural Gas Swaps (Variable to Fixed) 6,806,952
Weighted average variable price ..... $2.536
Weighted average fixed price.......... $2.473
</TABLE>
(2) LONG-TERM DEBT:
The Company's sinking fund requirements and maturities of long-term debt
for 1998 through 2002 are $145 million, $106 million, $134 million, $125
million and $25 million, respectively.
The interest rate on the Company's Adjustable Rate Series Mortgage Bonds
is reset every two years at 160 basis points over the average yield to
maturity of 10-year Treasury securities. The rate was reset in 1997.
The Company's Variable Rate Pollution Control Revenue Obligations bear
interest at rates that are periodically established through remarketing of
the bonds in the short-term tax-exempt market. The Company, at its option,
may change the mode of interest calculation for these bonds by selecting from
among several alternative floating or fixed rate modes. The interest rates
shown in the Consolidated Statements of Capitalization are the weighted
average interest rates as of December 31, 1997 and 1996. The Company
maintains dedicated revolving credit facility agreements or renewable lines
of credit to provide liquidity for holders of these issues.
Substantially all the former Iowa-Illinois utility property and
franchises, and substantially all of the former Midwest Power electric
utility property in Iowa, or approximately 82% of gross utility plant, is
pledged to secure mortgage bonds.
MidAmerican Capital has $64 million and $50 million unsecured revolving
credit facility agreements which mature in 1998. Borrowings under these
agreements may be on a fixed rate, floating rate or competitive bid rate
basis. All subsidiary long-term borrowings outstanding at December 31, 1997,
are without recourse to Holdings.
F-56
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) JOINTLY OWNED UTILITY PLANT:
Under joint plant ownership agreements with other utilities, MidAmerican
had undivided interests at December 31, 1997, in jointly owned generating
plants as shown in the table below.
The dollar amounts below represent MidAmerican's share in each jointly
owned unit. Each participant has provided financing for its share of each
unit. Operating Expenses on the Consolidated Statements of Income include
MidAmerican's share of the expenses of these units (dollars in millions).
<TABLE>
<CAPTION>
NUCLEAR COAL FIRED
------------- -----------------------------------------------
COUNCIL
QUAD CITIES NEAL BLUFFS NEAL OTTUMWA LOUISA
UNITS UNIT UNIT UNIT UNIT UNITS
NO. 1 & 2 NO. 3 NO. 3 NO. 4 NO. 1 NO. 1
------------- ------- --------- ------- --------- --------
IN SERVICE DATE 1972 1975 1978 1979 1981 1983
<S> <C> <C> <C> <C> <C> <C>
Utility plant in service $ 240 $ 128 $ 298 $ 159 $ 210 $ 531
Accumulated depreciation . $ 87 $ 78 $ 164 $ 87 $ 103 $ 235
Unit capacity-MW ......... 1,529 515 675 624 716 700
Percent ownership ........ 25.0% 72.0% 79.1% 40.6% 52.0% 88.0%
</TABLE>
(4) COMMITMENTS AND CONTINGENCIES:
(A) CAPITAL EXPENDITURES:
Utility construction expenditures for 1998 are estimated to be $201
million, including $13 million for Quad Cities nuclear fuel. Nonregulated
capital expenditures depend upon the availability of investment opportunities
and other factors. During 1998, such expenditures are estimated to be
approximately $10 million.
(B) MANUFACTURED GAS PLANT FACILITIES:
The United States Environmental Protection Agency (EPA) and the state
environmental agencies have determined that contaminated wastes remaining at
certain decommissioned manufactured gas plant facilities may pose a threat to
the public health or the environment if such contaminants are in sufficient
quantities and at such concentrations as to warrant remedial action.
MidAmerican is evaluating 26 properties which were, at one time, sites of
gas manufacturing plants in which it may be a potentially responsible party
(PRP). The purpose of these evaluations is to determine whether waste
materials are present, whether such materials constitute an environmental or
health risk, and whether MidAmerican has any responsibility for remedial
action. MidAmerican is currently conducting field investigations at seventeen
of the sites and has completed investigations at one of the sites. In
addition, MidAmerican has completed removals at three of the sites.
MidAmerican is continuing to evaluate several of the sites to determine the
future liability, if any, for conducting site investigations or other site
activity.
MidAmerican's present estimate of probable remediation costs for the sites
discussed above as of December 31, 1997 is $21 million. This estimate has
been recorded as a liability and a regulatory asset for future recovery. The
ICC has approved the use of a tariff rider which permits recovery of the
actual costs of litigation, investigation and remediation relating to former
MGP sites. MidAmerican's present rates in Iowa provide for a fixed annual
recovery of MGP costs. MidAmerican intends to pursue recovery of the
remediation costs from other PRPs and its insurance carriers.
The estimate of probable remediation costs is established on a site
specific basis. The costs are accumulated in a three-step process. First, a
determination is made as to whether MidAmerican has
F-57
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
potential legal liability for the site and whether information exists to
indicate that contaminated wastes remain at the site. If so, the costs of
performing a preliminary investigation and the costs of removing known
contaminated soil are accrued. As the investigation is performed and if it is
determined remedial action is required, the best estimate of remediation
costs is accrued. If necessary, the estimate is revised when a consent order
is issued. The estimated recorded liabilities for these properties include
incremental direct costs of the remediation effort, costs for future
monitoring at sites and costs of compensation to employees for time expected
to be spent directly on the remediation effort. The estimated recorded
liabilities for these properties are based upon preliminary data. Thus,
actual costs could vary significantly from the estimates. The estimate could
change materially based on facts and circumstances derived from site
investigations, changes in required remedial action and changes in technology
relating to remedial alternatives. In addition, insurance recoveries for some
or all of the costs may be possible, but the liabilities recorded have not
been reduced by any estimate of such recoveries.
Although the timing of potential incurred costs and recovery of such costs
in rates may affect the results of operations in individual periods,
management believes that the outcome of these issues will not have a material
adverse effect on MidAmerican's financial position or results of operations.
(C) CLEAN AIR ACT:
On July 18, 1997, the EPA adopted revisions to the National Ambient Air
Quality Standards for ozone and a new standard for fine particulate matter.
Based on data to be obtained from monitors located throughout the states, the
EPA will make a determination of whether the states have any areas that do
not meet the air quality standards (i.e., areas that are classified as
nonattainment). If a state has area(s) classified as nonattainment area(s),
the state is required to submit a State Implementation Plan specifying how it
will reach attainment of the standards through emission reductions or other
means.
The impact of the new standards on MidAmerican will depend on the
attainment status of the areas surrounding MidAmerican's operations and
MidAmerican's relative contribution to the nonattainment status. If
MidAmerican's operations contribute to nonattainment and modifications to
MidAmerican's operations or facilities are necessary, the cost of making
emissions reductions to meet the air quality standards will be dependent upon
the level of emissions reductions required and the available technology.
MidAmerican will continue to evaluate the potential impact of the new
regulations.
Following recommendations provided by the Ozone Transport Assessment
Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking
which identified 22 states and the District of Columbia as making significant
contribution to nonattainment of NAAQS for ozone. Iowa is not subject to
these emissions reduction requirements as EPA's rule is currently drafted,
and, as such, MidAmerican does not anticipate that its facilities will be
subject to additional emissions reductions as a result of this initiative.
The EPA anticipates issuing its final rules in September 1998. MidAmerican
will continue to closely monitor this rulemaking proceeding.
(D) LONG-TERM POWER PURCHASE CONTRACT:
Payments to NPPD cover one-half of the fixed and operating costs of Cooper
(excluding depreciation but including debt service) and MidAmerican's share
of nuclear fuel cost (including nuclear fuel disposal) based on energy
delivered. The debt service portion is approximately $1.5 million per month
for 1998 and is not contingent upon the plant being in service. In addition,
MidAmerican pays one-half of NPPD's decommissioning funding related to
Cooper.
The debt amortization and Department of Energy (DOE) enrichment plant
decontamination and decommissioning component of MidAmerican's payments to
NPPD were $13.8 million, $14.5 million and $12.0 million and the net interest
component was $3.8 million, $3.6 million and $4.6 million each for the years
1997, 1996 and 1995, respectively.
F-58
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MidAmerican's payments for the debt principal portion of the power
purchase contract obligation and the DOE enrichment plant decontamination and
decommissioning payments are $14.4 million, $15.0 million, $15.8 million,
$16.6 million, $17.4 million and $18.3 million for 1998 through 2003,
respectively.
(E) DECOMMISSIONING COSTS:
Based on site-specific decommissioning studies that include
decontamination, dismantling, site restoration and dry fuel storage cost,
MidAmerican's share of expected decommissioning costs for Cooper and Quad
Cities, in 1997 dollars, is $247 million and $230 million, respectively. In
Illinois, nuclear decommissioning costs are included in customer billings
through a mechanism that permits annual adjustments. Such costs are reflected
as base rates in Iowa tariffs.
For purposes of developing a decommissioning funding plan for Cooper, NPPD
assumes that decommissioning costs will escalate at an annual rate of 4.0%.
Although Cooper's operating license expires in 2014, the funding plan assumes
decommissioning will start in 2004, the anticipated plant shutdown date.
As of December 31, 1997, MidAmerican's share of funds set aside by NPPD in
internal and external accounts for decommissioning was $78.2 million. In
addition, the funding plan also assumes various funds and reserves currently
held to satisfy NPPD bond resolution requirements will be available for plant
decommissioning costs after the bonds are retired in early 2004. The funding
schedule assumes a long-term return on funds in the trust of 6.75% annually.
Certain funds will be required to be invested on a short-term basis when
decommissioning begins and are assumed to earn at a rate of 4.0% annually.
NPPD is recognizing decommissioning costs over the life of the power sales
contract. MidAmerican makes payments to NPPD related to decommissioning
Cooper. These payments are included in MidAmerican's power purchase costs.
The Cooper decommissioning component of MidAmerican's payments to NPPD was
$11.3 million, $9.9 million and $8.9 million for the years 1997, 1996, and
1995, respectively, and is included in Other Operating Expenses in the
Consolidated Statements of Income. Earnings from the internal and external
trust funds, which are recognized by NPPD as the owner of the plant, are tax
exempt and serve to reduce future funding requirements.
External trusts have been established for the investment of funds for
decommissioning the Quad Cities units. The total accrued balance as of
December 31, 1997, was $93.3 million and is included in Other Liabilities and
a like amount is reflected in Investments and represents the value of the
assets held in the trusts.
MidAmerican's provision for depreciation included costs for Quad Cities
nuclear decommissioning of $9.8 million, $8.6 million and $8.6 million for
1997, 1996 and 1995, respectively. The provision charged to expense is equal
to the funding that is being collected in rates. The decommissioning funding
component of MidAmerican's Illinois tariffs assumes decommissioning costs,
related to the Quad Cities unit, will escalate at an annual rate of 5.3% and
the assumed annual return on funds in the trust is 6.5%. The Quad Cities
decommissioning funding component of MidAmerican's Iowa tariffs assumes
decommissioning costs will escalate at an annual rate of 6.3% and the assumed
annual return on funds in the trust is 6.5%. Earnings on the assets in the
trust fund were $5.0 million, $3.5 million and $2.5 million for 1997, 1996
and 1995, respectively.
(F) NUCLEAR INSURANCE:
MidAmerican maintains financial protection against catastrophic loss
associated with its interest in Quad Cites and Cooper through a combination
of insurance purchased by NPPD (the owner and operator of Cooper) and
Commonwealth Edison (the joint owner and operator of Quad Cities), insurance
F-59
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
purchased directly by MidAmerican, and the mandatory industry-wide loss
funding mechanism afforded under the Price-Anderson Amendments Act of 1988.
The coverage falls into three categories: nuclear liability, property
coverage and nuclear worker liability.
NPPD and Commonwealth Edison each purchase nuclear liability insurance in
the maximum available amount of $200 million. In accordance with the
Price-Anderson Amendments Act of 1988, excess liability protection above that
amount is provided by a mandatory industry-wide program under which the
owners of nuclear generating facilities could be assessed for liability
incurred due to a serious nuclear incident at any commercial nuclear reactor
in the United States. Currently, MidAmerican's maximum potential share of
such an assessment is $79.3 million per incident, payable in installments not
to exceed $10 million annually.
The property coverage provides for property damage, stabilization and
decontamination of the facility, disposal of the decontaminated material and
premature decommissioning. For Quad Cities, Commonwealth Edison purchases
primary and excess property insurance protection for the combined interest in
Quad Cities totalling $2.1 billion. For Cooper, NPPD purchases primary
property insurance in the amount of $500 million. Additionally, MidAmerican
and NPPD separately purchase coverage for their respective obligation of
$1.125 billion each in excess of the $500 million primary layer purchased by
NPPD. This structure provides that both MidAmerican and NPPD are covered for
their respective 50% obligation in the event of a loss totalling $2.75
billion. MidAmerican also directly purchases extra expense/business
interruption coverage to cover the cost of replacement power and/or other
continuing costs in the event of a covered accidental outage at Cooper or
Quad Cities. The coverages purchased directly by MidAmerican, and the primary
and excess property coverages purchased by Commonwealth Edison, contain
provisions for retrospective premium assessments should two or more full
policy-limit losses occur in one policy year. Currently, the maximum
retrospective amounts that could be assessed against MidAmerican from
industry mutual insurance companies for its obligations associated with
Cooper and Quad Cities combined total $11.6 million.
The master nuclear worker liability coverage is an industry-wide policy
with an aggregate limit of $200 million for the nuclear industry as a whole,
which is in effect to cover tort claims of workers as a result of radiation
exposure on or after January 1, 1988. MidAmerican's share, based on its
interest in Cooper and Quad Cities, of a maximum potential share of a
retrospective assessment under this program is $3.0 million.
(G) COAL AND NATURAL GAS CONTRACT COMMITMENTS:
MidAmerican has entered into supply and related transportation contracts
for its fossil fueled generating stations. The contracts, with expiration
dates ranging from 1998 to 2003, require minimum payments of $132.2 million,
$88.8 million, $57.8 million, $26.3 million and $3.1 million and $3.1 million
for the years 1998 through 2003, respectively. The Company expects to
supplement these coal contracts with spot market purchases to fulfill its
future fossil fuel needs.
The Company has entered into various natural gas supply and transportation
contracts for its utility operations. The minimum commitments under these
contracts are $88 million, $63 million, $37 million, $32 million and $16
million for the years 1998 through 2002, respectively, and $76 million for
the total of the years thereafter. During 1993 FERC Order 636 became
effective, requiring interstate pipelines to restructure their services. The
pipeline will recover the transition costs related to Order 636 from the
local distribution companies. The Company has recorded a liability and
regulatory asset for the transition costs which are being recovered by the
Company through the purchased gas adjustment clause. The unrecovered balance
recorded by the Company as of December 31, 1997, was $9.3 million.
F-60
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) COMMON SHAREHOLDERS' EQUITY:
Common shares outstanding changed during the years ended December 31 as
shown in the table below (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- --------------------
AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
---------- --------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of
year ................ $801,431 100,752 $801,227 100,752 $786,420 99,687
Changes due to:
Repurchase of common
shares ............. (47,444) (5,451) -- -- -- --
Issuance of common
shares.............. -- -- -- -- 15,083 1,065
Stock options ....... 210 -- 623 -- -- --
Capital stock
expense............. (289) -- (419) -- (276) --
Other ............... (35) -- -- -- -- --
---------- --------- ---------- --------- ---------- --------
Balance, end of year $753,873 95,301 $801,431 100,752 $801,227 100,752
========== ========= ========== ========= ========== ========
</TABLE>
(6) RETIREMENT PLANS:
The Company has noncontributory defined benefit pension plans covering
substantially all employees. Benefits under the plans are based on
participants' compensation, years of service and age at retirement.
Funding is based upon the actuarially determined costs of the plans and
the requirements of the Internal Revenue Code and the Employee Retirement
Income Security Act. MidAmerican has been allowed to recover funding
contributions in rates.
Net periodic pension cost includes the following components for the years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Service cost-benefit earned during the period ......... $ 10,092 $ 12,323 $ 9,817
Interest cost on projected benefit obligation ......... 29,623 31,109 27,934
Decrease in pension costs from actual return on assets (79,580) (58,460) (63,593)
Net amortization and deferral .......................... 39,446 26,223 32,126
One-time charge ........................................ -- -- 15,683
Regulatory deferral of incurred cost ................... 5,423 568 (10,470)
---------- ---------- ----------
Net periodic pension cost............................... $ 5,004 $ 11,763 $ 11,497
========== ========== ==========
</TABLE>
During 1995, the Company incurred a one-time charge of $15.7 million
related to the early retirement portion of its restructuring plan. Of such
cost, $3.0 million was charged to expense and the remaining amount was
deferred for future recovery through the regulatory process.
The plan assets are stated at fair market value and are primarily
comprised of insurance contracts, United States government debt and corporate
equity securities. The plans in which accumulated benefits exceed assets
consist entirely of nonqualified defined benefit plans. Although the plans
have no assets, the Company purchases corporate owned life insurance to
provide funding for the future cash requirements. The cash value of such
insurance was $21.5 million and $17.3 million at December 31, 1997 and 1996,
F-61
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively. The following table presents the funding status of the plans
and amounts recognized in the Consolidated Balance Sheets as of December 31
(dollars in thousands):
<TABLE>
<CAPTION>
PLANS IN WHICH:
---------------------------------------------------
ASSETS EXCEED ACCUMULATED BENEFITS
ACCUMULATED BENEFITS EXCEED ASSETS
-------------------------- ------------------------
1997 1996 1997 1996
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation....................... $(325,770) $(298,237) $(40,080) $(36,574)
Nonvested benefit obligation ................... (3,623) (3,454) (242) (1,925)
------------ ------------ ----------- -----------
Accumulated benefit obligation ................. (329,393) (301,691) (40,322) (38,499)
Provision for future pay increases ............. (52,027) (79,790) (8,301) (8,733)
------------ ------------ ----------- -----------
Projected benefit obligation ................... (381,420) (381,481) (48,623) (47,232)
Plan assets at fair value ....................... 483,668 427,828 -- --
------------ ------------ ----------- -----------
Projected benefit obligation (greater) less than
plan assets .................................... 102,248 46,347 (48,623) (47,232)
Unrecognized prior service cost ................. 592 18,636 21,147 21,544
Unrecognized net loss (gain) .................... (93,770) (63,173) (1,281) --
Unrecognized net transition asset ............... (16,339) (18,929) -- --
Other .......................................... -- -- (11,565) (12,811)
------------ ------------ ----------- -----------
Pension liability recognized in the Consolidated
Balance Sheets ................................. $ (7,269) $ (17,119) $(40,322) $(38,499)
============ ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Assumptions used were:
Discount rate ................................................. 7.0% 7.5%
Rate of increase in compensation levels ....................... 5.0% 5.0%
Weighted average expected long-term rate of return on assets .. 9.0% 9.0%
</TABLE>
The Company currently provides certain health care and life insurance
benefits for retired employees. Under the plans, substantially all of the
Company's employees may become eligible for these benefits if they reach
retirement age while working for the Company. However, the Company retains
the right to change these benefits anytime at its discretion.
In January 1993, the Company adopted SFAS No. 106, Employers Accounting
for Postretirement Benefits Other Than Pensions. The Company began expensing
these costs on an accrual basis for its Illinois customers and certain of its
Iowa customers in 1993 and including provisions for such costs in rates for
these customers. For its remaining Iowa customers, the Company deferred the
portion of these costs above the "pay-as-you-go" amount already included in
rates until recovery on an accrual basis was established in 1995. The Company
is currently amortizing the deferral, expensing the SFAS No. 106 accrual and
including provisions for these costs in rates.
F-62
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic postretirement benefit cost includes the following components
for the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost-benefit earned during the period .......... $ 2,680 $ 2,118 $ 1,583
Interest cost ........................................... 8,822 8,341 7,185
Increase (decrease) in benefit cost from actual return
on assets .............................................. (2,285) (1,598) (2,090)
Amortization of unrecognized transition obligation ..... 5,291 5,291 5,291
Amortization of unrecognized service cost ............... 650 -- --
Amortization of unrecognized prior year (loss) ......... (298) -- --
Other ................................................... (288) (297) (262)
One-time charge for early retirement .................... -- -- 4,353
Regulatory recognition of incurred cost ................. 4,888 5,112 5,140
--------- --------- ---------
Net periodic postretirement benefit cost ................ $19,460 $18,967 $21,200
========= ========= =========
</TABLE>
During 1995, the Company recorded a one-time expense of $4.4 million
related to the early retirement portion of its restructuring plan.
The Company has established external trust funds to meet its expected
postretirement benefit obligations. The trust funds are comprised primarily
of guaranteed rate investment accounts and money market investment accounts.
A reconciliation of the funded status of the plan to the amounts realized as
of December 31 is presented below (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Accumulated present value of benefit obligations:
Retiree benefit obligation ........................... $ (74,534) $ (78,935)
Active employees fully eligible for benefits ........ (6,466) (2,798)
Other active employees ............................... (46,347) (34,772)
----------- -----------
Accumulated benefit obligation ....................... (127,347) (116,505)
Plan assets at fair value ............................. 52,174 36,783
----------- -----------
Accumulated benefit obligation greater than plan
assets................................................ (75,173) (79,722)
Unrecognized net gain ................................. (11,248) (8,810)
Prior service cost .................................... 8,277 --
Unrecognized transition obligation .................... 79,370 84,662
----------- -----------
Postretirement benefit liability recognized in the
Consolidated Balance Sheets........................... $ 1,226 $ (3,870)
=========== ===========
Assumptions used were:
Discount rate ........................................ 7.0% 7.5%
Weighted average expected long-term rate of return on
assets (after taxes) ................................ 6.5% 6.7%
</TABLE>
For purposes of calculating the postretirement benefit obligation, it is
assumed health care costs for covered individuals prior to age 65 will
increase by 10.0% in 1998, and that the rate of increase thereafter will
decline by 1.0% annually to an ultimate rate of 5.5% by the year 2003. For
covered individuals age 65 and older, it is assumed health care costs will
increase by 7.0% in 1998, and that the rate of increase thereafter will
decline by 1.0% annually to an ultimate rate of 5.5% by the year 2000.
If the assumed health care trend rates used to measure the expected cost
of benefits covered by the plans were increased by 1%, the total service and
interest cost would increase by $1.8 million and the accumulated
postretirement benefit obligation would increase by $15.4 million.
F-63
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company sponsors defined contribution pension plans (401(k) plans)
covering substantially all employees. The Company's contributions to the
plans, which are based on the participants' level of contribution and cannot
exceed four percent of the participants' salaries or wages, were $4.6
million, $4.4 million and $3.7 million for 1997, 1996 and 1995, respectively.
(7) STOCK-BASED COMPENSATION PLANS:
The company has stock-based compensation arrangements as described below.
The company accounts for these plans under Accounting Principles Board
Opinion No. 25 and the related interpretations. The total compensation cost
recognized in income for stock-based compensation awards was $1.3 million,
$0.6 million, and $1.8 million for 1997, 1996, and 1995 respectively. Had the
company used Statement of Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), pro-forma net income for common stock
would be $135.3 million, $130.9 million, and $122.6 million, while earnings
per share would be $1.38, $1.30, and $1.22 for the years ended 1997, 1996,
and 1995 respectively.
Stock options and performance share awards have been granted pursuant to
the MidAmerican Energy Company 1995 Long-Term Incentive Plan (the "Plan"). Up
to four million shares are authorized to be granted under the Plan.
Stock Options -- Under the Plan, the Board of Directors have granted options
to purchase shares of MidAmerican Holdings common stock (the "Options") at
the fair market value of the shares on the date of the grant. The options
vest over a 4-year period at a rate of 25% per year and expire ten years
after the date of grant. Stock option activity for 1997, 1996, and 1995 is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXEERCISE
NUMBER PRICE NUMBER PRICE
--------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of year ....... 800,000 $14.66 700,000 $14.50
Granted ............................... 46,666 $17.36 100,000 $15.75
Exercised ............................. 165,000 $14.58 -- --
Forfeited ............................. 115,000 $14.93 -- --
Expired ............................... -- -- -- --
Outstanding, end of year .............. 566,666 $15.12 800,000 $14.66
Exercisable, end of year .............. 315,000 $14.54 175,000 $14.50
Weighted average fair value of options
granted during year .................. $ 1.66 $ 1.48
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1995
---------------------
WEIGHTED
AVERAGE
EXERCISE
NUMBER PRICE
--------- ----------
<S> <C> <C>
Outstanding, beginning of year ....... -- --
Granted ............................... 700,000 $14.50
Exercised ............................. -- --
Forfeited ............................. -- --
Expired ............................... -- --
Outstanding, end of year .............. 700,000 $14.50
Exercisable, end of year .............. -- --
Weighted average fair value of options
granted during year .................. $ 1.58
</TABLE>
The fair value of the options granted were estimated as of the date of the
grant using the Black-Scholes option pricing model. The model assumed:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Dividend rate per share .... $ 1.20 $ 1.20 $1.20
Expected volatility ......... 16.55% 17.62% 23%
Expected life ............... 10 Years 10 Years 10 Years
Risk free interest rate .... 6.14% 6.53% 6.28%
</TABLE>
The options outstanding at December 31, 1997 have an exercise price range
of $14.50 to $17.785, with a weighted average contractual life of 8.25 years.
<PAGE>
Performance Shares -- Under the Plan, participants are granted contingent
shares of common stock. The shares are contingent upon the attainment of
specified performance measures within a 3-year performance period. During the
performance period, the participant is entitled to receive dividends and vote
the stock. The stock is vested upon achievement of the performance measures.
If the specified
F-64
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
criteria is not met within the 3-year performance period, the shares are
forfeited. The following table provides certain information regarding
contingent performance incentive shares granted under the Plan:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Number of performance shares granted ....... 77,105 68,189 86,277
Fair value at date of grant (in thousands) $1,335 $1,176 $1,251
Weighted average per share amounts ........ $ 17.3125 $17.2500 $14.5000
End of performance period .................. 6/30/2000 6/30/99 6/30/98
</TABLE>
In addition, the company has granted 800 restricted shares to each
non-employee director in 1997, 1996 and 1995. Non-employee directors are
restricted from disposing of granted shares until such time as they cease to
be a director of the company. The following table provides certain
information regarding the directors restricted shares granted under the Plan.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Number of shares granted ................... 11,200 12,000 13,600
Fair value at date of grant (in thousands) $194 $207 $197
Weighted average price per share amounts .. $17.3125 $17.2500 $14.5000
</TABLE>
Employee Stock Ownership Plan -- Employees of the Company are allowed to
purchase company stock up to the lesser of 15% or $25,000 of their annual
compensation at a 15% discount. The number of shares acquired by employees
under the plan were 140,943, 150,899, and 182,707 in 1997, 1996 and 1995,
respectively. The Company currently acquires shares in the open market for
this plan. Participants who purchase shares under the Plan are required to
hold purchased shares for 180 days.
(8) SHORT-TERM BORROWING:
Interim financing of working capital needs and the construction program
may be obtained from the sale of commercial paper or short-term borrowing
from banks. Information regarding short-term debt follows (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance at year-end ....................... $138,054 $161,990 $184,800
Weighted average interest rate on year-end
balance .................................. 5.9% 5.4% 5.7%
Average daily amount outstanding during
the year ................................. $117,482 $151,318 $114,036
Weighted average interest rate on average
daily amount outstanding during the year 5.7% 5.5% 6.0%
</TABLE>
MidAmerican has authority from FERC to issue short-term debt in the form
of commercial paper and bank notes aggregating $400 million. As of December
31, 1997, MidAmerican had a $250 million revolving credit facility agreement
and a $10 million line of credit and Holdings had lines of credit totaling
$120 million. MidAmerican's commercial paper borrowings are supported by the
revolving credit facility and the line of credit.
(9) RATE MATTERS:
As a result of a negotiated settlement in Illinois, MidAmerican reduced
its Illinois electric service rates by annual amounts of $13.1 million and
$2.4 million, effective November 3, 1996, and June 1, 1997, respectively.
F-65
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On June 27, 1997, the Iowa Utilities Board (IUB) issued an order in a
consolidated rate proceeding involving MidAmerican's pricing proposal and a
filing by the Iowa Office of Consumer Advocate (OCA). The order approved a
March 1997 settlement agreement between MidAmerican, the OCA and other
parties to the proceeding. The agreement includes a number of characteristics
of MidAmerican's pricing proposal. Prices for residential customers were
reduced $8.5 million annually and $10.0 million annually, effective November
1, 1996, and July 11, 1997, respectively, and will be reduced an additional
$5.0 million annually on June 1, 1998, for a total annual decrease of $23.5
million. Rates for commercial and industrial customers will be reduced a
total of $10 million annually by June 1, 1998, through pilot projects,
negotiated rates with individual customers and, if needed, a base rate
reduction effective June 1, 1998. The agreement includes a tracking mechanism
to currently recover the cost of capital improvements required by the Cooper
Nuclear Station Power Purchase Contract. The tracking mechanism will offset
approximately $9 million of these reductions.
In addition, the agreement accepted MidAmerican's proposal to eliminate
the Iowa energy adjustment clause (EAC) which was the mechanism through which
fuel costs were collected from Iowa customers prior to July 11, 1997. The EAC
flows the cost of fuel to customers on a current basis, and thus, fuel costs
had little impact on net income. Prospectively, base rates for Iowa customers
will include a factor for recovery of a representative level of fuel costs.
To the extent actual fuel costs vary from that factor, pre-tax earnings will
be impacted. The fuel cost factor will be reviewed in February 1999 and
adjusted prospectively if actual 1998 fuel costs vary 15% above or below the
factor included in base rates.
Under the agreement, if MidAmerican's annual Iowa electric jurisdictional
return on common equity exceeds 12%, then an equal sharing between customers
and shareholders of earnings above the 12% level begins; if it exceeds 14%,
then two-thirds of MidAmerican's share of those earnings will be used for
accelerated recovery of certain regulatory assets. The agreement permits
MidAmerican to file for increased rates if the return falls below 9%. Other
parties signing the agreement are prohibited from filing for reduced rates
prior to 2001 unless the return, after reflecting credits to customers,
exceeds 14%.
The agreement also provides that MidAmerican will develop a pilot program
for a market access service which allows customers with at least 4 MW of load
to choose energy suppliers. The pilot program, which is subject to approval
by the IUB and the Federal Energy Regulatory Commission (FERC), is limited to
60 MW of participation the first year and can be expanded by 15 MW annually
until the conclusion of the program. Any loss of revenues associated with the
pilot program will be considered part of the $10 million annual reduction for
commercial and industrial customers as described above, but may not be
recovered from other customer classes. The program was filed with the IUB and
the FERC in September 1997. The Company anticipates that the necessary
approvals will be received before the end of the second quarter of 1998.
(10) DISCONTINUED OPERATIONS:
In the third quarter of 1996, the Company announced the discontinuation of
certain nonstrategic businesses in support of its strategy of becoming the
leading regional energy and complementary services provider. In November of
1996, the Company signed a definitive agreement with KCS Energy, Inc. (KCS)
to sell an oil and gas exploration and development subsidiary and completed
the sale on January 3, 1997. The Company recorded an after-tax loss of $7.1
million for the disposition in 1996 and an additional $0.9 million in 1997.
In October 1997, the company sold its subsidiary that developed and continues
to operate a computerized information system facilitating the real-time
exchange of power in the electric industry. The Company recorded a $4.0
million estimated after-tax loss on disposal in the third quarter of 1996 and
an additional $3.2 million in September 1997. In addition, in the third
quarter of 1996 the Company received a final settlement from the sale of a
coal mining subsidiary which was reflected as a discontinued operation by a
predecessor company in 1982. The final settlement, which resulted in an
after-tax loss of $3.3 million, included the reacquisition of preferred
equity by the buyer and the settlement of reclamation reserves.
F-66
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Proceeds received from the disposition of the oil and gas subsidiary
included $210 million in cash and 870,000 warrants, after a stock split in
1997, to purchase KCS common stock. The warrants were valued at $6 million.
Proceeds received from the disposition of the subsidiary that operates a
computerized information system for the exchange of power in the electric
industry included an unsecured note receivable for $0.7 million and warrants
to purchase twenty percent of the acquirer which have been valued at zero.
Proceeds received from the disposition of the coal mining subsidiary
settlement were $15 million. Net assets of the discontinued operations are
separately presented on the Consolidated Balance Sheets as Investment in
Discontinued Operations.
Revenues from discontinued activities, as well as the results of
operations and the estimated loss on the disposal of discontinued operations
for the years ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
OPERATING REVENUES................. $ -- $233,952 $81,637
=========== =========== ==========
INCOME FROM OPERATIONS
Income (loss) before income taxes . $ (200) $ 1,638 $ 4,704
Income tax benefit (expense) ..... 82 479 (1,645)
----------- ----------- ----------
Income (loss) from Operations ..... $ (118) $ 2,117 $ 3,059
=========== =========== ==========
LOSS ON DISPOSAL
Income (loss) before income taxes $(10,106) $ 9,047 $ --
Income tax benefit (expense) ..... 5,996 (23,879) --
----------- ----------- ----------
Loss on disposal................... $ (4,110) $(14,832) $ --
=========== =========== ==========
</TABLE>
(11) CONCENTRATION OF CREDIT RISK:
The Company's electric utility operations serve 560,000 customers in Iowa,
85,000 customers in western Illinois and 3,000 customers in southeastern
South Dakota. The Company's gas utility operations serve 486,000 customers in
Iowa, 65,000 customers in western Illinois, 63,000 customers in southeastern
South Dakota and 4,000 customers in northeastern Nebraska. The largest
communities served by the Company are the Iowa and Illinois Quad-Cities; Des
Moines, Sioux City, Cedar Rapids, Waterloo, Iowa City and Council Bluffs,
Iowa; and Sioux Falls, South Dakota. The Company's utility operations grant
unsecured credit to customers, substantially all of whom are local businesses
and residents. As of December 31, 1997, billed receivables from the Company's
utility customers totalled $14.8 million. As described in Note 18, billed
receivables related to utility services have been sold to a wholly owned
unconsolidated subsidiary.
MidAmerican Capital has investments in preferred stocks of companies in
the utility industry. As of December 31, 1997, the total cost of these
investments was $96 million.
MidAmerican Capital has entered into leveraged lease agreements with
companies in the airline industry. As of December 31, 1997, the receivables
under these agreements totalled $35 million.
(12) PREFERRED SHARES:
During 1996, MidAmerican redeemed all shares of the $1.7375 Series of
preferred stock. The redemptions were made at a premium, which resulted in a
charge to net income of $1.6 million.
The $5.25 Series Preferred Shares, which are not redeemable prior to
November 1, 1998 for any purpose, are subject to mandatory redemption on
November 1, 2003 at $100 per share. The $7.80 Series Preferred Shares have
sinking fund requirements under which 66,600 shares will be redeemed at $100
per share each May 1, beginning in 2001 through May 1, 2006.
F-67
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The total outstanding cumulative preferred stock of MidAmerican not
subject to mandatory redemption requirements may be redeemed at the option of
the Company at prices which, in the aggregate, total $31.8 million. The
aggregate total the holders of all preferred stock outstanding at December
31, 1997, are entitled to upon involuntary bankruptcy is $181.8 million plus
accrued dividends. Annual dividend requirements for all preferred stock
outstanding at December 31, 1997, total $12.9 million.
(13) SEGMENT INFORMATION:
Information related to segments of the Company's business is as follows
for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
UTILITY
Electric:
Operating revenues ..................... $1,126,300 $1,099,008 $1,094,647
Cost of fuel, energy and capacity ..... 235,760 234,317 230,261
Depreciation and amortization expense . 145,931 140,939 136,324
Other operating expenses ............... 502,109 424,594 459,344
------------ ------------ ------------
Operating income........................ $ 242,500 $ 299,158 $ 268,718
============ ============ ============
Gas:
Operating revenues...................... $ 536,306 $ 536,753 $ 459,588
Cost of gas sold ....................... 346,016 345,014 279,025
Depreciation and amortization expense . 24,609 23,653 22,626
Other operating expenses ............... 127,092 106,831 122,017
------------ ------------ ------------
Operating income........................ $ 38,589 $ 61,255 $ 35,920
============ ============ ============
Operating income ........................ $ 281,089 $ 360,413 $ 304,638
Other income (expense) .................. 14,699 3,998 (4,074)
Fixed charges .......................... 100,018 96,753 92,036
------------ ------------ ------------
Income from continuing operations before
income taxes ........................... 195,770 267,658 208,528
Income taxes ............................ 76,317 112,927 84,098
------------ ------------ ------------
Income from continuing operations ....... $ 119,453 $ 154,731 $ 124,430
============ ============ ============
Capital Expenditures--
Electric ............................... $ 128,544 $ 116,243 $ 133,490
Gas..................................... $ 38,388 $ 37,955 $ 57,281
</TABLE>
F-68
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
NONREGULATED
Revenues....................... $259,675 $236,851 $ 95,106
Cost of sales ................. 240,182 218,256 70,351
Depreciation and amortization 3,436 4,854 6,010
Other operating expenses ..... 26,640 30,516 31,029
---------- ----------- ----------
Operating income (loss) ...... (10,583) (16,775) (12,284)
Other income .................. 34,320 14,874 15,734
Fixed charges .................. 11,785 23,574 25,470
---------- ----------- ----------
Income (loss) from continuing
operations before income
taxes ........................ 11,952 (25,475) (22,020)
Income taxes .................. (7,927) (14,505) (17,295)
---------- ----------- ----------
Income (loss) from continuing
operations.................... $ 19,879 $(10,970) $ (4,725)
========== =========== ==========
Capital expenditures .......... $ 14,066 $ 55,788 $ 12,881
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
ASSET INFORMATION
Identifiable utility assets:
Electric (a) ......................... $2,825,573 $2,954,324 $2,947,832
Gas (a) .............................. 677,991 692,993 699,539
Used in overall utility operations .. 11,341 114,545 30,084
Nonregulated ......................... 763,186 593,666 615,342
Investment in discontinued operations -- 166,320 177,300
------------ ------------ ------------
Total assets ........................ $4,278,091 $4,521,848 $4,470,097
============ ============ ============
</TABLE>
- ------------
(a) Utility plant less accumulated provision for depreciation,
receivables, inventories, nuclear decommissioning trust fund and
regulatory assets.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments. Tariffs for the Company's utility
services are established based on historical cost ratemaking. Therefore, the
impact of any realized gains or losses related to financial instruments
applicable to the Company's utility operations is dependent on the treatment
authorized under future ratemaking proceedings.
Cash and cash equivalents -- The carrying amount approximates fair value
due to the short maturity of these instruments.
Quad Cities nuclear decommissioning trust fund -- Fair value is based on
quoted market prices of the investments held by the fund.
Marketable securities -- Fair value is based on quoted market prices.
Debt securities -- Fair value is based on the discounted value of the
future cash flows expected to be received from such investments.
Equity investments carried at cost -- Fair value is based on an estimate
of the Company's share of partnership equity, offers from unrelated third
parties or the discounted value of the future cash flows expected to be
received from such investments.
F-69
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Notes payable -- Fair value is estimated to be the carrying amount due to
the short maturity of these issues.
Preferred shares -- Fair value of preferred shares with mandatory
redemption provisions is estimated based on the quoted market prices for
similar issues.
Long-term debt -- Fair value of long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
The following table presents the carrying amount and estimated fair value
of certain financial instruments as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Financial Instruments Owned by the Company:
Equity investments carried at cost ................ $ 33,979 $ 36,491 $ 95,339 $ 273,311
Financial Instruments Issued by the Company:
MidAmerican preferred securities; subject to
mandatory redemption.............................. $ 50,000 $ 53,650 $ 50,000 $ 52,920
MidAmerican-obligated preferred securities; subject
to mandatory redemption............................ $ 100,000 $ 104,250 $ 100,000 $ 100,490
Long-term debt, including current portion ......... $1,178,769 $1,214,951 $1,474,701 $1,522,500
</TABLE>
Included in investments on the Consolidated Balance Sheets is the
Company's investment in common stock of McLeodUSA Incorporated (McLeodUSA).
McLeodUSA common stock has been publicly traded since June 14, 1996. Investor
agreements related to McLeodUSA's initial public offering and subsequent
merger with Consolidated Communications Inc. prohibit the Company from
selling or otherwise disposing of any of the common stock of McLeodUSA prior
to September 24, 1998, without approval of McLeodUSA's board of directors. As
a result of the agreements, the Company's investment was considered
restricted stock and as such, was recorded at cost in all periods prior to
September 1997. Beginning in September 1997, the investment is no longer
considered restricted for accounting purposes and is recorded at fair value.
At December 31, 1997 the cost and fair value of the McLeodUSA investment were
$45.2 million and $257.9 million, respectively. The unrealized gain is
recorded, net of income taxes, as a valuation allowance in common
shareholders' equity. At December 31, 1997, the net unrealized gain and
deferred income taxes for this investment were $212.7 million and $74.4
million, respectively.
F-70
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amortized cost, gross unrealized gain and losses and estimated fair
value of investments in debt and equity securities at December 31 are as
follows (in thousands):
<TABLE>
<CAPTION>
1997
------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Available-for-sale:
Equity securities .......... $257,316 $226,747 $(10,522) $473,541
Municipal bonds ............ 35,217 2,116 (1) 37,332
U. S. Government securities 18,753 800 (4) 19,549
Corporate securities ....... 13,579 222 (3) 13,798
Cash equivalents ........... 9,862 -- -- 9,862
----------- ------------ ------------ ----------
$334,727 $229,885 $(10,530) $554,082
=========== ============ ============ ==========
Held-to-maturity:
Equity securities........... $ 6,376 $ -- $ -- $ 6,376
Debt securities ............ 4,567 345 -- 4,912
----------- ------------ ------------ ----------
$ 10,943 $ 345 $ -- $ 11,288
=========== ============ ============ ==========
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Available-for-sale:
Equity securities.......... $208,226 $4,883 $(8,325) $204,784
Municipal bonds ........... 41,800 3,041 (356) 44,485
U.S. Government securities 26,814 137 (157) 26,794
Cash equivalents .......... 11,152 -- -- 11,152
----------- ------------ ------------ ----------
$287,992 $8,061 $(8,838) $287,215
=========== ============ ============ ==========
Held-to-maturity:
Equity securities.......... $ 6,435 $ -- $ (196) $ 6,239
Debt securities ........... 15,445 252 -- 15,697
----------- ------------ ------------ ----------
$ 21,880 $ 252 $ (196) $ 21,936
=========== ============ ============ ==========
</TABLE>
At December 31, 1997, the debt securities held by the Company had the
following maturities (in thousands):
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
---------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- ----------- --------
<S> <C> <C> <C> <C>
Within 1 year ...... $ 2,971 $ 2,987 $1,718 $2,014
1 through 5 years . 14,057 14,377 2,137 2,143
5 through 10 years 26,821 28,119 139 147
Over 10 years ...... 23,700 25,196 573 608
</TABLE>
During 1996, the Company sold a portion of its held-to-maturity securities
due to a significant deterioration in the issuer's credit worthiness. Such
securities had a carrying value of $4.8 million and proceeds from the sale
were $4.3 million.
F-71
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proceeds and the gross realized gains and losses on the disposition of
investments held by the Company for the years ended December 31, are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds from sales . $211,691 $250,772 $106,910
Gross realized gains 14,320 9,920 3,923
Gross realized
losses............... (6,480) (7,950) (3,082)
</TABLE>
(15) INCOME TAX EXPENSE:
Income tax expense from continuing operations includes the following for
the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Current
Federal.................... $ 91,627 $ 80,165 $54,430
State ..................... 21,619 22,100 13,330
---------- --------- ---------
113,246 102,265 67,760
---------- --------- ---------
Deferred
Federal ................... (29,257) 2,627 5,750
State ..................... (8,242) (264) 1,470
---------- --------- ---------
(37,499) 2,363 7,220
Investment tax credit, net (7,357) (6,206) (8,177)
---------- --------- ---------
Total...................... $ 68,390 $ 98,422 $66,803
========== ========= =========
</TABLE>
Included in Deferred Income Taxes in the Consolidated Balance Sheets as of
December 31 are deferred tax assets and deferred tax liabilities as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets
Related to:
Investment tax credits....................... $ 55,998 $ 61,349
Unrealized losses ........................... 7,880 12,034
Pensions .................................... 17,339 17,648
AMT credit carry forward .................... -- 10,188
Nuclear reserves and decommissioning ....... 15,287 8,233
Other ....................................... 1,589 5,839
---------- ----------
Total....................................... $ 98,093 $115,291
========== ==========
1997 1996
---------- ----------
Deferred tax liabilities
Related to:
Depreciable property ........................ $504,594 $545,459
Income taxes recoverable through future
rates ...................................... 197,877 201,998
Unrealized gains ............................ 81,501 --
Energy efficiency ........................... 40,902 44,734
Reacquired debt ............................. 15,346 14,265
FERC Order 636 .............................. 2,857 9,023
Other ....................................... 16,811 22,112
---------- ----------
Total ...................................... $859,888 $837,591
========== ==========
</TABLE>
F-72
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table is a reconciliation between the effective income tax
rate, before preferred stock dividends of subsidiary, indicated by the
Consolidated Statements of Income and the statutory federal income tax rate
for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Effective federal and state income tax rate ............. 31% 39% 34%
Amortization of investment tax credit ................... 3 2 4
State income tax, net of federal income tax benefit .... (4) (6) (5)
Dividends received deduction ............................ 2 2 2
Other ................................................... 3 (2) --
-------- -------- --------
Statutory federal income tax rate........................ 35% 35% 35%
======== ======== ========
</TABLE>
(16) INVENTORIES:
Inventories include the following amounts as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Materials and supplies, at average cost $31,425 $32,222
Coal stocks, at average cost ............ 14,225 32,293
Gas in storage, at LIFO cost ............ 35,430 23,915
Fuel oil, at average cost ............... 2,344 1,264
Other ................................... 2,667 1,170
--------- ----------
Total .................................. $86,091 $90,864
========= ==========
</TABLE>
At December 31, 1997 prices, the current cost of gas in storage was $50.3
million.
(17) MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF MIDAMERICAN ENERGY FINANCING I:
In December 1996, MidAmerican Energy Financing I (the Trust), a
wholly-owned statutory business trust of MidAmerican, issued 4,000,000 shares
of 7.98% Series MidAmerican-obligated mandatorily redeemable preferred
securities (the Preferred Securities). The sole assets of the Trust are
$103.1 million of MidAmerican 7.98% Series A Debentures due 2045 (the
Debentures). There is a full and unconditional guarantee by MidAmerican of
the Trust's obligations under the Preferred Securities. MidAmerican has the
right to defer payments of interest on the Debentures by extending the
interest payment period for up to 20 consecutive quarters. If interest
payments on the Debentures are deferred, distributions on the Preferred
Securities will also be deferred. During any deferral, distributions will
continue to accrue with interest thereon and MidAmerican may not declare or
pay any dividend or other distribution on, or redeem or purchase, any of its
capital stock.
The Debentures may be redeemed by MidAmerican on or after December 18,
2001, or at an earlier time if there is more than an insubstantial risk that
interest paid on the Debentures will not be deductible for federal income tax
purposes. If the Debentures, or a portion thereof, are redeemed, the Trust
must redeem a like amount of the Preferred Securities. If a termination of
the Trust occurs, the Trust will distribute to the holders of the Preferred
Securities a like amount of the Debentures unless such a distribution is
determined not to be practicable. If such determination is made, the holders
of the Preferred Securities will be entitled to receive, out of the assets of
the trust after satisfaction of its liabilities, a liquidation amount of $25
for each Preferred Security held plus accrued and unpaid distributions.
F-73
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) SALE OF ACCOUNTS RECEIVABLE:
In 1997 MidAmerican entered into a revolving agreement, which expires in
2002, to sell all of its right, title and interest in the majority of its
billed accounts receivable to MidAmerican Energy Funding Corporation (Funding
Corp.), a special purpose entity established to purchase accounts receivable
from MidAmerican. Funding Corp. in turn has sold receivable interests to
outside investors. In consideration of the sale, MidAmerican received $70
million in cash and the remaining balance in the form of a subordinated note
from Funding Corp. The agreement is structured as a true sale under which the
creditors of Funding Corp. will be entitled to be satisfied out of the assets
of Funding Corp. prior to any value being returned to MidAmerican or its
creditors and, as such, the accounts receivable sold are not reflected on
Holdings' or MidAmerican's Consolidated Balance Sheets. At December 31, 1997,
$130.0 million, net of reserves, was sold under the agreement.
(19) EARNINGS PER SHARE
Reconciliation for the Income and Shares of the Basic and Diluted per
share computations for income from continuing operations for the years ended
December 31 are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997
------------------------------
PER
SHARE
INCOME SHARES AMOUNT
---------- -------- --------
<S> <C> <C> <C>
INCOME FROM CONTINUING OPERATIONS.. $139,332
BASIC EPS
Income Available to Common
Shareholders ..................... $139,332 98,058 $1.42
========
EFFECT OF DILUTIVE SECURITIES
Stock Options ..................... -- 107
---------- -------- --------
DILUTED EPS
Income Available to Common
Shareholders...................... $139,332 98,165 $1.42
========== ======== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1996
-------------------------------
PER
SHARE
INCOME SHARES AMOUNT
---------- --------- --------
<S> <C> <C> <C>
INCOME FROM CONTINUING OPERATIONS.. $143,761
BASIC EPS
Income Available to Common
Shareholders ..................... $143,761 100,752 $1.43
---------- ========
EFFECT OF DILUTIVE SECURITIES
Stock Options ..................... -- 89
---------- --------- --------
DILUTED EPS
Income Available to Common
Shareholders...................... $143,761 100,841 $1.43
========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------
PER
SHARE
INCOME SHARES AMOUNT
---------- --------- --------
<S> <C> <C> <C>
INCOME FROM CONTINUING OPERATIONS ....... $119,705
BASIC EPS
Income Available to Common Shareholders $119,705 100,401 $1.19
========
EFFECT OF DILUTIVE SECURITIES
Stock Options ........................... -- 20
---------- --------- --------
DILUTED EPS
Income Available to Common Shareholders $119,705 100,421 $1.19
========== ========= ========
</TABLE>
F-74
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) UNAUDITED QUARTERLY OPERATING RESULTS:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues ............................ $584,395 $390,615 $440,698 $506,573
Operating income .............................. 77,233 55,395 97,948 39,930
Income from continuing operations ............. 34,174 24,176 49,705 31,277
Income (loss)from discontinued operations .... (234) 408 (2,793) (1,609)
Earnings on common stock ...................... 33,940 24,584 46,912 29,668
Earnings per average common share and Earnings
per average common share assuming dilution:
Income from continuing operations.............. $ 0.34 $ 0.24 $ 0.51 $ 0.33
Income (loss) from discontinued operations ... -- 0.01 (0.03) (0.02)
------------- ------------- ------------- -------------
$ 0.34 $ 0.25 $ 0.48 $ 0.31
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues ............................ $507,596 $391,466 $434,678 $538,872
Operating income .............................. 100,141 65,004 97,919 80,574
Income from continuing operations ............. 48,405 25,099 40,548 29,709
Income (loss) from discontinued operations ... 2,642 3,896 (17,992) (1,261)
Earnings on common stock ...................... 51,047 28,995 22,556 28,448
Earnings per average common share and Earnings
per average common share assuming dilution:
Income from continuing operations.............. $ 0.48 $ 0.25 $ 0.40 $ 0.29
Income (loss) from discontinued operations ... 0.03 0.04 (0.18) (0.01)
------------- ------------- ------------- -------------
$ 0.51 $ 0.29 $ 0.22 $ 0.28
============= ============= ============= =============
</TABLE>
The quarterly data reflect seasonal variations common in the utility
industry.
F-75
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(21) OTHER INFORMATION:
The Company completed a merger-related restructuring plan during 1995.
Other operating expenses in the Consolidated Statements of Income for 1995
includes $33.4 million related to the restructuring plan.
Non-Operating -- Other, Net, as shown on the Consolidated Statements of
Income includes the following for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Other-than-temporary declines in value of investments
and other assets ....................................... $(3,443) $(15,566) $(17,971)
IES merger costs ........................................ -- (8,689) --
Special purpose fund income ............................. 1,989 3,301 1,863
Energy efficiency carrying charges ...................... 4,993 3,255 3,092
Gain on sale of cushion gas ............................. 855 3,182 --
Incentive gas purchase plan award ....................... 4,914 2,677 --
Agency gas sales, net ................................... 1,184 1,840 228
Gain (loss) on reacquisition of long-term debt ......... (556) 1,105 --
Gain on sale of assets, net ............................. 10,213 974 8,570
MidAmerican merger costs ................................ -- -- (4,624)
Allowance for equity funds used during construction .... -- -- 481
Income (loss) from equity method investments ........... 1,273 2,510 (312)
NPPD settlement ......................................... 2,248 -- --
Other ................................................... (1,559) 1,391 (1,794)
---------- ----------- -----------
Total................................................... $22,111 $ (4,020) $(10,467)
========== =========== ===========
</TABLE>
F-76
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric utility............................. $287,094 $261,801 $543,448 $516,117
Gas utility.................................. 67,288 80,913 240,488 292,478
Nonregulated................................. 39,041 42,549 81,015 156,827
---------- ---------- ---------- ----------
393,423 385,263 864,951 965,422
---------- ---------- ---------- ----------
OPERATING EXPENSES
Utility:
Cost of fuel, energy and capacity........... 57,085 52,141 102,284 111,424
Cost of gas sold ........................... 32,648 45,099 137,969 186,932
Other operating expenses ................... 111,746 98,691 218,523 192,298
Maintenance ................................ 30,740 22,349 53,323 46,098
Depreciation and amortization .............. 44,191 42,060 88,382 84,068
Property and other taxes ................... 24,295 24,853 49,765 50,343
---------- ---------- ---------- ----------
300,705 285,193 650,246 671,163
---------- ---------- ---------- ----------
Nonregulated:
Cost of sales............................... 24,197 37,243 63,233 146,213
Other ...................................... 14,180 7,432 20,489 15,418
---------- ---------- ---------- ----------
38,377 44,675 83,722 161,631
---------- ---------- ---------- ----------
Total operating expenses ................... 339,082 329,868 733,968 832,794
---------- ---------- ---------- ----------
OPERATING INCOME............................. 54,341 55,395 130,983 132,628
---------- ---------- ---------- ----------
NON-OPERATING INCOME
Interest income.............................. 2,178 1,562 4,630 3,115
Dividend income.............................. 2,738 3,707 5,452 7,255
Realized gains and losses on securities,
net........................................ 954 98 2,019 616
Other, net................................... 778 3,279 6,435 7,264
---------- ---------- ---------- ----------
6,648 8,646 18,536 18,250
---------- ---------- ---------- ----------
FIXED CHARGES
Interest on long-term debt................... 20,324 22,829 40,608 46,292
Other interest expense....................... 3,416 4,119 6,628 5,448
Preferred dividends of subsidiaries.......... 3,233 3,231 6,465 8,000
Allowance for borrowed funds................. (921) (603) (1,675) (1,312)
---------- ---------- ---------- ----------
26,052 29,576 52,026 58,428
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES .............................. 34,937 34,465 97,493 92,450
INCOME TAXES ................................ 13,937 10,289 37,760 34,100
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS ........... 21,000 24,176 59,733 58,350
---------- ---------- ---------- ----------
DISCONTINUED OPERATIONS
Income (loss) from operations (net of income
taxes)..................................... -- 408 -- 698
Loss on disposal (net of income taxes) ...... -- -- -- (524)
---------- ---------- ---------- ----------
-- 408 -- 174
---------- ---------- ---------- ----------
NET INCOME................................... $ 21,000 $ 24,584 $ 59,733 $ 58,524
========== ========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING............ 94,473 98,621 94,675 99,534
EARNINGS PER COMMON SHARE
--BASIC AND DILUTED:
Continuing operations........................ $ 0.22 $ 0.24 $ 0.63 $ 0.59
Discontinued operations...................... -- 0.01 -- --
---------- ---------- ---------- ----------
Earnings per average common share............ $ 0.22 $ 0.25 $ 0.63 $ 0.59
========== ========== ========== ==========
DIVIDENDS DECLARED PER SHARE................. $ 0.30 $ 0.30 $ 0.60 $ 0.60
========== ========== ========== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED JUNE 30
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING REVENUES
Electric utility............................. $1,153,631 $1,086,271
Gas utility.................................. 484,316 547,627
Nonregulated................................. 183,863 305,074
------------ ------------
1,821,810 1,938,972
------------ ------------
OPERATING EXPENSES
Utility:
Cost of fuel, energy and capacity........... 226,620 229,243
Cost of gas sold ........................... 297,053 360,521
Other operating expenses ................... 456,019 364,703
Maintenance ................................ 105,315 90,844
Depreciation and amortization .............. 174,854 166,654
Property and other taxes ................... 100,739 93,871
------------ ------------
1,360,600 1,305,836
------------ ------------
Nonregulated:
Cost of sales............................... 157,202 287,219
Other ...................................... 35,147 34,796
------------ ------------
192,349 322,015
------------ ------------
Total operating expenses ................... 1,552,949 1,627,851
------------ ------------
OPERATING INCOME............................. 268,861 311,121
NON-OPERATING INCOME
Interest income.............................. 6,833 4,603
Dividend income.............................. 11,989 15,338
Realized gains and losses on securities,
net........................................ 9,201 (723)
Other, net................................... 21,282 (1,484)
------------ ------------
49,305 17,734
------------ ------------
FIXED CHARGES
Interest on long-term debt................... 84,214 97,496
Other interest expense....................... 11,214 10,666
Preferred dividends of subsidiaries.......... 12,933 14,028
Allowance for borrowed funds................. (2,960) (3,068)
------------ ------------
105,401 119,122
------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES .............................. 212,765 209,733
INCOME TAXES ................................ 72,050 81,126
------------ ------------
INCOME FROM CONTINUING OPERATIONS ........... 140,715 128,607
------------ ------------
DISCONTINUED OPERATIONS
Income (loss) from operations (net of income
taxes)..................................... (816) (3,723)
Loss on disposal (net of income taxes) ...... (3,586) (15,356)
------------ ------------
(4,402) (19,079)
------------ ------------
NET INCOME................................... $136,313 $109,528
============ ============
AVERAGE COMMON SHARES OUTSTANDING............ 95,619 100,096
EARNINGS PER COMMON SHARE
--BASIC AND DILUTED:
Continuing operations........................ $ 1.47 $ 1.28
Discontinued operations...................... (0.04) (0.19)
------------ ------------
Earnings per average common share............ $ 1.43 $ 1.09
============ ============
DIVIDENDS DECLARED PER SHARE................. $ 1.20 $ 1.20
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-77
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
--------------------- --------------------
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET INCOME............................... $ 21,000 $24,584 $59,733 $58,524
---------- --------- --------- ---------
OTHER COMPREHENSIVE INCOME
Unrealized (losses) gains on securities:
Unrealized holding gains (losses) during
period.................................. (29,603) (1,104) 53,253 3,022
Less reclassification adjustment for
realized gains (losses) reflected in
net income during period .............. 954 95 2,019 613
---------- --------- --------- ---------
(30,557) (1,199) 51,234 2,409
Income tax (benefit) expense ............ (10,535) (429) 18,014 789
---------- --------- --------- ---------
Other comprehensive income, net ....... (20,022) (770) 33,220 1,620
---------- --------- --------- ---------
COMPREHENSIVE INCOME..................... $ 978 $23,814 $92,953 $60,144
========== ========= ========= =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED JUNE 30
----------------------
1998 1997
---------- ----------
<S> <C> <C>
NET INCOME............................... $136,313 $109,528
---------- ----------
OTHER COMPREHENSIVE INCOME
Unrealized (losses) gains on securities:
Unrealized holding gains (losses) during
period.................................. 274,158 5,810
Less reclassification adjustment for
realized gains (losses) reflected in
net income during period .............. 9,193 (729)
---------- ----------
264,965 6,539
Income tax (benefit) expense ............ 92,792 2,234
---------- ----------
Other comprehensive income, net ....... 172,173 4,305
---------- ----------
COMPREHENSIVE INCOME..................... $308,486 $113,833
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-78
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
-----------------------------------------
JUNE 30 DECEMBER 31
-------------------------- -------------
1998 1997 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
UTILITY PLANT
Electric...................................................... $4,106,986 $4,050,767 $4,084,920
Gas........................................................... 766,127 731,978 756,874
------------ ------------ -------------
4,873,113 4,782,745 4,841,794
Less accumulated depreciation and amortization ............... 2,350,265 2,215,077 2,275,099
------------ ------------ -------------
2,522,848 2,567,668 2,566,695
Construction work in progress ................................ 82,671 37,880 55,418
------------ ------------ -------------
2,605,519 2,605,548 2,622,113
------------ ------------ -------------
POWER PURCHASE CONTRACT ...................................... 168,430 190,504 173,107
------------ ------------ -------------
INVESTMENT IN DISCONTINUED OPERATIONS......................... -- 6,610 --
------------ ------------ -------------
CURRENT ASSETS
Cash and cash equivalents..................................... 121,720 57,297 10,468
Receivables................................................... 160,212 203,511 207,471
Inventories................................................... 64,471 69,796 86,091
Other......................................................... 14,970 10,227 18,452
------------ ------------ -------------
361,373 340,831 322,482
------------ ------------ -------------
INVESTMENTS AND NONREGULATED PROPERTY, NET.................... 883,797 605,669 799,524
------------ ------------ -------------
OTHER ASSETS.................................................. 388,378 386,543 360,865
------------ ------------ -------------
TOTAL ASSETS.................................................. $4,407,497 $4,135,705 $4,278,091
============ ============ =============
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity................................... $1,311,583 $1,186,313 $1,301,286
MidAmerican preferred securities, not subject to mandatory
redemption................................................... 31,760 31,765 31,763
Preferred securities, subject to mandatory redemption:
MidAmerican preferred securities............................. 50,000 50,000 50,000
MidAmerican-obligated preferred securities of subsidiary
trust holding solely MidAmerican junior subordinated
debentures.................................................. 100,000 100,000 100,000
Long-term debt (excluding current portion).................... 1,043,909 1,109,531 1,034,211
------------ ------------ -------------
2,537,252 2,477,609 2,517,260
------------ ------------ -------------
CURRENT LIABILITIES
Notes payable................................................. 167,429 146,185 138,054
Current portion of long-term debt............................. 219,260 129,756 144,558
Current portion of power purchase contract.................... 14,361 13,717 14,361
Accounts payable.............................................. 90,593 87,515 145,855
Taxes accrued................................................. 108,916 81,795 92,629
Interest accrued.............................................. 21,637 26,457 22,355
Other......................................................... 69,475 48,969 38,766
------------ ------------ -------------
691,671 534,394 596,578
------------ ------------ -------------
OTHER LIABILITIES
Power purchase contract ...................................... 83,143 97,504 83,143
Deferred income taxes ........................................ 772,609 710,431 761,795
Investment tax credit ........................................ 80,274 85,985 83,127
Other ........................................................ 242,548 229,782 236,188
------------ ------------ -------------
1,178,574 1,123,702 1,164,253
------------ ------------ -------------
TOTAL CAPITALIZATION AND LIABILITIES ......................... $4,407,497 $4,135,705 $4,278,091
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-79
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
----------------------- ------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 21,000 $ 24,584 $ 59,733 $ 58,524
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization.............................. 49,624 47,573 98,060 95,982
Net decrease in deferred income taxes and investment tax
credit, net............................................... (4,748) (6,795) (10,121) (11,948)
Amortization of other assets............................... 10,133 5,596 19,345 12,474
Capitalized cost of real estate sold....................... 308 506 458 796
Loss from discontinued operations.......................... -- (408) -- (174)
Gain on sale of securities, assets and other investments .. (1,063) (362) (8,595) (1,827)
Other-than-temporary decline in value of investments ...... 72 92 110 252
Impact of changes in working capital, net of effects from
discontinued operations................................... (31,556) (77,780) 63,377 71,709
Other ..................................................... 13,826 3,584 15,902 (751)
----------- ---------- ----------- -----------
Net cash provided (used) ................................... 57,596 (3,410) 238,269 225,037
----------- ---------- ----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures........................... (43,906) (37,426) (68,592) (64,029)
Quad Cities Nuclear Power Station decommissioning trust
fund....................................................... (2,844) (2,140) (5,658) (4,280)
Deferred energy efficiency expenditures..................... -- (2,626) -- (6,349)
Nonregulated capital expenditures........................... (17,485) (4,377) (38,683) (7,002)
Purchase of real estate brokerage company................... (78,985) -- (78,985) --
Purchase of securities...................................... (45,125) (53,064) (98,354) (116,407)
Proceeds from sale of securities............................ 52,772 53,397 104,817 132,049
Proceeds from sale of assets and other investments ......... 20,145 526 28,344 13,670
Investment in discontinued operations....................... -- (1,822) -- 145,193
Other investing activities, net............................. 2,765 (289) (13) 52
----------- ---------- ----------- -----------
Net cash (used) provided.................................... (112,663) (47,821) (157,124) 92,897
----------- ---------- ----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid....................................... (28,310) (29,544) (56,686) (59,723)
Issuance of long-term debt, net of issuance cost ........... 158,440 -- 158,440 --
Retirement of long-term debt, including reacquisition cost . (391) (34,672) (75,422) (61,790)
Reacquisition of preferred shares........................... (1) (1) (3) (4)
Reacquisition of common shares.............................. (10,754) (26,235) (25,597) (46,564)
Decrease in MidAmerican Capital Company unsecured revolving
credit facility............................................ (3,200) -- -- (174,500)
Net increase (decrease) in notes payable.................... 26,366 105,975 29,375 (15,805)
----------- ---------- ----------- -----------
Net cash provided (used)................................... 142,150 15,523 30,107 (358,386)
----------- ---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...... 87,083 (35,708) 111,252 (40,452)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......... 34,637 93,005 10,468 97,749
----------- ---------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 121,720 $ 57,297 $ 121,720 $ 57,297
=========== ========== =========== ===========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized................... $ 18,865 $ 19,708 $ 43,999 $ 49,978
=========== ========== =========== ===========
Income taxes paid........................................... $ 33,927 $ 76,690 $ 34,651 $ 76,753
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-80
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A) GENERAL:
The consolidated financial statements included herein have been prepared
by Holdings, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company, all
adjustments have been made to present fairly the financial position, the
results of operations, comprehensive income and the changes in cash flows for
the periods presented. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, it is suggested
that these financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's latest
Annual Report on Form 10-K.
B) ENVIRONMENTAL MATTERS:
1) Manufactured Gas Plant Facilities:
The United States Environmental Protection Agency (EPA) and the state
environmental agencies have determined that contaminated wastes remaining at
certain decommissioned manufactured gas plant (MGP) facilities may pose a
threat to the public health or the environment if such contaminants are in
sufficient quantities and at such concentrations as to warrant remedial
action.
MidAmerican is evaluating 27 properties which were, at one time, sites of
gas manufacturing plants in which it may be a potentially responsible party
(PRP). The purpose of these evaluations is to determine whether waste
materials are present, whether such materials constitute an environmental or
health risk, and whether MidAmerican has any responsibility for remedial
action. MidAmerican is currently conducting field investigations at seventeen
of the sites and has completed investigations at one of the sites. In
addition, MidAmerican has completed removals at three of the sites.
MidAmerican is continuing to evaluate several of the sites to determine its
responsibility, if any, for conducting site investigations or other site
activity.
MidAmerican's present estimate of probable remediation costs for the sites
discussed above as of June 30, 1998 is $25 million. This estimate has been
recorded as a liability and a regulatory asset for future recovery. The
Illinois Commerce Commission (ICC) has approved the use of a tariff rider
which permits recovery of the actual costs of litigation, investigation and
remediation relating to former MGP sites. MidAmerican's present rates in Iowa
provide for a fixed annual recovery of MGP costs. MidAmerican intends to
pursue recovery of the remediation costs from other PRPs and its insurance
carriers.
The estimate of probable remediation costs is established on a site
specific basis. The costs are accumulated in a three-step process. First, a
determination is made as to whether MidAmerican has potential legal liability
for the site and whether information exists to indicate that contaminated
wastes remain at the site. Second, if potential legal liability exists, the
costs of performing a preliminary investigation and the costs of removing
known contaminated soil are accrued. Finally, as the investigation is
performed and if it is determined remedial action is required, the best
estimate of remediation costs is accrued. If necessary, the estimate is
revised when a consent order is issued. The estimated recorded liabilities
for these properties include incremental direct costs of the remediation
effort, costs for future monitoring at sites and costs of compensation to
employees for time expected to be spent directly on the remediation effort.
The estimated recorded liabilities for these properties are based upon
preliminary data. Thus, actual costs could vary significantly from the
estimates. The estimate could change materially based on facts and
circumstances derived from site investigations, changes in required remedial
action and changes in technology relating to remedial alternatives. In
addition, insurance recoveries for some or all of the costs may be possible,
but the liabilities recorded have not been reduced by any estimate of such
recoveries.
F-81
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B) ENVIRONMENTAL MATTERS: (Continued)
Although the timing of potential incurred costs and recovery of such
costs in rates may affect the results of operations in individual periods,
management believes that the outcome of these issues will not have a material
adverse effect on MidAmerican's financial position or results of operations.
2) Clean Air Act:
On July 18, 1997, the EPA adopted revisions to the National Ambient Air
Quality Standards (NAAQS) for ozone and a new standard for fine particulate
matter. Based on data to be obtained from monitors located throughout each
state, the EPA will determine which states have areas that do not meet the
air quality standards (i.e., areas that are classified as nonattainment). If
a state has area(s) classified as nonattainment area(s), the state is
required to submit a State Implementation Plan specifying how it will reach
attainment of the standards through emission reductions or other means.
The impact of the new standards on MidAmerican will depend on the
attainment status of the areas surrounding MidAmerican's operations and
MidAmerican's relative contribution to the nonattainment status. The
attainment status of areas in the state of Iowa will not be known for two to
three years. However, if MidAmerican's operations are determined to
contribute to nonattainment, the installation of additional control
equipment, such as scrubbers and/or selective catalytic reduction, on
MidAmerican's units could be required. The cost to install such equipment
could be significant. MidAmerican will continue to follow the attainment
status of the areas in which it operates and evaluate the potential impact of
the status of these areas on MidAmerican under the new regulations.
Following recommendations provided by the Ozone Transport Assessment
Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking
which identified 22 states and the District of Columbia as making significant
contribution to nonattainment of NAAQS for ozone. Iowa is not subject to
these emissions reduction requirements as EPA's rule is currently drafted,
and, as such, MidAmerican does not anticipate that its facilities will be
subject to additional emissions reductions as a result of this initiative.
The EPA anticipates issuing its final rules in September 1998. MidAmerican
will continue to closely monitor this rulemaking proceeding.
C) RATE MATTERS:
As a result of a negotiated settlement in Illinois, MidAmerican reduced
its Illinois electric service rates by annual amounts of $13.1 million and
$2.4 million, effective November 3, 1996, and June 1, 1997, respectively.
On June 27, 1997, the IUB approved a March 1997 settlement agreement
between MidAmerican, the Iowa Office of Consumer Advocate (OCA) and other
parties in a consolidated rate proceeding involving MidAmerican's electric
pricing proposal and a filing by the OCA. The agreement includes a number of
components of MidAmerican's pricing proposal. Six major components of the
settlement and their status are as follows:
1) On an annualized basis, prices for residential customers were reduced
$8.5 million, $10.0 million and $5.0 million effective November 1, 1996, July
11, 1997, and June 1, 1998 respectively, for a total annual decrease of $23.5
million.
2) Rates for industrial customers will be reduced by $6 million annually
and rates for commercial customers will be reduced by $4 million annually.
MidAmerican has been given permission to implement these reductions through a
retail access pilot project and through negotiated individual contracts. In
the event that these contracts in the aggregate do not reduce rates by $6
million and $4 million, respectively, MidAmerican is required to apply any
remaining amount to across-the-board rate reductions to customers who do not
enter into contracts.
F-82
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C) RATE MATTERS: (Continued)
The effective date for these rate reductions was set for June 1, 1998 in
the IUB Order approving the settlement. However, MidAmerican has pending
before the IUB a request to extend the deadlines until September 1, 1998 for
industrial customers, and December 31, 1998 for commercial customers. That
request would involve an obligation to increase the amount of the reduction
on a one-time basis to reflect the time value of money between June 1, 1998
and the new requested deadlines. MidAmerican estimates it will not have any
interest obligation with respect to the industrial contracts, and will not
incur any material interest obligation with respect to its commercial
contracts.
The negotiated contracts have differing terms and conditions as well as
prices. The contracts range in length from five to ten years, and some have
price renegotiation and early termination provisions exercisable by either
party. The vast majority of the contracts are for terms of seven years or
less, although, some large customers have agreed to 10-year contracts. Prices
are set as fixed prices; however, many contracts allow for potential price
adjustments with respect to environmental costs, government imposed public
purpose programs, tax changes, and transition costs. While the contract
prices are fixed (except for the potential adjustment elements), the costs
MidAmerican incurs to fulfill these contracts will vary. On an aggregate
basis the annual revenues under contract are approximately $125 million.
The IUB is currently considering the contracting process in two
proceedings. The outcome of those proceedings could impact further
contracting efforts, as well as determine whether any of the contracts will
need to be renegotiated, and the extent to which the annualized rate
reduction will take the form of negotiated contracts versus across-the-board
rate reductions.
3) A tracking mechanism (Cooper Tracker) is being used to currently
recover costs for capital improvements required by the Cooper Nuclear Station
Power Purchase Contract which will offset approximately $6 million of the
rate reductions in 1998. Other operating expenses will correspondingly
increase due to currently expensing the related costs.
4) Elimination of the Iowa energy adjustment clause (EAC). Prior to July
11, 1997, MidAmerican collected fuel costs from Iowa customers on a current
basis through the EAC, and thus, fuel costs had little impact on net income.
Since then, base rates for Iowa customers include a factor for recovery of a
representative level of fuel costs. To the extent actual fuel costs vary from
that factor, pre-tax earnings are impacted. The fuel cost factor will be
reviewed in February 1999 and adjusted prospectively if actual 1998 fuel
costs vary 15% above or below the factor included in base rates.
5) If MidAmerican's annual Iowa electric jurisdictional return on common
equity exceeds 12%, then an equal sharing between customers and shareholders
of earnings above the 12% level begins; if it exceeds 14%, then two-thirds of
MidAmerican's share of those earnings will be used for accelerated recovery
of certain regulatory assets. The agreement permits MidAmerican to file for
increased rates if the return falls below 9%. Other parties signing the
agreement are prohibited from filing for reduced rates prior to 2001 unless
the return, after reflecting credits to customers, exceeds 14%.
6) MidAmerican will develop a pilot program for a market access service
which allows customers with at least 4 MW of load to choose energy suppliers.
The pilot program, which is subject to approval by the IUB and the Federal
Energy Regulatory Commission (FERC), is limited to 60 MW of participation the
first year and can be expanded by 15 MW annually until the conclusion of the
program. Any loss of revenues associated with the pilot program will be
considered part of the $10 million annual reduction for commercial and
industrial customers as described above, but may not be recovered from other
customer classes. The program was filed with the IUB and the FERC in
September 1997. The Company anticipates that the necessary approvals will be
received by the fourth quarter of 1998.
D) ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION:
Statement of Financial Accounting Standards (SFAS) No. 71 sets forth
accounting principles for operations that are regulated and meet certain
criteria. For operations that meet the criteria, SFAS 71
F-83
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D) ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION: (Continued)
allows, among other things, the deferral of costs that would otherwise be
expensed when incurred. A possible consequence of the changes in the utility
industry is the discontinued applicability of SFAS 71. The majority of
MidAmerican's electric and gas utility operations currently meet the criteria
of SFAS 71, but its applicability is periodically reexamined. On December 16,
1997, MidAmerican's generation operations serving Illinois were no longer
subject to the provisions of SFAS 71 due to passage of restructuring
legislation in Illinois. Thus, MidAmerican was required to write off
regulatory assets and liabilities from its balance sheet related to its
Illinois generation operations. The net amount of such write-offs were
immaterial. If other utility operations no longer meet the criteria of SFAS
71, MidAmerican would be required to write off the related regulatory assets
and liabilities from its balance sheet and thus, a material adjustment to
earnings in that period could result. As of June 30, 1998, MidAmerican had
approximately $312 million of regulatory assets in its Consolidated Balance
Sheet because these costs are expected to be recovered in future charges to
utility customers.
E) MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES:
The MidAmerican Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely MidAmerican Junior Subordinated Debentures
included in the Consolidated Balance Sheets were issued by MidAmerican Energy
Financing I (the Trust), a wholly-owned statutory business trust of
MidAmerican. The sole assets of the Trust are $103.1 million of MidAmerican
7.98% Series A Debentures due 2045.
F) COMMON SHAREHOLDERS' EQUITY:
In March 1997, Holdings announced its plan to repurchase up to $200
million of the Company's common stock. The Company plans to purchase the
shares from time to time as market conditions warrant. As of June 30, 1998,
the Company had repurchased approximately 6.2 million shares for $114.8
million under the plan. In addition, a subsidiary has acquired 437,131 shares
of Holdings common stock which are also excluded from shares outstanding.
G) DETAIL OF OTHER COMPREHENSIVE INCOME -- INCOME TAXES:
For fiscal years beginning after December 15, 1997, full sets of
general-purpose financial statements are required to display comprehensive
income and its components in a financial statement that is displayed with the
same prominence as the other financial statements. Comprehensive income
refers, in general, to changes in the Company's equity, except those
resulting from transactions with shareholders. "Unrealized holding gains
(losses)" reflects the overall increase (decrease) in the market value of
marketable securities held by the Company as available-for-sale. The
"reclassification adjustment" removes any gains (losses) that have been
realized from sales of those securities and reflected in the Company's Net
Income.
F-84
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G) DETAIL OF OTHER COMPREHENSIVE INCOME -- INCOME TAXES: (Continued)
The following table shows the income tax expense or benefit related to
each component (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
----------------------- --------------------
1998 1997 1998 1997
----------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Unrealized holding (losses)/gains
during period
Before income taxes ............... $(29,603) $(1,104) $ 53,253 $3,022
Income tax benefit/(expense) ..... 10,195 392 (18,697) (949)
----------- ---------- ---------- --------
(19,408) (712) 34,556 2,073
----------- ---------- ---------- --------
Less reclassification adjustment for
realized gains/(losses) reflected
in net income during period
Before income taxes ............... 954 95 2,019 613
Income tax (expense)/benefit ..... (340) (37) (683) (160)
----------- ---------- ---------- --------
614 58 1,336 453
----------- ---------- ---------- --------
Other Comprehensive Income, Net .. $(20,022) $ (770) $ 33,220 $1,620
=========== ========== ========== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED JUNE 30
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Unrealized holding (losses)/gains
during period
Before income taxes ............... $274,158 $ 5,810
Income tax benefit/(expense) ..... (95,903) (1,954)
---------- ---------
178,255 3,856
---------- ---------
Less reclassification adjustment for
realized gains/(losses) reflected
in net income during period
Before income taxes ............... 9,193 (729)
Income tax (expense)/benefit ..... (3,111) 280
---------- ---------
6,082 (449)
---------- ---------
Other Comprehensive Income, Net .. $172,173 $ 4,305
========== =========
</TABLE>
H) MCLEODUSA INCORPORATED INVESTMENT:
Included in investments on the Consolidated Balance Sheets is the
Company's investment in common stock of McLeodUSA Incorporated (McLeodUSA).
McLeodUSA common stock has been publicly traded since June 14, 1996. Investor
agreements related to McLeodUSA's initial public offering and subsequent
merger with Consolidated Communications Inc. prohibit the Company from
selling or otherwise disposing of any of the common stock of McLeodUSA prior
to September 24, 1998, without approval of McLeodUSA's board of directors. As
a result of the agreements, the Company's investment was considered
restricted stock and, as such, was recorded at cost in all periods prior to
September 1997. Beginning in September 1997, the investment is no longer
considered restricted for accounting purposes and is recorded at fair value.
At June 30, 1998, the cost and fair value of the McLeodUSA investment were
$45.2 million and $313.3 million, respectively. The unrealized gain is
recorded, net of income taxes, as accumulated comprehensive income in common
shareholders' equity. At June 30, 1998, the unrealized gain and deferred
income taxes for this investment were $268.1 million and $93.8 million,
respectively.
I) SUBSEQUENT EVENT:
On August 11, 1998, a definitive merger agreement was entered into between
the Company and CalEnergy, a global provider of energy services. Under the
terms of the agreement, the shareholders of the Company will receive $27.15
cash for each share of their common stock reflecting a 36 percent premium
over the August 11, 1998 closing price. The merger will need to be approved
by the shareholders of both companies, the Federal Energy Regulatory
Commission, and the Nuclear Energy Regulatory Commission. Filings will also
be made with the Iowa Utilities Board, which has the right to review the
merger and to disapprove it only if found not in the public interest, the
Federal Trade Commission and the Department of Justice. State regulators in
Illinois will be notified of the merger. Management believes completion of
the merger could occur by the first quarter of 1999.
F-85
<PAGE>
INDEX TO PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
<S> <C>
Unaudited Pro Forma Condensed Consolidated Financial Data
Unaudited Pro Forma Combined Condensed Balance Sheet as of June 30, 1998 .......... P-3
Unaudited Pro Forma Combined Condensed Statement of Operations for the Six Months
Ended June 30, 1998 ............................................................... P-4
Unaudited Pro Forma Combined Condensed Consolidated Statement of Operations for the
Year Ended December 31, 1997 ...................................................... P-5
Notes to Unaudited Pro Forma Combined Condensed Financial Data ..................... P-6
</TABLE>
P-1
<PAGE>
The following unaudited pro forma combined condensed financial statements
are based on the historical consolidated financial statements of CalEnergy
and MidAmerican, combined and adjusted to give effect on a pro forma basis to
the Securities Offering and expected refinancing of the Senior Discount
Notes, and on a pro forma as adjusted basis, to those transactions and the
MidAmerican Merger and the transactions contemplated thereby (including the
related financing), as described in the notes thereto. Certain amounts in the
MidAmerican financial statements have been reclassified to conform to
CalEnergy's presentation. These statements should be read in conjunction with
the historical financial statements and notes thereto which are included and
incorporated by reference in this Prospectus Supplement. See "Incorporation
by Reference."
The unaudited pro forma combined condensed statements of earnings for the
year ended December 31, 1997 and for the six months ended June 30, 1998
present the results for CalEnergy and MidAmerican as if the MidAmerican
Merger had occurred at the beginning of each period presented. The
accompanying unaudited pro forma combined condensed balance sheet as of June
30, 1998 gives effect to the MidAmerican Merger as of that date.
The pro forma adjustments are based upon preliminary estimates,
information currently available and certain assumptions that management
believes are reasonable under the circumstances. CalEnergy's actual
consolidated financial statements will reflect the effects of the MidAmerican
Merger on and after the effective time of the MidAmerican Merger rather than
the dates indicated above. The unaudited pro forma combined condensed
financial statements neither purport to represent what the combined results
of operations or financial condition actually would have been had the
MidAmerican Merger and related transactions in fact occurred on the assumed
dates, nor to project the combined results of operations and financial
position for any future period.
The MidAmerican Merger will be accounted for by the purchase method and,
therefore, assets and liabilities of MidAmerican will be recorded at their
fair values. The excess of the purchase cost over the fair value of net
assets acquired at the effective time of the MidAmerican Merger will be
recorded as goodwill. Allocations included in the pro forma statements are
based on analysis which is not yet completed. Accordingly, the final value of
the purchase price and its allocation may differ, perhaps significantly, from
the amounts included in these pro forma statements.
At the effective time of the MidAmerican Merger, the MidAmerican
shareholders will receive $27.15 in cash for each issued and outstanding
share of MidAmerican common stock. The pro forma combined condensed financial
statements assume that all MidAmerican shares were tendered for the cash
consideration of $27.15 per share. The total consideration for the
transaction using this value was approximately $2.6 billion.
P-2
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETIREMENT
SECURITIES OF SENIOR
CALENERGY OFFERING DISCOUNT NOTES PRO FORMA
---------- ---------- -------------- ----------
(NOTE 1) (NOTE 2)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents .............. $ 272,446 $1,373,000 $(543,466) $1,101,980
Restricted cash and investments ....... 407,289 -- -- 407,289
Marketable securities .................. -- -- -- --
Accounts receivable .................... 479,704 -- -- 479,704
Property, plants, contracts and
equipment, net ........................ 4,358,649 -- -- 4,358,649
Excess of cost over fair value of net
assets acquired, net .................. 1,449,972 -- -- 1,449,972
Equity investments ..................... 128,110 -- -- 128,110
Deferred charges and other assets ..... 385,711 27,000 (6,150) 406,561
---------- ---------- -------------- ----------
Total assets ......................... $7,481,881 $1,400,000 $(549,616) $8,332,265
========== ========== ============== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable ....................... $ 192,172 $ -- $ -- $ 192,172
Accrued interest and other liabilities 1,134,383 -- -- 1,134,383
Parent company debt .................... 1,303,875 1,400,000 (529,640) 2,174,235
Subsidiary and project debt ............ 2,850,240 -- -- 2,850,240
Deferred income taxes .................. 550,644 -- 550,644
---------- ---------- -------------- ----------
Total liabilities .................... 6,031,314 1,400,000 (529,640) 6,901,674
Deferred income ........................ 50,979 -- -- 50,979
Company-obligated mandatorily
redeemable convertible preferred
securities of subsidiary trusts ...... 553,930 -- -- 553,930
Preferred securities of subsidiary .... 66,054 -- -- 66,054
Total stockholders' equity ............. 779,604 -- (19,976) 759,628
---------- ---------- -------------- ----------
Total liabilities and stockholders'
equity .............................. $7,481,881 $1,400,000 $(549,616) $8,332,265
========== ========== ============== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NON-RECOURSE EQUITY MIDAMERICAN PRO FORMA
FINANCING OFFERING MIDAMERICAN MERGER AS ADJUSTED
------------ -------- ----------- -------------- -----------
(NOTES 5, 6 &
(NOTE 3) (NOTE 4) 7)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents .............. $740,000 $600,000 $ 121,720 $(2,563,075) $ 625
Restricted cash and investments ....... -- -- -- -- 407,289
Marketable securities .................. -- -- 619,878 -- 619,878
Accounts receivable .................... -- -- 160,212 -- 639,916
Property, plants, contracts and
equipment, net ........................ -- -- 2,773,949 -- 7,132,598
Excess of cost over fair value of net
assets acquired, net .................. -- -- -- 1,373,226 2,823,198
Equity investments ..................... -- -- -- -- 128,110
Deferred charges and other assets ..... 10,000 -- 731,738 (38,765) 1,109,534
------------ -------- ----------- -------------- -----------
Total assets ......................... $750,000 $600,000 $4,407,497 $(1,228,614) $12,861,148
============ ======== =========== ============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable ....................... $ -- $ -- $ 90,593 $ -- $ 282,765
Accrued interest and other liabilities -- -- 620,354 142,405 1,897,142
Parent company debt .................... -- -- -- -- 2,174,235
Subsidiary and project debt ............ 750,000 -- 1,430,598 2,422 5,033,260
Deferred income taxes .................. -- -- 772,609 (62,485) 1,260,768
------------ -------- ----------- -------------- -----------
Total liabilities .................... 750,000 -- 2,914,154 82,342 10,648,170
Deferred income ........................ -- -- -- -- 50,979
Company-obligated mandatorily
redeemable convertible preferred
securities of subsidiary trusts ...... -- -- -- -- 553,930
Preferred securities of subsidiary .... -- 150,000 181,760 627 398,441
Total stockholders' equity ............. -- 450,000 1,311,583 (1,311,583) 1,209,628
------------ -------- ----------- -------------- -----------
Total liabilities and stockholders'
equity .............................. $750,000 $600,000 $4,407,497 $(1,228,614) $12,861,148
============ ======== =========== ============== ===========
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Combined
Condensed Financial Data
P-3
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
RETIREMENT
SECURITIES OF SENIOR
CALENERGY OFFERING DISCOUNT NOTES PRO FORMA
---------- ---------- -------------- ----------
(NOTE 1) (NOTE 2)
<S> <C> <C> <C> <C>
REVENUES:
Operating revenue ............... $1,212,440 $ -- $ -- $1,212,440
Interest and other income ...... 52,389 -- -- 52,389
---------- ---------- -------------- ----------
Total revenues ................ 1,264,829 -- -- 1,264,829
COSTS AND EXPENSES:
Cost of sales ................... 582,413 -- -- 582,413
Operating expense ............... 213,778 -- -- 213,778
Corporate administration ........ 22,858 -- -- 22,858
Depreciation and amortization .. 165,584 -- -- 165,584
Interest expense ................ 188,206 53,850 (27,768) 214,288
Less capitalized interest ...... (28,477) -- -- (28,477)
---------- ---------- -------------- ----------
Total costs and expenses ..... 1,144,362 53,850 (27,768) 1,170,444
---------- ---------- -------------- ----------
Income before tax ............... 120,467 (53,850) 27,768 94,385
Provision for income taxes ..... 40,483 (21,540) 11,107 30,050
---------- ---------- -------------- ----------
Income before minority interest 79,984 (32,310) 16,661 64,335
Minority interest ............... 20,223 -- -- 20,223
---------- ---------- -------------- ----------
Net income ...................... 59,761 (32,310) 16,661 44,112
Preferred dividends ............. -- -- -- --
---------- ---------- -------------- ----------
Net income available for common
shareholders ................... $ 59,761 $(32,310) $ 16,661 $ 44,112
========== ========== ============== ==========
Net income per share ............ $ 0.99 $ 0.73
========== ==========
Net income per share--diluted .. $ 0.95 $ 0.71
========== ==========
Basic shares outstanding ........ 60,658 60,658
========== ==========
Diluted shares outstanding ..... 74,641 (9,850) 64,791
========== ========== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NON-RECOURSE EQUITY MIDAMERICAN PRO FORMA
FINANCING OFFERING MIDAMERICAN MERGER AS ADJUSTED
------------ -------- ----------- -------------- -----------
(NOTES 5, 6 &
(NOTE 3) (NOTE 4) 7)
<S> <C> <C> <C> <C> <C>
REVENUES:
Operating revenue ............... $ -- $ -- $864,951 $ -- $2,077,391
Interest and other income ...... -- -- 18,536 147 71,072
------------ -------- ----------- -------------- -----------
Total revenues ................ -- -- 883,487 147 2,148,463
COSTS AND EXPENSES:
Cost of sales ................... -- -- 303,486 (2,884) 883,015
Operating expense ............... -- -- 335,104 (215) 548,667
Corporate administration ........ -- -- 6,996 167 30,021
Depreciation and amortization .. -- -- 88,382 16,986 270,952
Interest expense ................ 25,375 -- 47,236 -- 286,899
Less capitalized interest ...... -- -- (1,675) -- (30,152)
------------ -------- ----------- -------------- -----------
Total costs and expenses ..... 25,375 -- 779,529 14,054 1,989,402
------------ -------- ----------- -------------- -----------
Income before tax ............... (25,375) -- 103,958 (13,907) 159,061
Provision for income taxes ..... (10,150) (2,625) 37,760 1,303 56,338
------------ -------- ----------- -------------- -----------
Income before minority interest (15,225) 2,625 66,198 (15,210) 102,723
Minority interest ............... -- -- 6,465 -- 26,688
------------ -------- ----------- -------------- -----------
Net income ...................... (15,225) 2,625 59,733 (15,210) 76,035
Preferred dividends ............. -- 6,563 -- -- 6,563
------------ -------- ----------- -------------- -----------
Net income available for common
shareholders ................... $(15,225) $(3,938) $ 59,733 $(15,210) $ 69,472
============ ======== =========== ============== ===========
Net income per share ............ $ 0.90
===========
Net income per share--diluted .. $ 0.88
===========
Basic shares outstanding ........ 16,570 77,228
======== ===========
Diluted shares outstanding ..... 16,570 4,196 85,557
======== ============== ===========
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Combined
Condensed Financial Data
P-4
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
RETIREMENT
SECURITIES OF SENIOR
CALENERGY OFFERING DISCOUNT NOTES PRO FORMA
---------- ---------- -------------- ----------
(NOTE 1) (NOTE 2)
<S> <C> <C> <C> <C>
REVENUES:
Operating revenue ..................... $2,166,338 $ -- $ -- $2,166,338
Interest and other income ............. 104,573 -- -- 104,573
---------- ---------- -------------- ----------
Total revenues ...................... 2,270,911 -- -- 2,270,911
COSTS AND EXPENSES:
Cost of sales ......................... 1,055,195 -- -- 1,055,195
Operating expense ..................... 345,833 -- -- 345,833
Corporate administration .............. 52,705 -- -- 52,705
Depreciation and amortization ......... 276,041 -- -- 276,041
Loss on equity investment in Casecnan 5,972 -- -- 5,972
Interest expense ...................... 296,364 107,700 (55,536) 348,528
Less capitalized interest ............. (45,059) -- -- (45,059)
Non-recurring charge--asset valuation
impairment ........................... 87,000 -- -- 87,000
---------- ---------- -------------- ----------
Total costs and expenses ............ 2,074,051 107,700 (55,536) 2,126,215
---------- ---------- -------------- ----------
Income before tax ..................... 196,860 (107,700) 55,536 144,696
Provision for income taxes ............ 99,044 (43,080) 22,214 78,178
---------- ---------- -------------- ----------
Income before minority interest ...... 97,816 (64,620) 33,322 66,518
Minority interest ..................... 45,993 -- -- 45,993
---------- ---------- -------------- ----------
Net income ............................ 51,823 (64,620) 33,322 20,525
Preferred dividends ................... -- -- -- --
---------- ---------- -------------- ----------
Net income available for common
shareholders ......................... $ 51,823 $ (64,620) $ 33,322 $ 20,525
========== ========== ============== ==========
Net income per share .................. $ 0.77 $ 0.31
========== ==========
Net income per share--diluted ......... $ 0.75 $ 0.30
========== ==========
Basic shares outstanding .............. 67,268 67,268
========== ==========
Diluted shares outstanding ............ 68,686 68,686
========== ==========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NON-RECOURSE EQUITY MIDAMERICAN PRO FORMA
FINANCING OFFERING MIDAMERICAN MERGER AS ADJUSTED
------------ -------- ----------- -------------- -----------
(NOTES 5, 6 &
(NOTE 3) (NOTE 4) 7)
<S> <C> <C> <C> <C> <C>
REVENUES:
Operating revenue ..................... $ -- $ -- $1,922,281 $ -- $4,088,619
Interest and other income ............. -- -- 49,019 293 153,885
------------ -------- ----------- -------------- -----------
Total revenues ...................... -- -- 1,971,300 293 4,242,504
COSTS AND EXPENSES:
Cost of sales ......................... -- -- 821,958 (5,767) 1,871,386
Operating expense ..................... -- -- 645,083 (429) 990,487
Corporate administration .............. -- -- 14,194 333 67,232
Depreciation and amortization ......... -- -- 170,540 33,974 480,555
Loss on equity investment in Casecnan -- -- -- -- 5,972
Interest expense ...................... 50,750 -- 99,932 -- 499,210
Less capitalized interest ............. -- -- (2,597) -- (47,656)
Non-recurring charge--asset valuation
impairment ........................... -- -- -- -- 87,000
------------ -------- ----------- -------------- -----------
Total costs and expenses ............ 50,750 -- 1,749,110 28,111 3,954,186
------------ -------- ----------- -------------- -----------
Income before tax ..................... (50,750) -- 222,190 (27,818) 288,318
Provision for income taxes ............ (20,300) (5,250) 68,390 2,605 123,623
------------ -------- ----------- -------------- -----------
Income before minority interest ...... (30,450) 5,250 153,800 (30,423) 164,695
Minority interest ..................... -- -- 14,468 -- 60,461
------------ -------- ----------- -------------- -----------
Net income ............................ (30,450) 5,250 139,332 (30,423) 104,234
Preferred dividends ................... -- 13,125 -- -- 13,125
------------ -------- ----------- -------------- -----------
Net income available for common
shareholders ......................... $(30,450) $(7,875) $ 139,332 $(30,423) $ 91,109
============ ======== =========== ============== ===========
Net income per share .................. $ 1.09
===========
Net income per share--diluted ......... $ 1.07
===========
Basic shares outstanding .............. 16,570 83,838
======== ===========
Diluted shares outstanding ............ 16,570 85,256
======== ===========
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Combined
Condensed Financial Data.
P-5
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The Unaudited Pro Forma Combined Condensed Financial Data are based on the
following assumptions:
1. Issuance of $1,400 million 7.5% senior debt, net of $27 million debt
issue costs. (The actual weighted average interest rate for the
Securities is approximately 7.7%.)
2. Retirement of the $529.6 million 10.25% Senior Discount Notes including
a call premium of $27.1 million and write off of deferred financing
costs of $6.1 million.
3. Issuance of $750 million 6.5% notes of a subsidiary, prior to the
MidAmerican Merger, net of $10 million debt issue costs.
4. Issuance of 16.57 million shares of Common Stock of CalEnergy for $450
million, net, and 8.75% preferred securities of a subsidiary trust for
$150 million net, prior to the MidAmerican Merger.
5. The use of the proceeds of the debt and equity offerings described
above to purchase MidAmerican for $2,587.1 million, including
transaction costs.
6. The preliminary adjustments which have been made to the assets and
liabilities of MidAmerican to reflect the effect of the acquisition
accounted for as a purchase business combination follow (in thousands):
<TABLE>
<S> <C>
Goodwill............................. $1,373,226
Other assets......................... (38,765)
Other liabilities.................... (118,405)
Long-term debt....................... (2,422)
Deferred taxes....................... 62,485
Preferred securities of
subsidiaries........................ (627)
------------
$1,275,492
============
</TABLE>
7. A. Included in other assets is primarily an adjustment to reflect the
fair value of MidAmerican's investments in real estate.
B. Included in other liabilities are adjustments to reflect
MidAmerican's compensation obligations and to reflect MidAmerican's
long-term contracts at fair value based on the estimated market
prices for similar purchases with similar remaining maturities.
C. Record amortization of the excess purchase price over the net
assets acquired using the straight line method over 40 years.
D. Record amortization of the purchase price accounting adjustments
using the straight line or other applicable method over the
remaining estimated lives.
E. Includes income tax expense for the effects of the pro forma
adjustments which affect taxable income at an effective rate of
40%. Preferred dividends on the $150 million 8.75% preferred
securities are deductible for income tax purposes.
F. For the six months ended June 30, 1998, earning per share--diluted
is further adjusted for certain convertible securities which are
antidilutive on a pro forma and a pro forma as adjusted basis.
8. Excluding the $87.0 million Indonesian asset impairment charge from the
year ended December 31, 1997 actual, pro forma and pro forma as
adjusted amounts, basic earnings per share would have been $2.06, $1.60
and $2.12, respectively.
P-6
<PAGE>
PROSPECTUS
$1,926,587,500
CALENERGY COMPANY, INC.
COMMON STOCK, PREFERRED STOCK AND DEBT SECURITIES
CalEnergy Company, Inc. (the "Company") may from time to time offer,
together or separately, (i) shares of its common stock, par value $.0675 per
share ("Common Stock"), (ii) shares of its preferred stock, no par value
("Preferred Stock"), (iii) senior debt securities ("Senior Debt Securities")
and (iv) subordinated debt securities ("Subordinated Debt Securities" and
together with Senior Debt Securities, the "Debt Securities"). The Common
Stock, the Preferred Stock and the Debt Securities are collectively referred
to herein as the "Securities." The Securities in respect of which this
Prospectus is being delivered (the "Offered Securities") may be offered,
separately or together, in separate series, in amounts, at prices and on
terms to be set forth in a supplement to this Prospectus (a "Prospectus
Supplement").
By separate prospectus, the form of which is included in the Registration
Statement of which this Prospectus forms a part, three Delaware statutory
business trusts (individually, a "CalEnergy Trust" and collectively, the
"CalEnergy Trusts"), which are wholly owned subsidiaries of the Company, may
from time to time severally offer preferred securities guaranteed by the
Company to the extent set forth therein and the Company may offer from time
to time junior subordinated debt securities either directly or to a CalEnergy
Trust. The aggregate public offering price of the securities to be offered by
this Prospectus and such other prospectus shall not exceed $1,926,587,500 (or
its equivalent in one or more foreign currencies, currency units or composite
currencies).
Specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in an applicable Prospectus
Supplement, that includes, where applicable, the following: (i) in the case
of Common Stock, the specific designation, number of shares, purchase price
and the rights and privileges thereof, together with any qualifications or
restrictions thereon and any listing on a securities exchange; (ii) in the
case of Preferred Stock, the specific designation, number of shares, purchase
price and the rights, preferences and privileges thereof and any
qualifications or restrictions thereon (including dividends, liquidation
value, voting rights, terms for the redemption, conversion or exchange
thereof and any other specific terms of the Preferred Stock) and any listing
on a securities exchange; and (iii) in the case of the Debt Securities, the
specific designation, aggregate principal amount, authorized denomination,
maturity, premium, or discount, if any, exchangeability, redemption,
conversion, prepayment or sinking fund provisions, if any, interest rate
(which may be fixed or variable), if any, method, if any, of calculating
interest payments and dates for payment thereof, dates on which premium, if
any, will be payable, the right of the Company, if any, to defer payment of
interest on the Debt Securities and the maximum length of such deferral
period, the initial public offering price, any listing on a securities
exchange and other specific terms of the offering. Unless otherwise indicated
in the Prospectus Supplement, the Company does not intend to list any of the
Securities other than the Common Stock on a national securities exchange. Any
Prospectus Supplement relating to any series of Offered Securities will
contain information, where applicable, concerning certain United States
federal income tax considerations for the Offered Securities.
The Common Stock and Preferred Stock and Debt Securities offered pursuant
to this Prospectus may be denominated in U.S. dollars or one or more foreign
currencies, currency units or composite securities to be determined at or
prior to the time of any offering. The Debt Securities offered pursuant to
this Prospectus may consist of bonds, debentures, notes or other evidences of
indebtedness in one or more series and in amounts, at prices and on terms to
be determined at or prior to the time of any such offering. Unless otherwise
disclosed in a Prospectus Supplement, the Company's obligations under the
Senior Debt Securities will be unsecured obligations of the Company ranking
pari passu in right of payment of principal and interest and with all other
existing and future unsecured obligations of the Company. If security for the
Debt Securities is to be provided it will be described in an applicable
Prospectus Supplement. The Company's obligations under the Subordinated Debt
Securities will be subordinated in right of payment to the prior payment in
full of all Senior Debt.
The Offered Securities may be offered directly, through agents designated
from time to time, to or through dealers or to or through underwriters. Such
agents or underwriters may act alone or with other agents or underwriters.
Any such agents, dealers or underwriters will be set forth in a Prospectus
Supplement. If an agent of the Company, or a dealer or underwriter, is
involved in the offering of the Offered Securities, the agent's commission,
dealer's purchase price, underwriter's discount and net proceeds to the
Company, as the case may be, will be set forth in, or may be calculated from,
the Prospectus Supplement. Any underwriters, dealers or agents participating
in the offering may be deemed "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act").
<PAGE>
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS
THAT PROSPECTIVE INVESTORS SHOULD CONSIDER PRIOR TO AN INVESTMENT IN ANY OF
THE SECURITIES.
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.
This Prospectus may not be used to consummate sales of Offered Securities
unless accompanied by a Prospectus Supplement. Any statement contained in
this Prospectus will be deemed to be modified or superseded by any
inconsistent statement contained in an accompanying Prospectus Supplement.
The date of this Prospectus is September 9, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files
reports, proxy and information statements and other information with the
Securities and Exchange Commission (the "SEC"). Such reports, proxy and
information statements and other information filed by the Company with the
SEC can be inspected and copied at the Public Reference Section of the SEC at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the SEC located at Seven World Trade Center,
13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the
Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The SEC maintains a
Web site that contains reports, proxy and information statements and other
materials that are filed through the SEC's Electronic Data Gathering,
Analysis, and Retrieval (EDGAR) system. This Web site can be accessed at
http://www.sec.gov. Such reports, proxy and information statements and other
information can also be inspected at the offices of the New York Stock
Exchange Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the SEC a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the securities offered
by this Prospectus. This Prospectus does not contain all of the information
set forth or incorporated by reference in the Registration Statement and the
exhibits and schedules related thereto, certain portions of which have been
omitted as permitted by the rules and regulations of the SEC. For further
information with respect to the Company and the securities offered by this
Prospectus, reference is made to the Registration Statement and the exhibits
filed or incorporated as a part thereof. Statements contained in this
Prospectus as to the contents of any documents referred to are not
necessarily complete and, in each such instance, are qualified in all
respects by reference to the applicable documents filed with the SEC.
This Prospectus and the periodic filings of the Company under the Exchange
Act contain forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). These forward-looking
statements express the beliefs and expectations of management regarding the
Company's future results and performance.
Such statements are based on current expectation and involve a number of
known and unknown risks and uncertainties that could cause the actual
results, performance and/or other achievements of the Company to differ
materially from any expected future results, performance or achievements,
expressed or implied by the forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements and any such
statement is qualified by reference to the following cautionary statements.
In connection with the safe harbor provisions of the Reform Act, the
Company's management has identified important factors that could cause actual
results to differ materially from management's expectations. Reference is
made to the Company's Current Report on Form 8-K dated March 6, 1998,
incorporated herein by reference. The Company is not required to publicly
release any changes to these forward-looking statements for events occurring
after the date thereof or to reflect any other unanticipated events.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC (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, 1997;
(ii) the Company's Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 1998 and June 30, 1998;
(iii) the Company's Current Reports on Form 8-K dated January 12, 1998,
January 16, 1998, January 29, 1998, March 6, 1998, April 8, 1998, April
17, 1998, August 12, 1998 and September 9, 1998; and
(iv) the description of the Company's Common Stock contained in the
Company's registration statement on Form 8-A filed under the Exchange Act
and any amendments or reports filed for the purpose of updating such
description.
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 filing of a post-effective amendment which indicates the termination
of this offering 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 herein, 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.
No person is authorized to give any information or to make any
representations, other than those contained or incorporated by reference in
this Prospectus or a Prospectus Supplement, in connection with the offering
contemplated hereby and thereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Company or any underwriter, dealer or agent. This Prospectus and a Prospectus
Supplement do not constitute an offer to sell or a solicitation of an offer
to buy any Securities other than the Securities to which they relate and do
not constitute an offer to sell or a solicitation of an offer to buy any
Securities in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction. Neither the delivery of this
Prospectus or a Prospectus Supplement, nor any sale made hereunder or
thereunder, shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the date hereof or
thereof or that the information contained or incorporated by reference herein
or therein is correct as of any time subsequent to such date.
3
<PAGE>
RISK FACT0RS
Prospective investors should carefully consider the risk factors set forth
below, in addition to the other information appearing in or incorporated by
reference in this Prospectus. This Prospectus contains or incorporates by
reference forward-looking statements which involve risks and uncertainties.
The Company's actual results in the future could differ significantly from
the results discussed or implied in the forward-looking statements. Factors
that could cause or contribute to such a difference include, but are not
limited to, the following risk factors and risk factors described in the
documents incorporated herein by reference. The term "Company" refers to
CalEnergy Company, Inc. and its operating subsidiaries, unless the context
otherwise requires.
ACQUISITION UNCERTAINTIES. The Company's recent growth has been achieved,
in part, through strategic acquisitions in the energy industry which
complement and diversify the Company's existing business. The Company intends
to continue to pursue an aggressive acquisition strategy for the foreseeable
future. The Company has recently completed several major acquisitions,
including the acquisition of Magma Power Company ("Magma"), Falcon Seaboard
Resources, Inc. ("Falcon Seaboard") and Northern Electric plc ("Northern").
The Company has successfully integrated Magma, Falcon Seaboard and Northern.
In addition, on August 11, 1998, the Company entered into an Agreement and
Plan of Merger pursuant to which it has agreed to acquire, subject to the
conditions set forth therein, MidAmerican Energy Holdings Company
("MidAmerican") for approximately $2.6 billion in cash, in a transaction in
which approximately $1.4 billion in debt and preferred stock of MidAmerican
will remain outstanding (the "MidAmerican Merger"). See "The Company--Recent
Developments; MidAmerican Merger."
Achieving the expected benefits of the MidAmerican Merger will depend in
part upon the integration of the businesses of MidAmerican and the Company in
an efficient manner, and despite the Company's prior experience in
successfully integrating acquired businesses, there can be no assurance that
this will occur. Any substantial diversion of management attention and any
substantial difficulties encountered in the transition and integration
process could have a material adverse effect on the revenues, levels of
expenses and operating results of the combined company.
The consummation of the MidAmerican Merger is conditioned upon receipt of
approvals of the shareholders of the Company and MidAmerican, as well as the
Nuclear Regulatory Commission (the "NRC"), the Federal Energy Regulatory
Commission (the "FERC"), the Iowa Utilities Board (the "IUB"), and the
expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. In
addition, certain partial dispositions of interests in certain of the
Company's facilities will need to be divested prior to the consummation of
the MidAmerican Merger in order to maintain the qualifying facilities status
of certain of the Company's independent generating facilities. There can be
no assurance as to the timing of the required regulatory approvals, the
ability to obtain such approvals or that such approvals will contain
satisfactory terms and conditions.
The Company's ability to pursue acquisition opportunities successfully
will depend on many factors, including, among others, the Company's ability
to (i) identify suitable acquisition opportunities, (ii) consummate the
acquisition, including obtaining any necessary financing, and (iii)
successfully integrate acquired businesses. The integration of acquired
businesses entails numerous risks, including, among others, the risk of
diverting management's attention from the day-to-day operations of the
Company, the risk that the acquired businesses will require substantial
capital and financial investments and the risk that the investments will fail
to perform in accordance with expectations. There can be no assurance that
the MidAmerican Merger will be consummated, that additional acquisition
opportunities, if any, can be consummated on favorable terms or that the
Company's integration efforts will be successful.
HOLDING COMPANY STRUCTURE. The Company is a holding company which derives
substantially all of its operating income from its subsidiaries and joint
ventures. The Company expects that its future development and acquisition
efforts will be similarly structured to involve operating subsidiaries and
joint ventures. The Company is dependent on the earnings and cash flows of,
and dividends from, its subsidiaries and joint ventures to generate the funds
necessary to meet its obligations, including the
4
<PAGE>
payment of principal, interest and premium, if any, on the Debt Securities.
The availability of distributions from such entities is subject to the
satisfaction of various covenants and conditions contained in the applicable
subsidiaries' and joint ventures' financing documents and to certain utility
regulatory restrictions. Furthermore, the Company is structuring other
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 Debt Securities 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
Debt Securities. 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 Debt Securities
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). At June 30,
1998 the Company had approximately $6,031 million of total consolidated
indebtedness, which included approximately $2,850 million of the Company's
proportionate share of joint venture and subsidiary debt, which would be
effectively senior to the Debt Securities, substantially all of which would
have been secured by the assets of such joint ventures and subsidiaries. At
such date, the Company also had approximately $554 million of subordinated
debt issued in connection with Capital Trust Convertible Preferred
Securities.
LEVERAGE. The Company is substantially leveraged. At June 30, 1998, the
Company's total consolidated liabilities were approximately $6,031 million
(excluding deferred income), its obligations in respect of the Trust
Convertible Preferred Securities and the TIDES Securities were approximately
$554 million, its total consolidated assets were approximately $7,482 million
and its total stockholders' equity was approximately $780 million. The
Company's leverage level presents the risk that the Company might not
generate sufficient cash to service the Company's indebtedness, including the
Debt Securities or Preferred Stock, or that its leveraged capital structure
could limit its ability to finance future acquisitions, develop additional
projects, compete effectively and operate successfully under adverse economic
conditions. 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 or such entities are
otherwise subject to regulatory restrictions. See "Risk Factors--Holding
Company Structure."
NORTHERN'S REGULATORY ENVIRONMENT. Northern's electricity distribution and
supply business are subject to extensive regulation in the United Kingdom.
Price Regulation of Distribution. Revenue from Northern's distribution
business is controlled by a formula (the "Distribution Price Control
Formula") which determines the maximum average price per unit of electricity
(expressed in kilowatt ("kW") hours, a "unit") that a regional electricity
company (a "REC") in the United Kingdom may charge. The Distribution Price
Control Formula is expected to have a five year duration and is subject to
review by the Director General of Electricity Supply (the "Regulator") at the
end of each five-year period and at other times in the discretion of the
Regulator. At each review, the Regulator can propose adjustments to the
Distribution Price Control Formula. In July 1994, a review resulted in a 17%
reduction in allowed distribution income compared to the original formula,
before allowing for inflation, effective April 1, 1995. In July 1995, a
further review of distribution prices was concluded by the Regulator for
fiscal years 1997 to 2000. As a result of this further review, Northern's
allowed distribution from income was reduced by a further 11%, before
allowing for inflation, effective April 1, 1996. The next review of the
Distribution Price Control Formula is expected to occur in April 2000. There
can be no assurance that any further price reviews by the Regulator will not
have a material adverse effect on the Company's results of operations.
Competition in Supply. Northern's supply business is also subject to price
control and is being progressively opened to competition. The market for
customers with a maximum demand above 1
5
<PAGE>
megawatt ("MW") has been open to competition for suppliers of electricity
since privatization while the market for customers with a maximum demand
above 100 kW ("Non-Franchise Supply Customers") became competitive in April
1994. The final stage of this process is expected to occur in the fall of
1998, when the exclusive right to supply Franchise Supply Customers is
scheduled to end. There can be no assurance that competition among suppliers
of electricity will not have a material adverse effect on the Company's
results of operations. The domestic gas market is also being opened to
competition in phases and there can be no assurance that Northern will be
successful in such competition among suppliers of gas.
Pool Purchase Price Volatility. Northern's supply business to
Non-Franchise Supply Customers generally involves entering into fixed price
contracts to supply electricity to its customers. Northern obtains the
electricity to satisfy its obligations under such contracts primarily by
purchases from the wholesale trading market for electricity in England and
Wales (the "Pool"). Because the price of electricity purchased from the Pool
can be volatile, to the extent that Northern purchases electricity from the
Pool, Northern is exposed to risk arising from differences between the fixed
price at which it sells and the fluctuating prices at which it purchases
electricity, unless it can effectively hedge such exposure. Northern's
ability to manage such risk at acceptable levels will depend, in part, on the
specifics of the supply contracts that Northern enters into, Northern's
ability to implement and manage an appropriate hedging strategy and the
development of an adequate market for hedging instruments. There can be no
assurance that this risk will be effectively mitigated.
Change in Government Policy. In the general election held in the United
Kingdom on May 1, 1997, the Labour Party won a majority of seats in the
United Kingdom Parliament. On July 31, 1997, the United Kingdom Parliament
passed the windfall tax which was levied on privatized utilities and resulted
in a 1997 third quarter extraordinary item of $135.85 million. See the
Company's Current Report on Form 8-K dated July 7, 1997, incorporated herein
by reference. There can be no assurance that other possible changes in tax or
utility regulation by the United Kingdom government, by whichever party it is
controlled, would not have a material adverse effect on the Company's results
of operations.
DEVELOPMENT UNCERTAINTY. The Company is actively seeking to develop,
construct, own and operate new energy projects (including, without
limitation, generation, distribution, transmission, exploration/production,
storage and supply projects and related activities, infrastructure and
services), 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, permitting, fuel supply,
resource exploration, legal and other expenses in preparation for competitive
bids which the Company may not win or before it can be determined whether a
project is feasible, economically attractive or capable of being financed.
Successful development and construction is contingent upon, among other
things, negotiation on terms satisfactory to the Company of engineering,
construction, fuel supply and power sales contracts with other project
participants, receipt of required governmental permits and consents and
timely implementation of construction. Further, there can be no assurance
that the Company, which is substantially leveraged, will obtain access to the
substantial debt and equity capital required to continue to develop and
construct electric power projects or to refinance projects. The future growth
of the Company is dependent, in large part, upon the demand for significant
amounts of additional energy (including the generation, distribution,
transmission, exploration/ production, storage and supply projects and
related activities, infrastructure and services) and related services and the
Company's ability to obtain contracts to supply portions of this demand.
There can be no assurance that development efforts on any particular project,
or the Company's efforts generally, will be successful.
UNCERTAINTIES RELATED TO DOING BUSINESS OUTSIDE THE UNITED STATES. The
Company has various projects under construction outside the United States, a
number of projects under award outside the United States and a number of
operating projects doing business outside of 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 or regulation, changes in government policy, political instability, civil
unrest and expropriation) and other risk/structuring issues that have the
potential to cause substantial delays in respect of, or material
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impairment of, the value of the project being developed, constructed or
operated, 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. Furthermore, the central
bank of any such country may have the authority in certain circumstances to
suspend, restrict or otherwise impose conditions on foreign exchange
transactions or to approve distributions to foreign investors. Although the
Company may structure certain power purchase agreements and other project
revenue agreements to provide for payments to be made in, or indexed to,
United States dollars or a currency freely convertible into United States
dollars, there can be no assurance that the Company will be able to achieve
this structure in all cases or that a power purchaser or other customer will
be able to obtain sufficient dollars or other hard currency or that available
dollars will be allocated to pay such obligations. In addition, the Company's
investment in certain international projects, including without limitation
Northern, where payments are to be made in the foreign currency and any
dividends or distributions of earnings in respect of such investment may be
significantly affected by fluctuations in the exchange rate between the
United States dollar and the British pound or other applicable foreign
currency. Although the Company may enter into certain transactions to hedge
risks associated with exchange rate fluctuations, there can be no assurance
that such transactions will be successful in reducing such risks.
The Company's international projects may, in certain cases, be subject to
the risks of being delayed, suspended or terminated by the applicable foreign
governments or may be subject to risks of contract abrogation or other
uncertainties resulting from changes in government policy or personnel or
changes in general political or economic conditions effecting the country. In
this regard, reference is made to the substantial uncertainties associated
with the Company's Indonesian projects, the contracts for which are currently
not being honored by the Government of Indonesia and which are presently the
subject of international arbitration.
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.
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EXPLORATION, DEVELOPMENT AND PRODUCTION OF GAS RESOURCES. The exploration
development and production of gas resources involve resource based and
geologic risks similar to those for geothermal resources described above,
including dry holes, uncontrolled releases and uncertainties relating to
resource production, required capital and operating expenditures, and
resource quality, quantity, extractability, sustainability and extent of
reserves.
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.
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.
FUEL SUPPLY OPERATIONS. 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. Although the Company believes that it has
contracted for natural gas supply and transportation in sufficient quantities
to satisfy the needs of its projects, the gas suppliers are not required in
all cases to provide dedicated reserves in support of their contractual
obligations. 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 deliver
natural gas in accordance with its contract could have a material adverse
effect on the cash flows to the Company. In addition, under certain gas
supply contracts the Company is obligated to pay for a certain minimum
quantity of natural gas even if it cannot utilize it. 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. Finally, the state,
federal and Canadian regulatory authorities that have jurisdiction over
natural gas transportation have the right to modify aspects of the rates,
terms and conditions of those contracts. It is possible that such a
modification could materially increase the fuel transportation costs of the
projects or give the transporter a right to terminate or suspend or decrease
its performance under its contract.
PRESENT DEPENDENCE ON LARGE CUSTOMER; CONTRACT UNCERTAINTIES. The Company
currently relies on long-term power purchase "Standard Offer No. 4" contracts
(each, an "SO4 Agreement") with a large customer, Southern California Edison
Company ("Edison"), to generate a substantial portion of its operating
revenues. Any material failure by Edison to fulfill its contractual
obligations under 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 after achieving firm operation,
energy payments under each SO4 Agreement 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 expired in August
1997 for the Company's Navy I Project and will expire in March 1999 for its
BLM Project and January 2000 for its Navy II Project, which three projects
comprise the Coso Project in California (the "Coso Project"). Such ten-year
period expired in 1996 with respect to one of the eight geothermal plants in
the Imperial Valley in California ("Imperial Valley Projects") 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
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respective SO4 Agreements and is currently expected to remain so. For the
year ended December 31, 1997, the time period-weighted average of Edison's
Avoided Cost of Energy was 3.3 cents per kWh, compared to the time
period-weighted average for the year ended December 31, 1997 selling prices
for energy of approximately 12.0 cents per kWh for the Company's SO4
Agreements. 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. Moreover, the Company's
subsidiaries have a number of ongoing contract disputes with Edison involving
litigation of the SO4 Agreements, which create additional litigation
uncertainties regarding such contracts.
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. In particular, the state of California has restructured its
electric industry by providing for a phased-in competitive power generation
industry, with a power pool and an independent system operator, and for
direct access to generation for all power purchasers outside the power
exchange under certain circumstances. Although existing qualifying facility
power sales contracts are to be honored under such restructuring, and all of
the Company's California operating projects are qualifying facilities, until
the new system is fully implemented, it is impossible to predict what impact,
if any, it may have on the operations of those projects. In addition, if the
MidAmerican Merger is consummated, future industry restructuring efforts by
states in the Midwest (such as Iowa or Illinois) where MidAmerican has
substantial operations could impact the results of operations of MidAmerican
in a manner which is difficult to predict, since such effects will depend on
the form and timing of such restructuring.
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. Without
limiting the generality of the foregoing, if the MidAmerican Merger is
consummated, regulatory requirements applicable in the future to coal or
nuclear generating facilities could adversely affect the results of
operations of MidAmerican. 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) that affect the
Company's operations. PURPA provides to qualifying facilities ("QFs") certain
exemptions from federal and state laws and regulations, including
organizational, rate and
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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 domestic power plants it owns
are QFs under PURPA or are exempted as exempt wholesale generators ("EWGs"),
and so long as its foreign utility operations are exempted as EWGs or foreign
utility companies or are otherwise exempted under PUHCA. QF status is
conditioned on meeting certain criteria, and would be jeopardized, for
example, in the case of the Company's cogeneration facilities, 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
or replaced 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.
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 of Energy. 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. As noted above, if the MidAmerican Merger is consummated, industry
restructuring efforts by states in the Midwest (such as Iowa and Illinois)
where MidAmerican has substantial operations could affect MidAmerican's
operations in a manner which is difficult to predict, since such effects will
depend on the form and timing of such restructuring. 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.
SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE. Pursuant to the Company's
1996 Stock Option Plan (the "1996 Plan"), as of June 30, 1998, the Company
had outstanding various options to its officers, directors and employees for
the purchase of 5,694,745 shares of Common Stock. All of the shares of Common
Stock issuable upon exercise of said options have been registered pursuant to
registration statements on Form S-8, and, when fully vested and exercised,
are available for immediate resale. Sales of substantial amounts of Common
Stock or the availability of Common Stock for sale, could have an adverse
impact on the market price of the Common Stock and on the Company's ability
to raise additional capital through the sale of Common Stock.
LACK OF PUBLIC MARKET FOR THE DEBT SECURITIES AND THE PREFERRED
STOCK. There is no existing public trading market for the Debt Securities and
the Preferred Stock and there can be no assurance regarding the future
development of a market for either the Debt Securities or the Preferred
Stock, or the ability of holders of such securities to sell their Debt
Securities and/or Preferred Stock or the price at which such holders may be
able to sell their Securities. If such a market were to develop, the Debt
Securities and/or Preferred Stock could trade at prices that may be higher or
lower than their initial offering price depending on many factors, including
prevailing interest rates, the price of Common Stock, the Company's operating
results and the market for similar securities. Historically, the market for
non-investment grade debt has demonstrated substantial volatility in the
prices of securities similar to the Debt Securities. There can be no
assurance that the future market for the Debt Securities will not be subject
to similar volatility.
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THE COMPANY
GENERAL
CalEnergy Company, Inc. (the "Company") is a fast-growing global power
company whose goal is to be one of the leading providers of low cost energy
services throughout the world as electricity and gas markets privatize or
deregulate. The Company manages and owns interests in over 5,000 MW of power
generation facilities in operation, construction and development worldwide
and currently operates 20 generating facilities. In addition, through its
subsidiary, Northern Electric plc ("Northern"), the Company is engaged in the
distribution and supply of electricity and gas to approximately 1.9 million
customers in the U.K. The Company employs 4,200 people worldwide. For the
year ended December 31, 1997, the Company generated revenues of over $2.2
billion and had assets of approximately $7.5 billion.
The Company's Common Stock is traded on the New York, Pacific and London
Stock Exchanges.
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.
RECENT DEVELOPMENTS; MIDAMERICAN MERGER
On August 11, 1998, the Company announced that it had entered into an
Agreement and Plan of Merger with MidAmerican Energy Holdings Company
("MidAmerican"), pursuant to which the Company agreed (i) to pay $27.15 in
cash for each outstanding share of MidAmerican common stock for an aggregate
purchase price of approximately $2.65 billion, in a transaction in which
approximately $1.4 billion of debt and preferred securities of MidAmerican
will remain outstanding, in a merger pursuant to which MidAmerican will
become a wholly owned subsidiary of the Company, and (ii) to reincorporate in
the State of Iowa and be renamed MidAmerican Energy Holdings Company. Closing
of the transaction is subject to the approval of the shareholders of both
companies and the obtaining of certain regulatory approvals. The transaction
is presently expected to close by the end of the first quarter of 1999. See
"Risk Factors--Acquisition Uncertainties; MidAmerican Merger." Reference is
also made to the Company's Current Report on Form 8-K dated August 12, 1998
which contains the Merger Agreement relating to the MidAmerican Merger, which
Form 8-K is incorporated herein by reference.
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RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's ratio of earnings to fixed
charges on a historical basis for each of the five years in the period ended
December 31, 1997 and for the six months ended June 30, 1997 and 1998.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges....... 2.8 1.7 1.5 1.6 1.4 1.7 1.4
</TABLE>
- ------------
(1) The ratio of earnings to fixed charges for the year ended December
31, 1997 was impacted by the $87 million non-recurring asset
impairment charge related to the Company's assets in Indonesia.
Without this charge, the ratio of earnings to fixed charges would
have been 1.7.
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 and excluding the equity in loss of a
non-consolidated subsidiary, 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) and preferred stock dividend requirements of
majority owned subsidiaries.
USE OF PROCEEDS
Unless otherwise set forth in the applicable Prospectus Supplement
accompanying this Prospectus, proceeds from the sale of the Offered
Securities ultimately will be used by the Company to make equity investments
in future domestic and international energy projects, to fund possible
project or Company acquisitions, for the repayment of debt or for other
general corporate purposes, and initially may be temporarily invested in
short-term securities. See "The Company--Recent Developments; MidAmerican
Merger."
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DESCRIPTION OF CAPITAL STOCK
The following summary does not purport to be complete and is subject to,
and qualified in its entirety by, the Company's Restated Certificate of
Incorporation, as amended (the "Restated Certificate of Incorporation"), and
the Company's By-Laws, as amended (the "By-Laws"), and by the provisions of
applicable law. The authorized capital stock of the Company consists of
180,000,000 shares of Common Stock, par value $0.0675 per share, and
2,000,000 shares of Preferred Stock, no par value. This summary contains a
description of certain general terms of the Common Stock and the Preferred
Stock to which any Prospectus Supplement may relate. Certain terms of any
Common Stock or any series of Preferred Stock offered by a Prospectus
Supplement will be described in the Prospectus Supplement relating thereto,
including the number of shares, offered, any initial offering price, and
market price and dividend information. If so indicated in the Prospectus
Supplement, the terms of any series may differ from the terms set forth
below.
COMMON STOCK
At June 30, 1998, there were 60,032,677 shares of Common Stock
outstanding. The holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders.
Holders of the Common Stock vote together as a single class on all matters.
Subject to preferences that may be applicable to any outstanding Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding Preferred Stock. The outstanding shares of Common Stock are fully
paid and nonassessable. The Common Stock will, when issued against payment
therefor, be fully paid and nonassessable.
On December 1, 1988, the Company distributed a dividend of one Preferred
Share Purchase Right (a "Right") for each outstanding share of Common Stock.
The Rights are not exercisable until ten days after a person or group,
without prior Board approval, acquires, or has the right to acquire,
beneficial ownership of 20% or more of the Common Stock or announces a tender
or exchange offer for 30% or more of the Common Stock. Each Right entitles
the holder to purchase one one-hundredth of a share of Series A Junior
Preferred Stock, no par value ("Series A 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
are automatically attached to, and trade with, each share of Common Stock.
The Rights will expire, unless previously redeemed or exercised, on November
30, 1998.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 2,000,000 shares
of Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any
series or the designation of such series, without any further action by the
stockholders. The issuance of shares of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of the Company
without further action by the stockholders. The issuance of shares of
Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. The Company has no present plans to issue any additional
shares of Preferred Stock. See "Description of Preferred Stock."
RESTATED CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS AFFECTING CHANGE
IN CONTROL
The Restated Certificate of Incorporation and the By-Laws include certain
provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and that may have the
effect of delaying, deterring or preventing a future takeover or change in
control of the Company, unless such takeover or change in control is approved
by the Board of Directors. Such provisions may also render the removal of the
directors and management more difficult. Such provisions
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include a classified Board of Directors divided into three classes serving
staggered three-year terms, prohibit stockholders of the Company from taking
action by written consent, require the affirmative vote of at least 66 2/3%
of the outstanding shares of stock of the Company entitled to vote thereon to
adopt, repeal, alter, amend or rescind the By-Laws, and require that special
meetings of stockholders be called only by the Board of Directors or the
Chief Executive Officer. In addition to the foregoing, the Board of Directors
has adopted a Stockholder Rights Plan, which provided for a dividend of one
Right for each outstanding share of Common Stock. See "--Common Stock."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Under Section 203, certain "business
combinations" between a Delaware corporation whose stock is publicly traded
or held of record by more than 2,000 stockholders and an "interested
stockholder" are prohibited for a three-year period following the date that
such stockholder became an interested stockholder, unless (i) the corporation
has elected in its original certificate of incorporation not to be governed
by Section 203 (the Company did not make such an election), (ii) the
transaction in which the stockholder became an interested stockholder or the
business combination was approved by the board of directors of the
corporation before the other party to the business combination became an
interested stockholder, (iii) upon consummation of the transaction that made
it an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the commencement of the
transaction (excluding voting stock owned by directors who are also officers
or held in employee benefit plans in which the employees do not have a
confidential right to tender or vote stock held by the plan) or (iv) the
business combination was approved by the board of directors of the
corporation and ratified by two-thirds of the voting stock which the
interested stockholder did not own. The term "business combination" is
defined generally to include mergers or consolidations between a Delaware
corporation and an "interested stockholder," transactions with an "interested
stockholder" involving the assets or stock of the corporation or its
majority-owned subsidiaries and transactions which increase an "interested
stockholder's" percentage ownership of stock. The term "interested
stockholder" is defined generally as a stockholder who, together with its
affiliates and associates, owns (or, within three years prior, did own) 15%
or more of a Delaware corporation's voting stock. Section 203 could prohibit
or delay a merger, takeover or other change in control of the Company and
therefore could discourage attempts to acquire the Company.
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DESCRIPTION OF PREFERRED STOCK
The following description of the terms of the shares of Preferred Stock
that may be offered by the Company sets forth certain general terms and
provisions of the Preferred Stock to which any Prospectus Supplement may
relate. Certain other terms of any series of Preferred Stock and the terms of
any related option, put or right of the Company to require the holder of any
other Security offered to also acquire shares of Preferred Stock will be
specified in the applicable Prospectus Supplement. If so specified in the
applicable Prospectus Supplement, the terms of any series of Preferred Stock
may differ from the terms set forth below. The description of the terms of
the Preferred Stock set forth below and in any Prospectus Supplement is
necessarily a summary thereof and is qualified in its entirety by reference
to the Certificate of Designation relating to the applicable series of
Preferred Stock, which Certificate of Designation will be filed as an exhibit
to or incorporated by reference in the Registration Statement of which this
Prospectus forms a part.
GENERAL
Pursuant to the Restated Certificate of Incorporation and the Delaware
General Corporation Law, the Board of Directors of the Company has the
authority, without further stockholder action, to issue from time to time up
to a maximum of up to 2,000,000 shares of Preferred Stock, in one or more
series and for such consideration as may be fixed from time to time by the
Board of Directors of the Company and to fix before the issuance of any
shares of Preferred Stock of a particular series, the designation of such
series, the number of shares to comprise such series, the dividend rate or
rates payable with respect to the shares of such series, the redemption price
or prices, if any, and the terms and conditions of any redemption, the voting
rights, any sinking fund provisions for the redemption or purchase of the
shares of such series, the terms and conditions upon which the shares are
convertible or exchangeable, if they are convertible or exchangeable, and any
other relative rights, preferences and limitations pertaining to such series.
Reference is made to the Prospectus Supplement relating to the particular
series of Preferred Stock offered thereby for specific terms, including: (i)
the designation, stated value and liquidation preference of such Preferred
Stock and the number of shares offered; (ii) the initial public offering
price at which such shares will be issued; (iii) the dividend rate or rates
(or method of calculation), the dividend periods, the date or dates on which
dividends shall be payable and whether such dividends shall be cumulative or
noncumulative and, if cumulative, the dates from which dividends shall
commence to cumulate; (iv) any redemption or sinking fund provisions; (v) any
conversion or exchange provisions; (vi) the procedures for any auction and
remarketing, if any, of such Preferred Stock; (vii) whether interests in
Preferred Stock will be represented by depositary shares; and (viii) any
additional dividend, liquidation, redemption, sinking fund and other rights,
preferences, privileges, limitations and restrictions of such Preferred
Stock.
The Preferred Stock will, when issued against payment therefor, be fully
paid and nonassessable. Holders of Preferred Stock will have no preemptive
rights to subscribe for any additional securities which may be issued by the
Company.
Because the Company is a holding company, its rights and the rights of
holders of its securities, including the holders of Preferred Stock, to
participate in the distribution of assets of any subsidiary of the Company
upon the latter's liquidation or recapitalization will be subject to the
prior claims of such subsidiary's creditors and preferred stockholders,
except to the extent the Company may itself be a creditor with recognized
claims against such subsidiary or a holder of preferred stock of such
subsidiary.
DIVIDENDS
The holders of the Preferred Stock will be entitled to receive, when and
as declared by the Board of Directors of the Company, out of funds legally
available therefor, dividends at such rates and on such dates as will be
specified in the applicable Prospectus Supplement. Such rates may be fixed or
variable or both. If variable, the formula used for determining the dividend
rate for each dividend period will be specified in the applicable Prospectus
Supplement. Dividends will be payable to the holders of record as they appear
on the stock books of the Company on such record dates as will be fixed by
the Board of
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Directors of the Company. Dividends may be paid in the form of cash,
Preferred Stock (of the same or a different series) or Common Stock of the
Company, in each case as specified in the applicable Prospectus Supplement.
Dividends on any series of Preferred Stock may be cumulative or
noncumulative, as specified in the applicable Prospectus Supplement.
Dividends, if cumulative, will be cumulative from and after the date set
forth in the applicable Prospectus Supplement. If the Board of Directors of
the Company fails to declare a dividend payable on a dividend payment date on
any Preferred Stock for which dividends are noncumulative ("Noncumulative
Preferred Stock"), then the holders of such Preferred Stock will have no
right to receive a dividend in respect of the dividend period relating to
such dividend payment date, and the Company will have no obligation to pay
the dividend accrued for such period, whether or not dividends on such
Preferred Stock are declared or paid on any future dividend payment dates.
The Company shall not declare, pay or set apart for payment any dividends
on any series of its Preferred Stock ranking, as to dividends, on a parity
with or junior to the outstanding Preferred Stock of any series unless (i) if
such series of Preferred Stock has a cumulative dividend ("Cumulative
Preferred Stock"), full cumulative dividends have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment
thereof set apart for such payment on such Preferred Stock for all past
dividend periods and the then current dividend period, or (ii) if such series
of Preferred Stock is Noncumulative Preferred Stock, full dividends for the
then current dividend period on such Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for such payment. When dividends are not paid
in full upon Preferred Stock of any series and any other shares of Preferred
Stock of the Company ranking on a parity as to dividends with such Preferred
Stock, all dividends declared upon such Preferred Stock and any other
Preferred Stock of the Company ranking on a parity as to dividends with such
Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share on such Preferred Stock and such other shares of Preferred
Stock shall in all cases bear to each other the same ratio that the accrued
dividends per share on such Preferred Stock (which shall not, if such
Preferred Stock is Noncumulative Preferred Stock, include any accumulation in
respect of unpaid dividends for prior dividend periods) and such other shares
of Preferred Stock bear to each other. No interest, or sum of money in lieu
of interest, shall be payable in respect of any dividend payment or payments
on Preferred Stock of such series which may be in arrears.
Except as set forth in the preceding sentence, unless (i) full dividends
on the outstanding Cumulative Preferred Stock of any series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for all past dividend periods and
the then current dividend period or (ii) full dividends for the then current
dividend period on the outstanding Noncumulative Preferred Stock of any
series have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for such payment, no
dividends (other than in Common Stock of the Company or other shares of the
Company ranking junior to such Preferred Stock as to dividends and upon
liquidation) shall be declared or paid or set aside for payment, nor shall
any other distribution be made, on the Common Stock of the Company or on any
other shares of the Company ranking junior to or on a parity with such
Preferred Stock as to dividends or upon liquidation.
Unless (i) full dividends on the Cumulative Preferred Stock of any series
have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past
dividend periods and the then current dividend period or (ii) full dividends
for the then current dividend period on the Noncumulative Preferred Stock of
any series have been declared and paid or declared and a sum sufficient for
the payment thereof set apart for such payment, no Common Stock or any other
shares of the Company ranking junior to or on a parity with such Preferred
Stock as to dividends or upon liquidation shall be redeemed, purchased or
otherwise acquired for any consideration (or any moneys be paid or made
available for a sinking fund for the redemption of any such shares) by the
Company or any subsidiary of the Company except by conversion into or
exchange for shares of the Company ranking junior to such Preferred Stock as
to dividends and upon liquidation. Any dividend payment made on shares of
Cumulative Preferred Stock of any series shall first be credited against the
earliest accrued but unpaid dividend due with respect to shares of such
series which remains unpaid.
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REDEMPTION
Preferred Stock may be redeemable, in whole or in part, at the option of
the Company, out of funds legally available therefor, and may be subject to
mandatory redemption pursuant to a sinking fund or otherwise, in each case
upon terms, at the times and at the redemption prices specified, in the
applicable Prospectus Supplement. Preferred Stock redeemed by the Company
will be restored to the status of authorized but unissued shares of Preferred
Stock.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be
specified, together with an amount equal to all accrued and unpaid dividends
thereon (which shall not, if such Preferred Stock is Noncumulative Preferred
Stock, include any accumulation in respect of unpaid dividends for prior
dividend periods) to the date of redemption. The redemption price may be
payable in cash or other property, as specified in the applicable Prospectus
Supplement. If the redemption price for Preferred Stock of any series is
payable only from the net proceeds of the issuance of capital stock of the
Company, the terms of such Preferred Stock may provide that, if no such
capital stock shall have been issued or to the extent the net proceeds from
any issuance are insufficient to pay in full the aggregate redemption price
then due, such Preferred Stock shall automatically and mandatorily be
converted into shares of the applicable capital stock of the Company pursuant
to conversion provisions specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) full dividends on the Cumulative
Preferred Stock of any series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for all past dividend periods and the then current dividend period or
(ii) full dividends for the then current dividend period on the Noncumulative
Preferred Stock of any series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment, no shares of Preferred Stock of such series shall be redeemed unless
all outstanding shares of Preferred Stock of such series are simultaneously
redeemed, and the Company shall not purchase or otherwise acquire any shares
of Preferred Stock of such series; provided, however, that the foregoing
shall not prevent the purchase or acquisition of Preferred Stock of such
series pursuant to a purchase or exchange offer provided such offer is made
on the same terms to all holders of the Preferred Stock of such series.
Notice of redemption shall be given by mailing the same to each record
holder of the Preferred Stock to be redeemed, not less than 30 nor more than
60 days prior to the date fixed for redemption thereof, at the address of
such holder as the same shall appear on the stock books of the Company. Each
notice shall state: (i) the redemption date; (ii) the number of shares and
series of the Preferred Stock to be redeemed; (iii) the redemption price;
(iv) the place or places where certificates for such Preferred Stock are to
be surrendered for payment of the redemption price; (v) that dividends on the
shares to be redeemed will cease to accrue on such redemption date; and (vi)
the date upon which the holder's conversion or exchange rights, if any, as to
such shares shall terminate. If fewer than all the shares of Preferred Stock
of any series are to be redeemed, the notice mailed to each such holder
thereof shall also specify the number of shares of Preferred Stock to be
redeemed from each such holder.
If fewer than all the outstanding shares of Preferred Stock of any series
are to be redeemed, the number of shares to be redeemed will be determined by
the Board of Directors of the Company and such shares may be redeemed pro
rata from the holders of record of such shares in proportion to the number of
such shares held by such holders (with adjustments to avoid redemption of
fractional shares) or by lot in a manner determined by the Board of Directors
of the Company.
If notice of redemption of any shares of Preferred Stock has been given
and if the funds necessary for such redemption have been set aside by the
Company, separate and apart from its other funds, in trust for the pro rata
benefit of holders of any shares of Preferred Stock so called for redemption,
then from and after the redemption date for such shares, dividends on such
shares shall cease to accrue and such shares shall no longer be deemed to be
outstanding, and all rights of the holders thereof as stockholders of the
Company (except the right to receive the redemption price) shall cease. Upon
surrender, in
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accordance with such notice, of the certificates representing any such shares
(properly endorsed or assigned for transfer, if the Board of Directors of the
Company shall so require and the notice shall so state), the redemption price
set forth above shall be paid out of the funds provided by the Company. If
fewer than all the shares represented by any such certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares without
cost to the holder thereof.
CONVERSION OR EXCHANGE RIGHTS
The Prospectus Supplement relating to a series of Preferred Stock that is
convertible or exchangeable will state the terms on which shares of such
series are convertible or exchangeable into Common Stock, another series of
Preferred Stock or Debt Securities.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of each series of Preferred Stock
shall be entitled to receive out of the assets of the Company legally
available for distribution to stockholders, before any distribution of assets
is made to holders of Common Stock or any other class or series of capital
stock ranking junior to such Preferred Stock upon liquidation, liquidating
distributions in the amount of the liquidation preference of such Preferred
Stock plus all accrued and unpaid dividends thereon (which shall not, in the
case of Noncumulative Preferred Stock, include any accumulation in respect of
unpaid dividends for prior dividend periods). If, upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the
amounts payable with respect to Preferred Stock of any series and any other
shares of Preferred Stock of the Company ranking as to any such distribution
on a parity with such Preferred Stock are not paid in full, the holders of
such Preferred Stock and of such other shares of Preferred Stock will share
ratably in any such distribution of assets of the Company in proportion to
the full respective preferential amounts to which they are entitled. After
payment of the full amount of the liquidating distribution to which they are
entitled, the holders of Preferred Stock of any series Will not be entitled
to any further participation in any distribution of assets by the Company.
VOTING RIGHTS
Except as indicated below or in the applicable Prospectus Supplement, or
except as expressly required by applicable law, the holders of Preferred
Stock will not be entitled to vote.
If the Company fails to pay dividends on any shares of Preferred Stock for
six consecutive quarterly periods, the holders of such shares of Preferred
Stock (voting separately as a class with all other series of Preferred Stock
upon which like voting rights have been conferred and are exercisable) will
be entitled to vote for the election of two additional directors of the
Company at a special meeting called by the holders of record of at least 10%
of such Preferred Stock or the next annual meeting of stockholders and at
each subsequent meeting until (i) all dividends accumulated on shares of
Cumulative Preferred Stock for the past dividend periods and the then current
dividend period shall have been fully paid or declared and a sum sufficient
for the payment thereof set aside for payment or (ii) four consecutive
quarterly dividends on shares of Noncumulative Preferred Stock shall have
been fully paid or declared and a sum sufficient for the payment thereof set
aside for payment. In such case, the entire Board of Directors of the Company
will be increased by two directors.
So long as any shares of Preferred Stock remain outstanding, the Company
shall not, without the affirmative vote of the holders of at least two-thirds
of each series of Preferred Stock outstanding at the time, given in person or
by proxy, at a meeting (voting separately as a class): (i) authorize, create
or issue, or increase the authorized or issued amount of, any class or series
of capital stock ranking prior to such series of Preferred Stock with respect
to payment of dividends or distribution of assets upon liquidation,
dissolution or winding up, or reclassify any capital stock into any such
shares, or authorize, create or issue any obligation or security convertible
into, exchangeable for or evidencing the right to purchase any such shares or
(ii) amend, alter or repeal the provisions of the Restated Certificate of
Incorporation, including the Certificate of Designation relating to such
series of Preferred Stock, whether by merger, consolidation,
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or otherwise, so as to materially and adversely affect any right, preference,
privilege or voting power of such series of Preferred Stock or the holders
thereof; provided, however, that any increase in the amount of the authorized
Preferred Stock or any outstanding series of Preferred Stock or any other
capital stock of the Company, or the creation and issuance of any other
series of Preferred Stock or of any other capital stock of the Company, in
each case ranking on a parity with or junior to the Preferred Stock of such
series with respect to the payment of dividends or the distribution of assets
upon liquidation, dissolution or winding up, shall not be deemed to
materially and adversely affect such rights, preferences, privileges or
voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of such series of Preferred Stock
shall have been redeemed or called for redemption upon proper notice and
sufficient funds shall have been deposited in trust to effect such
redemption.
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DESCRIPTION OF DEBT SECURITIES
The Debt Securities may consist of Senior Debt Securities or Subordinated
Debt Securities. The Senior Debt Securities will be issued under an indenture
(the "Senior Debt Indenture") between the Company, as issuer, and one or more
trustees (each a "Trustee") meeting the requirements of a trustee under the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
Subordinated Debt Securities will be issued under an indenture (the
"Subordinated Debt Indenture") between the Company, as issuer, and a Trustee.
Forms of the Indentures have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. The Indentures are subject to
and governed by the Trust Indenture Act. The following summaries of certain
provisions of the Indentures do not purport to be complete, and where
reference is made to particular provisions of the Indentures, such
provisions, including definitions of certain terms, are incorporated by
reference as a part of such summaries or terms, which are qualified in their
entirety by such reference. The Indentures are substantially identical except
for provisions relating to subordination.
The Debt Securities may be issued in one or more series. The particular
terms of each series of Debt Securities, as well as any modifications of or
additions to the general terms of the Debt Securities as described herein
that may be applicable in the case of a particular series of Debt Securities,
will be described in the Prospectus Supplement relating to such series of
Debt Securities. Accordingly, for a description of the terms of a particular
series of Debt Securities, reference must be made to both the Prospectus
Supplement relating thereto and the description of Debt Securities set forth
in this Prospectus.
GENERAL
Neither of the Indentures limits the amount of Debt Securities that may be
issued thereunder. Each Indenture provides that Debt Securities issuable
thereunder may be issued up to the aggregate principal amount which may be
authorized from time to time by the Company. Reference is made to the
Prospectus Supplement for the following terms of the Debt Securities (to the
extent such terms are applicable to such Debt Securities) in respect of which
this Prospectus is being delivered (the "Offered Debt Securities"):
(i) the title of the Offered Debt Securities and whether the Offered Debt
Securities are Senior Debt Securities or Subordinated Debt Securities;
(ii) the aggregate principal amount of the Offered Debt Securities and
any limit on such aggregate principal amount;
(iii) the date or dates, or the method for determining such date or
dates, on which the principal of the Offered Debt Securities will be
payable;
(iv) the rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which the Offered Debt
Securities will bear interest, if any;
(v) the date or dates, or the method for determining such date or dates,
from which any interest will accrue, the interest payment dates on which
any such interest will be payable, the regular record dates for such
interest payment dates, or the method by which any such date shall be
determined, the person to whom such interest shall be payable, and the
basis upon which interest shall be calculated if other than that of a
360-day year of twelve 30-day months;
(vi) the place or places where the principal of (and premium, if any) and
interest, if any, on such Offered Debt Securities will be payable, such
Offered Debt Securities may be surrendered for conversion or registration
of transfer or exchange and notices or demands to or upon the Company in
respect of such Offered Debt Securities and the applicable Indenture may
be served;
(vii) the period or periods within which, the price or prices at which
and the terms and conditions upon which the Offered Debt Securities may be
redeemed, as a whole or in part, at the option of the Company, if the
Company is to have such an option;
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(viii) the denominations of the Offered Debt Securities if other than
$1,000 and any integral multiple thereof;
(ix) if other than the principal amount thereof, the portion of the
principal amount of the Offered Debt Securities payable upon declaration
of acceleration of the maturity thereof, or (if applicable) the portion of
the principal amount of the Offered Debt Securities which is convertible
into Common Stock or Preferred Stock, or the method by which any such
portion shall be determined;
(x) whether the amount of payments of principal of (and premium, if any)
or interest, if any, on the Offered Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not be, based on one or more currencies, currency
units, composite currencies, commodities, equity indicies or other
indicies) and the manner in which such amounts shall be determined;
(xi) any additions to, modifications of or deletions from the terms of
the Offered Debt Securities with respect to the Events of Default or
covenants set forth in the applicable Indenture;
(xii) provisions, if any, granting special rights to the Holders of the
Offered Debt Securities upon the occurrence of such events as may be
specified;
(xiii) whether any of the Offered Debt Securities are to be issuable
initially in temporary global form and whether any of the Offered Debt
Securities are to be issuable in permanent global form and, if so, whether
beneficial owners of interests in any such permanent global Security may
exchange such interests for Debt Securities of such series and of like
tenor of any authorized form and denomination and the circumstances under
which any such exchanges may occur, if other than in the manner provided
in the applicable Prospectus Supplement, and, if the Offered Debt
Securities are to be issuable as a global Security, the identity of the
depositary for the Offered Debt Securities;
(xiv) the date as of which any temporary global Security representing
outstanding Offered Debt Securities shall be dated if other than the date
of original issuance of the first Offered Debt Security to be issued;
(xv) the Person to whom any interest on any Offered Debt Security shall
be payable, if other than the Person in whose name that Offered Debt
Security is registered, and the extent to which, or the manner in which,
any interest payable on a temporary global Security on an Interest Payment
Date will be paid if other than in the manner provided in the applicable
Prospectus Supplement;
(xvi) the applicability, if any, of defeasance and covenant defeasance
provisions of the applicable Indenture and any provisions in modification
of, in addition to or in lieu of any such defeasance or covenant
defeasance provisions;
(xvii) if the Offered Debt Securities are to be issuable in definitive
form (whether upon original issue or upon exchange of a temporary Offered
Debt Security) only upon receipt of certain certificates or other
documents or satisfaction of other conditions, then the form and/or terms
of such certificates, documents or conditions;
(xviii) if the Offered Debt Securities are to be issued upon the exercise
of warrants, the time, manner and place for such Offered Debt Securities
to be authenticated and delivered;
(xix) the terms, if any, upon which the Offered Debt Securities may be
convertible into Common Stock or Preferred Stock of the Company and the
terms and conditions upon which such conversion will be effected,
including, without limitation, the initial conversion price or rate and
the conversion period as well as any applicable limitations on the
ownership or transferability of the Common Stock or Preferred Stock into
which the Offered Debt Securities are convertible; and
(xx) any other terms of the Offered Debt Securities not inconsistent with
the provisions of the applicable Indenture.
As described in each Prospectus Supplement relating to any particular
series of Debt Securities offered thereby, the Indenture under which such
Debt Securities are issued may contain covenants
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limiting: (i) the incurrence of debt by the Company; (ii) the incurrence of
debt by subsidiaries of the Company; (iii) the making of certain payments by
the Company and its subsidiaries; (iv) business activities of the Company and
its subsidiaries; (v) the issuance of preferred stock of subsidiaries; (vi)
asset dispositions; (vii) transactions with affiliates; (viii) liens; and
(ix) mergers and consolidations involving the Company.
SENIOR DEBT SECURITIES
The payment of principal of, premium, if any, and interest on the Senior
Debt Securities will, to the extent and in the manner set forth in the Senior
Debt Indenture, rank pari passu in right of payment with all other existing
and future unsecured and unsubordinated obligations of the Company.
SUBORDINATION OF SUBORDINATED DEBT SECURITIES
The Subordinated Debt Indenture provides that the Subordinated Debt
Securities are subordinate and junior in right of payment to all Senior
Indebtedness of the Company as provided in the Subordinated Debt Indenture.
No payment of principal of (including redemption payments), or interest on,
the Subordinated Debt Securities may be made (i) if any Senior Indebtedness
is not paid when due, any applicable grace period with respect to a default
thereunder has ended and such default has not been cured or waived, or (ii)
if the maturity of any Senior Indebtedness has been accelerated because of a
default. Upon any distribution of assets of the Company to creditors upon any
dissolution, winding up, liquidation or reorganization, whether voluntary or
involuntary or in bankruptcy, insolvency, receivership or other proceedings,
all principal of, and premium, if any, and interest due or to become due on,
all Senior Indebtedness must be paid in full before the holders of the
Subordinated Debt Securities are entitled to receive or retain any payment.
In the event that, notwithstanding the foregoing, any payment or distribution
of cash, property or securities shall be received or collected by a holder of
the Subordinated Debt Securities in contravention of the foregoing
provisions, such payment or distribution shall be held for the benefit of and
shall be paid over to the holders of Senior Indebtedness or their
representative or representatives or to the trustee or trustees under any
indenture under which any instrument evidencing Senior Indebtedness may have
been issued, as their respective interests may appear, to the extent
necessary to pay in full all Senior Indebtedness then due, after giving
effect to any concurrent payment to the holders of Senior Indebtedness.
Subject to the payment in full of all Senior Indebtedness, the rights of the
holders of the Subordinated Debt Securities will be subrogated to the rights
of the holders of Senior Indebtedness to receive payments or distributions
applicable to Senior Indebtedness until all amounts owing on the Subordinated
Debt Securities are paid in full.
The term "Senior Indebtedness" shall mean in respect of the Company (i)
the principal, premium, if any, and interest in respect of (A) indebtedness
of such obligor for money borrowed and (B) indebtedness evidenced by
securities, bonds or other similar instruments issued by such obligor, (ii)
all capital lease obligations of such obligor, (iii) all obligations of such
obligor issued or assumed as the deferred purchase price of property, all
conditional sale obligations of such obligor and all obligations of such
obligor under any title retention agreement (but excluding trade accounts
payable and other similar obligations arising in the ordinary course of
business), (iv) all obligations of such obligor for the reimbursement of any
letter of credit, banker's acceptance, security purchase facility or similar
credit transaction, (v) all obligations of the type referred to in clauses
(i) through (iv) above of other persons for the payment of which such obligor
is responsible or liable as obligor, guarantor or otherwise, and (vi) all
obligations of the type referred to in clauses (i) through (v) above of other
persons secured by any lien on any property or asset of such obligor (whether
or not such obligation is assumed by such obligor), except for (1) any such
indebtedness issued after the date of original issuance of the Subordinated
Debt Securities that is by its terms subordinated to or pari passu with the
Subordinated Debt Securities and (2) any indebtedness (including all other
debt securities and guarantees in respect of those debt securities) initially
issued to any other trust, or a trustee of such trust, partnership or other
entity affiliated with the Company that is, directly or indirectly, a
financing vehicle of the Company (a "Financing Entity") in
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connection with the issuance by such Financing Entity of Convertible
Preferred Securities or other similar securities. Such Senior Indebtedness
shall continue to be Senior Indebtedness and entitled to the benefits of the
subordination provisions irrespective of any amendment, modification or
waiver of any term of such Senior Indebtedness.
The Indenture does not limit the aggregate amount of Senior Indebtedness
the Company may issue.
CERTAIN COVENANTS
Unless otherwise provided in a Prospectus Supplements with respect to a
particular series of Offered Debt Securities, each of the Indentures will
contain certain covenants, including the ones summarized below, which
covenants will be applicable (unless they are waived or amended or unless the
Debt Securities are defeased, see "Defeasance" below) so long as any of the
Debt Securities 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 (as defined in
the Indenture) 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 Senior Debt Securities of all series,
in the case of the Senior Debt Indenture or the Subordinated Debt Securities
of all series in the case of the Subordinated Debt Indenture, 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, 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 Debt Securities and other Debt outstanding as of
the date of original issuance of any series of the Debt Securities (other
than Debt to the extent that it is extinguished, retired, defeased or repaid
in connection with the original issuance of any series of the Debt
Securities), 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 any series of the Debt Securities 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 any series of the Debt
Securities, (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
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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 Debt Securities are rated
Investment Grade by Standard & Poor's Corporation and Moody's Investors
Service, Inc. (or if both do not make a rating of the Debt Securities
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 it
has 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
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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 Indentures 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 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 any series of Debt
Securities, (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 Chief
Executive Officer 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
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that the Chief Executive Officer 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 Chief Executive Officer 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 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 (ii) 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 any 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
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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 any
series of Debt Securities at a purchase price equal to 100% of the 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 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 any 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 series of Debt Securities tendered pursuant to an Offer have an
aggregate purchase price that is less than the Excess Proceeds available for
the purchase of such Debt Securities, 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
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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 Debt Securities tendered.
Holders that elect to have their Debt Securities purchased will be required
to surrender such Debt Securities at least one Business Day prior to the
Purchase Date. If at the expiration of the Offer period the aggregate
purchase price of the series of Debt Securities properly tendered by Holders
pursuant to the Offer exceeds the amount of such Excess Proceeds, such series
of Debt Securities or portions of Debt Securities 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 Debt Securities of any series 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 any 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 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 Debt Securities 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
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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 Chief Executive Officer 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 any series of the Debt Securities, (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 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 Debt Securities Upon a Change of Control
Upon the occurrence of a Change of Control, each Holder of the Debt
Securities of each series will have the right to require that the Company
repurchase such Holder's Debt Securities of such series 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 Debt Securities of any series, in the event that the
Company or its Subsidiaries Incur additional Debt, whether through
recapitalizations or otherwise.
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Within 30 days following a Change of Control, the Company will mail a
notice to each Holder of the Debt Securities of each series, 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 Debt
Securities 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 Debt Security will continue to accrue, (5)
any Debt Security 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 Debt Security of any series purchased pursuant to
a Change of Control Offer will be required to surrender the Debt Security of
such series, with the form entitled "Option of Holder To Elect Purchase" on
the reverse of the Debt Security 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 paying 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 Debt Securities of such series the Holder
delivered for purchase, and a statement that such Holder is withdrawing his
election to have such Debt Securities of such series purchased and (8) that
Holders that elect to have their Debt Securities of any series purchased only
in part will be issued new Debt Securities having a principal amount equal to
the portion of the Debt Securities of the series that were surrendered but
not tendered and purchased.
On the Purchase Date, the Company will (i) accept for payment all Debt
Securities of any series 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 Debt Securities of such series or portions thereof so
tendered for purchase and (iii) deliver or cause to be delivered to the
Trustee the Debt Securities of such series properly tendered together with an
Officers' Certificate identifying the Debt Securities of such series or
portions thereof tendered to the Company for purchase. The Trustee will
promptly mail, to the Holders of the Debt Securities of such series properly
tendered and purchased, payment in an amount equal to the purchase price, and
promptly authenticate and mail to each Holder a new Debt Security of the same
series having a principal amount equal to any portion of such Holder's Debt
Securities of such series 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.
If the Company is prohibited by applicable law from making the Change of
Control Offer or purchasing Debt Securities of any series 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 any 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
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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 outstanding on the date
of the Indentures, 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 Debt Securities, (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
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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.
EVENTS OF DEFAULT
An Event of Default, as defined in each of the Indentures and applicable
to any particular series of Debt Securities issued under such Indenture is
defined as being: (i) default as to the payment of principal, or premium, if
any, on any Debt Security of that series 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 Debt Security of that series 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
Debt Securities Upon a Change of Control" above or a failure to purchase Debt
Securities of that series tendered in respect of such offer, (iv) default in
the performance, or breach, of any covenant, agreement or warranty contained
in the Indentures and the Debt Securities of that series 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 outstanding of the
Debt Securities of that series issued under such Indenture, as provided in
such 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 Indentures, 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 provisions described in the first paragraph of "Limited on
Debt" above, and (vii) certain events involving bankruptcy, insolvency or
reorganization of the Company or any of its Significant Subsidiaries.
The Indentures provide that the Trustee may withhold notice to the Holders
of any default (except in payment of principal of, premium, if any, or
interest on any series of Debt Securities 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 Indentures provide that if an Event of Default with respect to Debt
Securities of any series at the time outstanding (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 Debt Securities of that
series issued under such Indenture then outstanding may declare the Default
Amount of all Debt Securities of that series 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 Debt Securities of that
series 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
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Debt Securities of that series 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 Debt Securities of that series will become immediately due and
payable.
The Holders of a majority in principal amount of the Debt Securities of
any series issued under such Indenture 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 with respect to the Debt
Securities of such series, subject to certain limitations specified in the
Indenture, provided that the Holders of Debt Securities of such series must
have offered to the Trustee reasonable indemnity against expenses and
liabilities. Each 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 Indentures.
MODIFICATION
Each of the Indentures 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 Debt Securities at the time outstanding, to modify
such Indenture or any supplemental indenture or the rights of the Holders of
the series of Debt Securities issued under such Indenture, except that no
such modification may (i) extend the final maturity of any of the Debt
Securities, reduce the principal amount thereof, 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 series of Debt Securities so
affected or (ii) reduce the percentage of any series of Debt Securities, the
consent of the Holders of which is required for any such modification,
without the consent of the Holders of all series of Debt Securities issued
under such Indenture then outstanding.
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 Debt
Securities, (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.
DEFEASANCE AND DISCHARGE
Legal Defeasance
Each of the Indentures provides that the Company will be deemed to have
paid and will be discharged from any and all obligations in respect of the
Debt Securities of or within any series, 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 such Indenture will
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cease to be applicable with respect to such Debt Securities of such series
(except for, among other matters, certain obligations to register the
transfer or exchange of such Debt Securities of such series, to replace
stolen, lost or mutilated Debt Securities of such series, 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 applicable Debt Securities, on the respective Stated
Maturities of the Debt Securities or, if the Company makes arrangements
satisfactory to the Trustee for the redemption of the Debt Securities prior
to their Stated Maturity, on any earlier redemption date in accordance with
the terms of such Indenture and the applicable Debt Securities, (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 Debt Securities 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 Indentures 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 Debt Securities are listed on a national
securities exchange, the Company has delivered to the Trustee an Opinion of
Counsel to the effect that the Debt Securities will not be delisted as a
result of such deposit, defeasance and discharge.
Covenant Defeasance
The Indentures further provide 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 any series of Debt Securities 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 things, the Holders of such Debt Securities 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 Debt Securities 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 Indentures with respect to the Debt
Securities of any series as described in the immediately preceding paragraph
and any series of Debt Securities are declared due and payable because of the
occurrence of
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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 such Debt Securities at the time of their Stated Maturity or
scheduled redemption, but may not be sufficient to pay amounts due on such
Debt Securities at the time of acceleration resulting from such Event of
Default. The Company will remain liable for such payments.
GOVERNING LAW
The Indentures and the Debt Securities 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 each of the Indentures. Reference is made
to the Indentures 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 applicable 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 (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 is 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
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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 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 any series of the Debt
Securities 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
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Subsidiaries or such Eligible Joint Ventures become a party after such date
if the Chief Executive Officer 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 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
Debt Securities, 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.
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"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).
"Change of Control" is defined to mean the occurrence of one or more of
the following events:
(i) 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
the term "beneficial owner" is defined under Rule 13d-3 or any successor
rule or regulation promulgated under the Exchange Act), 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 (i), 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;
(ii) 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
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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
(iii) 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 (i), (ii) and
(iii), 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 Debt Securities 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 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 Senior Debt Securities
in the case of the Senior Debt Indenture and the Subordinated Debt Securities
in the case of the Subordinated Debt Indenture at least to the same extent,
if any, as the Debt so exchanged or refinanced is subordinated to the Senior
Debt Securities in the case of the Senior Debt Indenture and the Subordinated
Debt Securities in the case of the Subordinated Debt Indenture, (B) such Debt
win 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 Debt Securities, provided that if such
new Debt refinances any series of the Debt Securities in part only, the final
Stated Maturity of such new Debt must be at least six months after the final
Stated Maturity of such series of Debt Securities.
"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
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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
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.
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"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.
"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
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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 Debt Securities 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 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
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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 Debt Securities" and other similar terms are defined
to mean the registered holder of any Debt Security.
"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 Debt Securities,
(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.
"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
Indentures, 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
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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 Debt Securities), (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
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 Chief Executive Officer 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
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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 any series of Debt Securities, (ii)
does not require any payment of principal at any time sooner than six months
after the final Stated Maturity of any series of Debt Securities, (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.
"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
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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 Chief Executive Officer 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 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 limitations, 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,
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(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 Debt Securities with the proceeds from
the issuance of (x) Debt that is subordinate to the Debt Securities 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
Debt Securities, 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 Debt Securities 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 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 Debt Securities 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 any series of Debt Securities.
"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.
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"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 Debt Securities 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 Debt Securities 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 Debt Securities is under publicly announced
consideration for possible downgrading by any of the Rating Agencies: (a) in
the event that any series of the Debt Securities are rated by either Rating
Agency on the Rating Date as Investment Grade, the rating of such Debt
Securities by both such Rating Agencies will be reduced below Investment
Grade, or (b) in the event the Debt Securities are rated below Investment
Grade by both such Rating Agencies on the Rating Date, the rating of such
Debt Securities 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 any series of the Debt Securities, (ii)
redeemable at the option of the holder of such class or series of Capital
Stock at any time prior to the Stated Maturity of any series of Debt
Securities 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 any series of Debt Securities, 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 any series
of Debt Securities 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 Debt Securities 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
Debt Securities required to be purchased by the Company under the covenants
described under "Limitation on Dispositions" and "Purchase of Debt Securities
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
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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 Senior Debt Securities in the case of the Senior Debt
Indenture and the Subordinated Debt Securities 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 any series of Debt Securities (other than the
Debt Securities), 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 Debt Securities 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 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 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
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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)
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.
As more fully described in the Prospectus Supplement, each of the
Indentures also provides for defeasance of certain covenants.
CERTIFICATED SECURITIES
Except as may be set forth in a Prospectus Supplement, Debt Securities
will not be issued in certificated form. If, however, Debt Securities of any
series are to be issued in certificated form, no service charge will be made
for any transfer or exchange of any such Debt Securities, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
BOOK-ENTRY SYSTEM
If so specified in any accompanying Prospectus Supplement relating to Debt
Securities of any series, Debt Securities of or within such series may be
issued under a book-entry system in the form of one or
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more global securities (each, a "Global Security"). Each Global Security will
be deposited with, or on behalf of, a depositary, which, unless otherwise
specified in the accompanying Prospectus Supplement, will be The Depository
Trust Company, New York, New York (the "Depositary"). The Global Securities
will be registered in the name of the Depositary or its nominee.
The Depositary 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. The Depositary holds securities that its participants ("Participants")
deposit with the Depositary. The Depositary 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. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations, and certain other
organizations. The Depositary is owned by a number of its Direct Participants
and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc.
and the National Association of Securities Dealers, Inc. Access to the
Depositary 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 Direct Participant, either directly or
indirectly ("Indirect Participants"). The rules applicable to the Depositary
and its Participants are on file with the SEC.
Purchases of the Offered Securities under the Depositary system must be
made by or through Direct Participants, which will receive a credit for the
Securities on the Depositary's records. The ownership interest of each actual
purchaser of each Security ("Beneficial Owner") is in turn to be recorded on
the Direct and Indirect Participants' records. Beneficial Owners will not
receive written confirmation from the Depositary of their purchase, but
Beneficial Owners are expected to receive written confirmations providing
details of the transaction, as well as periodic statements of their holdings,
from the Direct or Indirect Participant through which the Beneficial Owner
entered into the transaction. Transfers of ownership interests in the
Securities are to be accomplished by entries made on the books of
Participants acting on behalf of Beneficial Owners. Beneficial Owners will
not receive certificates representing their ownership interests in
Securities, except in the event that use of the book-entry system for the
Securities is discontinued.
To facilitate subsequent transfers, all Securities deposited by
Participants with the Depositary are registered in the name of the
Depositary's partnership nominee, Cede & Co. The deposit of Securities with
the Depositary and their registration in the name of Cede & Co. effect no
change in beneficial ownership. The Depositary has no knowledge of the actual
Beneficial Owners of the Securities; the Depositary's records reflect only
the identity of the Direct Participants to whose accounts such Securities are
credited, which may or may not be the Beneficial Owners. The Participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
Conveyance of notices and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
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.
Neither the Depositary nor Cede & Co. will consent or vote with respect to
the Securities. Under its usual procedures, the Depositary mails an Omnibus
Proxy to the Company as soon as possible after the record date. The Omnibus
Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Securities are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
Principal and interest payments on the Securities will be made to the
Depositary. The Depositary's practice is to credit Direct Participants'
accounts on the payable date in accordance with their respective holdings
shown on the Depositary's records unless the Depositary has reason to believe
that it will not receive payment on the payable date. Payments by
Participants to Beneficial Owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts
of
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<PAGE>
customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of the Depositary, agent, or the
Company, subject to any statutory or regulatory requirements as may be in
effect from time to time. Payment of principal and interest to the Depositary
is the responsibility of the Depositary, and disbursement of such payments to
the Beneficial Owners shall be the responsibility of Direct and Indirect
Participants.
The Depositary may discontinue providing its services as securities
depository with respect to the Securities at any time by giving reasonable
notice to the Company. Under such circumstances, in the event that a
successor securities depository is not obtained, Security certificates are
required to be printed and delivered. The Company may decide to discontinue
use of the system of book-entry transfers through the Depositary (or a
success securities depository). In that event, Security certificates will be
printed and delivered.
The information in this section concerning the Depositary and the
Depositary'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.
A Global Security of any series may not be transferred except as a whole
by the Depositary to a nominee or successor of the Depositary or by a nominee
of the Depositary to another nominee of the Depositary. A Global Security
representing all but not part of an offering of Offered Debt Securities
hereby is exchangeable for Debt Securities in definitive form of like tenor
and terms if (i) the Depositary notified the Company that it is unwilling or
unable to continue as depositary for such Global Security or if at any time
the Depositary is no longer eligible to be or in good standing as a clearing
agency registered under the Exchange Act, and in either case, a successor
depositary is not appointed by the Company within 90 days of receipt by the
Company of such notice or of the Company becoming aware of such
ineligibility, or (ii) the Company in its sole discretion at any time
determines not to have all of the Debt Securities represented in an offering
of Offered Debt Securities by a Global Security and notifies the Trustee
thereof. A Global Security exchangeable pursuant to the preceding sentence
shall be exchangeable for Debt Securities registered in such names and in
such authorized denominations as the Depositary of such Global Security shall
direct.
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PLAN OF DISTRIBUTION
The Company may sell the Offered Securities in any of the following ways
(or in any combination thereof): (i) through underwriters or dealers; (ii)
directly to a limited number of purchasers or to a single purchaser; or (iii)
through agents. The Prospectus Supplement with respect to any Offered
Securities will set forth the terms of the offering of such Offered
Securities, including the name or names of any underwriters, dealers or
agents and the respective amounts of such Offered Securities underwritten or
purchased by each of them, the initial public offering price of such Offered
Securities and the proceeds to the Company from such sale, any discounts,
commissions or other items constituting compensation from the Company and any
discounts, commissions or concessions allowed or reallowed or paid to dealers
and any securities exchanges on which such Offered Securities may be listed.
If underwriters are used in the sale of any Offered Securities, such
Offered Securities will be acquired by the underwriters for their own account
and may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying
prices determined at the time of sale. Such Offered Securities may be either
offered to the public through underwriting syndicates represented by managing
underwriters, or directly by underwriters.
Offered Securities may be sold directly by the Company or through agents
designated by the Company from time to time. Unless otherwise indicated in
the Prospectus Supplement, any such agent will be acting on a best efforts
basis for the period of its appointment.
If so indicated in the Prospectus Supplement, the Company will authorize
underwriters, dealers or agents to solicit offers by certain purchasers to
purchase Offered Securities from the Company at the public offering price set
forth in the Prospectus Supplement pursuant to delayed delivery contracts
providing for payment and delivery on a specified date in the future. Such
contracts will be subject only to those conditions set forth in the
Prospectus Supplement.
Agents, dealers and underwriters may be entitled under agreements entered
into with the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments which the agents or underwriters may be
required to make in respect thereof.
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LEGAL MATTERS
Certain legal matters (including the validity of the Securities) will be
passed upon for the Company by Steven A. McArthur, Senior Vice President and
General Counsel of the Company and by Willkie Farr & Gallagher. As of August
31, 1998, Mr. McArthur beneficially owned approximately 200,000 shares of
Common Stock.
EXPERTS
The consolidated financial statements and financial statement schedules of
the Company and its subsidiaries incorporated by reference in this
Registration Statement by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1997, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports which are
incorporated herein by reference, and have been so incorporated in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
With respect to the Company's unaudited interim financial information for
the periods ended March 31, 1998 and 1997 and June 30, 1998 and 1997,
incorporated herein by reference, Deloitte & Touche LLP have applied limited
procedures in accordance with professional standards for a review of such
information. However, as stated in their reports included in the Company's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998 and June
30, 1998, and incorporated by reference herein, 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.
Deloitte & Touche LLP are not subject to the liability provisions of Section
11 of the Securities Act for their reports on the unaudited interim financial
information because those reports are not "reports" or a "part" of the
Registration Statement prepared or certified by an accountant within the
meaning of Sections 7 and 11 of the Securities Act.
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NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED
BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY AGENT OR THE
UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY
PERSON IN ANY JURISDICTION WHERE AN OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PROSPECTUS SUPPLEMENT
Summary .................................. S-1
Use of Proceeds .......................... S-14
Capitalization ........................... S-15
Selected Consolidated Financial and
Operating Data .......................... S-16
Selected Pro Forma Financial Data ....... S-19
The Business of the Company .............. S-20
Description of the Securities............. S-29
Underwriting ............................. S-32
Notice to Canadian Residents ............. S-33
Legal Matters ............................ S-34
Experts .................................. S-34
Index to Financial Statements............. F-1
Index to Pro Forma Financial Data ........ P-1
PROSPECTUS
Available Information .................... 2
Incorporation of Certain Documents by
Reference ............................... 3
Risk Factors ............................. 4
The Company .............................. 11
Ratio of Earnings to Fixed Charges ...... 12
Use of Proceeds .......................... 12
Description of Capital Stock ............. 13
Description of Preferred Stock ........... 15
Description of Debt Securities ........... 20
Plan of Distribution ..................... 53
Legal Matters ............................ 54
Experts .................................. 54
</TABLE>
$1,400,000,000
CALENERGY COMPANY, INC.
$215,000,000
6.96% SENIOR NOTES DUE 2003
$260,000,000
7.23% SENIOR NOTES DUE 2005
$450,000,000
7.52% SENIOR NOTES DUE 2008
$475,000,000
8.48% SENIOR BONDS DUE 2028
---------------------
PROSPECTUS SUPPLEMENT
SEPTEMBER 17, 1998
---------------------
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
GOLDMAN, SACHS & CO.
